Difference Between Financial Planning & Wealth Management

2024-08-02

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Financial planning and wealth management are both a part of personal financial management. Financial planning and wealth management are both related to money, but they’re vastly different. Understanding the differences between these two different financial approaches are important. Knowing the difference between financial planning and wealth management will help you choose the right one.

What is Financial Planning?

Financial management helps you in budgeting your income and expenses. You can plan your investments, keep track of money spent and do course corrections when needed.

Financial planning is the process of developing a strategy for managing your financial goals. This typically involves taking into account factors such as

Your current financial situation,
Your future goals and
Resources you have available to help meet those goals.

Financial planning is often thought of as a one-time process. It is often linked to investing. You may implement financial planning to help meet long-term goals, such as retirement or include short-term goals, such as saving for a down payment on a home.

What is Wealth Management?

Wealth management is a term that is used to describe the management of assets to help you reach your financial goals. Wealth management strategies may include investing in stocks and bonds, real estate, or other types of assets.

It may also include financial advising and other advice designed to help you maximize your assets.

Financial Planning Vs Wealth Management

Many people confuse financial planning and wealth management . However, there are some key differences between the two disciplines. Financial planning is often a one-time process that is used to create a financial plan to help achieve short and long-term financial goals.

Financial Planning	Wealth Management
You only need an income for financial planning	You need a large pool of funds for wealth management
Meet short- and long-term financial goals	Manages assets to increase or preserve the value
Focuses on planning	Focuses on execution
Manages cash flow	Creates or preserves money and assets
Decisions based on financial goals	Decisions focus on wealth goals, i.e., creation or preservation
Gives a comprehensive roadmap for financial life	Focuses on immediate portfolio strategy

Financial Planning Process

Financial planning revolves around how you will manage your finances and the process involves assessing your current financial situation, identifying your goals and then developing a strategy:

a) Cash Flow:

Cash flow is the amount of money coming in and going out of your bank account in a given period. Ensure you have sufficient cash flows to sustain a livelihood. At the same, put surplus money to good use.

b) Goal Planning:

Goal planning involves setting specific financial goals and determining what is needed to achieve them.

c) Contingency Plan:

A contingency plan is an emergency fund that covers you in the event of a financial emergency. Its cash is set aside for a rainy day.

d) Budget:

Budgeting is the process of setting your income against your expenses. It’s a way to manage your income and expenses by putting them together in one place.

e) Investment Plan:

An investment plan is a process of deciding what you want to invest in and when

Wealth Management Strategies

Many different strategies can be employed in wealth management. Some common ones include investing in stocks and bonds, real estate, and commodities. Wealth management broadly focuses on accumulation, preservation and distribution which includes managing a portfolio of different assets.

a) Accumulation:

Start investing early on, in your career. Get your priorities right, have a clear budget and stick to it. Do not buy things you don’t need. Invest the money instead. Start planning for retirement. Invest in high-growth instruments such as equities.

b) Preservation:

If you haven’t covered your health and life with insurance, do so on top priority. Balance your investment portfolio with equity and debt. The proportion of the amount in debt should gradually increase as you inch towards retirement. Take calculated risks because you will not have time to bounce back if your riskier bets do not pan out as planned.

c) Distribution:

Time to reap the benefits of all the hard work, due diligence, financial prudence and planning. Earn income from your investments in the form of interest payouts, annuities, profits etc. Keep ploughing back the surplus, if any.

Financial Instruments for Wealth Management

Each of the strategies described above requires investment in an appropriate asset class or financial instrument. Some examples of popular instruments are listed below:

1. Public Provident Fund (PPF):

The Public Provident Fund is a savings plan for the long term and carries a low risk. PPF is one of the safest investment options out there as it is backed by the Indian government’s sovereign guarantee.

2. Stocks

Stocks are an investment that comes with a medium to high risk and is suitable for long-term investments as you have to hold on to them for at least 5 years to see any significant gains.

3. Deposits:

A deposit is an investment that comes with low risk. While it is a safer option, it is not suitable for long-term investments and that too in large proportions. It can be used for wealth preservation when your approach retirement. You will earn interest at a fixed rate if you put your money in a term deposit.

4. Gold:

You can buy gold in the form of coins or bars. You may also buy Sovereign Gold Bonds (SGB), issued by the Indian Government. SGB is a government security instrument and does not require physical gold to be procured and/or maintained. You get guaranteed interest twice a year and redemption is on maturity. You may also trade the bond on the exchange.

5. Real Estate:

Real estate is an investment with medium to high risk. It is suitable for long-term investments as you need to hold on to it for a few years to see any significant gains.

- Capital gain over some time
- Inflation-adjusted rental income

6. Unit Linked Insurance Plan (ULIP):

ULIPs invest in equity and come with several advantages. ULIPs have an insurance cover that comes along with the investment. Moreover, both the investment and the maturity amounts have tax benefits which means you save money on taxes as well.

- Invest in a diversified portfolio

- Invest for 5 years to up to 99 years of age (Invest 4G ULIP from Canara HSBC Life Insurance)

- Tax-free partial withdrawals after five years

- Bonus additions for long-term investors

- Automated portfolio management for equity investors

- Systematic withdrawal option

7. National Pension System (NPS):

You may buy annuities from NPS and earn a steady cash flow each month post retirement until the end of your life. You may buy the annuity

a. using the corpus that you earned elsewhere or
b. plan well in advance and accumulate money in your NPS account by investing while working The amount of pension depends on the amount that you invested in the accumulation phase (the years that you worked and invested in NPS) or the lump sum amount that you put in on retirement.

Financial planners help you develop a financial plan to meet your short- and long-term financial goals whereas wealth managers help you manage your assets to increase their value. Financial planning often focuses on asset accumulation whereas wealth management typically focuses on asset allocation.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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