Hiring a professional for your money-related matters is crucial. When you start your search to find a financial professional, you will come across several titles, such as investment advisors, portfolio managers, financial planners, wealth managers, asset managers, etc. Each professional has expertise in their field. Broadly, these professionals are categorized into two groups – portfolio managers and investment advisors.
Professionals working as portfolio managers and investment advisors offer guidance on different financial topics. However, one thing they have in common is money management. Investment advisors encompass professionals that can help you with investment management, retirement planning, estate management, tax management, budgeting, debt management, etc. Portfolio managers are typically more focused on helping you invest and managing your investment portfolio.
In comparison, an investment advisor is the broader term and includes portfolio managers. The Securities and Exchange Commission (SEC) specifies that most investment advisors/financial planners are portfolio managers but not vice versa. Financial planners assess every money-related aspect of your life, including savings, budget, spending, investments, taxes, retirement, estate planning, etc. These planners help you develop a detailed strategy or a plan to optimize their areas and meet your financial goals. Alternatively, portfolio managers offer primarily investment recommendations and support, such as which financial securities to choose, the expense ratio of investments, documentation required, etc. Portfolio managers help you create a financial portfolio aligned with your risk tolerance, financial objectives, and investment horizon. They also monitor your portfolio and suggest changes over time to help you achieve your goals. However, portfolio managers do not offer professional support in other important financial matters such as tax optimization, retirement planning, estate management, etc.
Before you decide between hiring a portfolio manager and an investment advisor, it is important to know your needs and the expertise of the concerned professional, and the services they offer. Further, it is also vital to understand the scope of services, the fee model, and other remuneration details.
Here is everything you need to know about portfolio managers and investment advisors and how the two differ:
Who is a portfolio manager?
A portfolio manager creates and maintains an investment account on your behalf. According to the SEC, a portfolio manager provides advice and issues reports on individual securities to clients for compensation. However, the advice in this relation is not limited to individual securities. A portfolio manager can also advise on asset allocation and market trends, as well as monitor and handle your investment portfolio end-to-end. A portfolio manager earns a commission from the financial securities they sell.
Portfolio managers are known as money managers, investment consultants, investment advisors, etc. However, not all portfolio managers offer the same scope of services. Hence, when engaging with a portfolio manager, it is critical to understand their expertise and the level of support they can provide in managing your investment portfolio.
What is an investment advisor?
An investment advisor or a financial advisor offers holistic and professional advice according to your needs in return for compensation. These advisors assess your financial needs and offer comprehensive financial guidance.
An investment advisor can provide counsel in financial aspects, such as budgeting, debt management, tax management, retirement planning, estate planning, succession management, healthcare management, etc. Investment advisors can also help you build an emergency corpus, save for your child’s education, or achieve your financial goals, such as buying a house. Usually, a financial advisor offers all or most of these services. But in some cases, individuals (also known as financial advisors) might offer specialized services, such as retirement planning or tax management. Each type of investment advisor holds different degrees, certifications, and professional licenses. Moreover, investment advisors use different fee structures to charge for their services. Mostly, investment advisors follow the fee-only method, where they charge as per the assets under management (AUM) or a pre-defined fee.
All investment advisors follow a fiduciary duty, which means that the investment advisor will place your needs before their own. Fiduciary investment advisors follow an ethical code of conduct. Hence, they lawfully pledge to act in your best interest at all times. Fiduciary investment advisors work to minimize disputes and ensure transparency in dealings.
What does a portfolio manager do?
A portfolio manager advises you about securities that will fit your portfolio as per your risk tolerance, investment horizon, and financial goals. Portfolio managers help you select, create, manage a portfolio of stocks, bonds, mutual funds, target-date funds, exchange-traded funds (ETFs), or other alternative investments to ensure you meet your financial goals. Portfolio managers also take day-to-day trading decisions regarding your portfolio and are focused on meeting your financial needs through the rate of return from the portfolio. Further, these professionals also rebalance the account to align it with your investment preferences and risk appetite.
What does an investment advisor do?
Investment advisors or financial advisors offer more thorough financial advice than portfolio managers. Investment advisors work with you to understand your overall financial standing, financial goals, investment preferences, life stage, risk tolerance, etc., and accordingly, offer sound and comprehensive financial advice. Investment advisors help you:
- Create a budget and work effectively to achieve your savings target
- Build an emergency fund as per the standard requirements (at least three times your monthly income)
- Identify ways to reduce debt.
- Set short-term and long-term financial goals
- Create an investment portfolio as per your risk appetite, financial goals, and investment period
- Effectively accumulate retirement assets and create a sound retirement plan.
- Help you maximize retirement account benefits and other government financial aid programs like Social Security benefits.
- Save effectively for your child’s education expenses.
- Minimize your taxes
- Create a holistic estate plan and draft succession planning documents, if required.
What are portfolio manager and investment advisor fees?
Both portfolio managers and investment advisors charge differently for their services.
- Portfolio managers adopt a fee-only cost model. In the fee-only model, the professional typically earns through commissions. These professionals get a specific percentage of commission on the financial products you buy through them. They do not levy any fixed, retainer, hourly, or asset-based fee. So, the more financial products (company shares, bonds, insurance, mutual funds, etc.) you buy through them, the higher is the income. Generally, the average pay for portfolio advisors is between 3-4%. For instance, a portfolio manager suggests that you invest $2,000 in a mutual fund scheme that levies a 5% commission. In this case, you would pay $100 as commission to the portfolio manager and invest $1,900 in mutual funds.
- Alternatively, the investment advisor fee model is different from portfolio managers. Investment advisors can charge a flat fee, hourly rate, or an asset-based rate (AUM) for their services. In the AUM mode, the financial advisor charges you a specific percentage on the market value of the assets they manage on your behalf. The average investment advisor fee under the AUM method ranges from 0.50% to 2% per year.
The commission-based fee model has a higher risk of bias. The advice these professionals offer might favor their interests as they earn their remuneration through commissions. However, in the case of investment advisors, there is a minimum risk of bias. This is because they directly get their income from you and have no benefit in offering specific financial products. Instead, investment advisors benefit from your growth. If your assets grow, your investment advisor will benefit simultaneously.
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Portfolio manager vs. investment advisor
Both a portfolio manager and an investment advisor are the same in one aspect – they help you manage your money-related matters. However, the services each provides starkly differ from the other.
Here are some key differences between portfolio managers and investment advisors:
| Portfolio managers | Investment advisors |
| Only offer advice, data, analysis to help you pick the right investments and effectively manage your investment portfolio | Offer holistic advice regarding your financial well-being across various matters such as budget, retirement, taxes, estate planning, healthcare planning, etc |
| Offer advice related to portfolio creation and management and may not assess your overall financial goals | Assess your financial situation and then create a plan to help you reach financial goals |
| Portfolio managers are not investment advisors | Investment advisors can offer portfolio management services |
| Higher chances of biased advice. Managers might sell you financial products for their benefit | Low chances of biased advice as they earn a fixed percentage from you. Your growth is beneficial for the advisor and increases their earnings |
| Required to register with the state, and also the Securities and Exchange Commission (SEC) if they manage assets worth more than $100 million. | Regulated by the FINRA (Financial Industry Regulatory Authority) and SEC if they manage assets worth more than $100 million. |
Overall, portfolio managers help you handle your investments and securities and create a failproof investment portfolio. Portfolio managers evaluate your financial situation and risk tolerance. Based on the analysis, the portfolio manager proposes an investing strategy customized to achieve your targets. You can also give your portfolio manager the power to invest on your behalf. Portfolio managers have an in-depth understanding of market trends and volatility. Hence, if you want to invest in stocks, mutual funds, and other securities, your portfolio manager can propose the most effective strategy as per your financial situation.
Alternatively, investment advisors offer portfolio management services along with several other professional financial services. Investment advisors analyze your financial situation and propose a plan to help you reach your goals. Investment advisors can provide advice on budgeting, taxes, insurance, estate planning, and retirement. Some investment advisors also offer management services. If an investment advisor manages $100 million in assets, they are also known as registered investment advisors (RIAs).
Should you hire a portfolio manager or an investment advisor?
Whether you should hire a portfolio manager or an investment advisor depends on your needs and financial goals. If you want only investment-related counsel, opting for a portfolio manager would be a good choice. However, if you want more comprehensive financial support, including investment-related counsel, it is wise to hire an investment advisor.
Alternatively, you can apply these scenarios to get an idea of which type of professional you should hire:
1. Investment support only:
If you want a professional to create and manage your investment portfolio, engage with a portfolio manager. For instance, you are a working professional and have no time to manage your investment portfolio. However, you want to invest and create a large corpus for retirement. In this case, you can opt for a portfolio manager who can create a portfolio aligned with your risk tolerance, financial goals, and investment horizon. These portfolio managers may or may not be Certified Financial Planner (CFP) but should be an RIA.
2. Comprehensive financial planning with investment advice:
If you require holistic financial support, engaging with an investment advisor would be beneficial. For instance, you want to start your retirement plan (like a 401(k) or an IRA (Individual Retirement Account)) and also buy a home in the future before you retire. Alternatively, you are paying a high amount of taxes in the present and have high-interest debt. You also want to save for your child’s education. In this case, you will likely benefit from the counsel of an investment advisor. Investment advisors offer complete financial support and help you optimize your retirement portfolio, maximize retirement contributions, create a sound budget, etc., to increase your savings. An investment advisor will also help you identify ways to save for your child’s education. This professional should be a CFP and an RIA.
3. Financial planning without investment advice:
Ifyou have a 401(k) plan and do not need any investment-related advice, but require help with budgeting, first home purchase, long-term healthcare planning, etc., then you can consider engaging with an investment advisor who offers financial planning services part from investment advice. In this case, you can go for a CFP who may or may not be an RIA.
How to find a portfolio manager or an investment advisor
Whether you want to engage with a portfolio manager or an investment advisor, you can follow these steps to find the right professional for your needs:
1. Understand your requirements:
Understand and identifyareas where you need financial advice. If you want only investment-related counsel, you can aim to look for a portfolio manager. However, if you require exhaustive financial support, you can choose an investment advisor. In the case of an investment advisor, you should precisely know the area where you require professional help. For instance, if you need support with retirement planning or tax management, or both.
2. Start your search:
Once youknow your requirements, you can start your search to find your desired professional by taking suggestions from your colleagues, family, and friends. You can also use theWiserAdvisor’s advisor match toolto find a capable professional as per your needs. The tool helps you find advisors (portfolio managers and investment advisors) based on their experience, fee structure, and licensing related to SEC and FINRA.
3. Shortlist and interview the candidates:
Once you have your prospective advisors, you can shortlist them based on their educational background, work reviews, credentials, investment philosophy, ethics, fee models, etc. For this purpose, you can useFINRA’s BrokerChecktool that gives you all information regarding the professional’s registration, employment history, regulatory actions, licenses, complaints, and arbitrations, if any. Once you review the details, you can interview the candidates you shortlist. Here are some questions you should ask before hiring a portfolio manager or an investment advisor:
- What are your qualifications and certifications?
- What licenses do you hold?
- What are your expertise, and what services do you provide?
- What type of clients do you serve?
- What is your investment philosophy or financial planning approach?
- How do you charge for your services, and what is the investment advisor fee?
- Do you work in a team or independently?
- How will the relationship work, and what will be the mode of communication?
- How will your performance be assessed?
4. Engage with the ideal professional:
After you have answers to all the above questions, you can evaluate the qualities and flaws of the shortlisted professionals. You can also compare the fee models and see which individual or firm fits your budget and meets your needs.
To sum it up
Hiring a portfolio manager or an investment advisor solely depends on your financial needs.Irrespective of whether you choose a portfolio manager or an investment advisor, you will benefit individually from the services of both professionals. These individuals will help you set realistic investment or financial goals and eventually help you achieve those targets. Moreover, studies have shown thatprofessional financial advicecan help navigate the market volatility, minimize taxes, create a retirement plan, and do much more.
