Differences between Financial Planning and Wealth Management

Prabhat Nigam

10 Sep, 2022

The concepts of financial planning and wealth management are used interchangeably in financial discussions. However, these two different terms differ a lot in terms of their nature, operations, scope of activities etc. This piece of writing discusses the meaning and the 5 major differences that exist between financial planning and wealth management.  

What is financial planning?  

The process of synchronisation of the financial goals with the personal finances of the individual is called financial planning^[1]. The concept of financial planning revolves managing day to day finances of the individual with the aim of becoming financially self-sufficient in life. In includes adoption of multiple financial processes to achieve one’s financial goals. Financial planning is a set of quantitative measures one has to adhere to in order to reach the desired financial objectives.

Financial planning includes various activities such as debt management and cash flow management, management of financial risk by using financial products like life insurance, retirement planning and real estate planning. Financial planning also extends to investments as well and not just making savings like investing in education, home, marriage, children’s education and most importantly retirement plans. Last but not the least, tax planning is also crucial to financial management in order to save an individual’s hard earned money.    

What is wealth management?  

The strategies adopted by high net worth individuals for preservation of their wealth and for further accumulation are called wealth management. As part of wealth management, these individuals actively try to identify and take advantage of profit making activities. Wealth management is meant for high net worth individuals or highly rich businessmen. As part of wealth management, these businesses appoint wealth managers to preserve and further accumulate their wealth. Some of the common activities or strategies that form part of wealth management includes capital gains assessment, estate planning, risk management and last but not the least tax management.     

5 major differences between financial planning and wealth management

Following are the 5 major differences that exist between financial planning and wealth management:

1. Applicability: both the strategies of financial planning and wealth management are ideally meant for different set of individuals. Wealth management ideally suits the needs of High net worth individuals who have sufficient amount of wealth. Wealth management is ideally meant to grow the existing wealth multiple times and at the same time preserve it too. On the other hand, financial planning is meant for everyone. It includes both HNIs and non-HNIs. The strategy of financial planning is to save and optimise the hard earned money of the individuals and synchronise it with their financial goals.
2. Objectives: financial planning and wealth management differ in terms of the scope of their activities. Financial planning is the process of managing the income and expenses of an individual and optimally utilising them to achieve the financial goals. In financial planning, there is almost no scope for management of accumulated wealth which exists in the individual’s bank account and other related assets. Wealth management on the other hand revolves around the management of the existing and accumulated wealth of individuals lying in different kinds of assets by investing them in various kinds of growth oriented financial instruments.  
3. Scope of activities: In the process of financial planning, the day to day activities of a financial planner involves planning the day to day expenses of an individual and other activities such as individual’s monthly income, expenses, tax savings, tax planning, savings. The scope of financial planning does not take into account the amount of wealth you have in hand or the extent of assets one holds. However, such is not the case with wealth management where the wealth planner is only concerned about the amount wealth one has and invests and reinvests the same in order to have high yielding returns along with growth.  
4. Extent of involvement: The scheme of operation in case of financial planning does not involve active involvement from the individual’s end. The financial planner designs the steps that need to be followed by the individual. There is not much scope for the individual. However, wealth management usually involves active involvement of the client with the wealth manager in order to better optimize the investment decision for further wealth creation and preservation.
5. Remuneration of the consultants: when it comes to the remuneration of financial planners and wealth managers, it is completely poles apart. A financial planner charges a paltry sum of Rupees 5000 to 10,000 per individual and the remuneration increases based on the complexity of the task entrusted to the planner. However, in case of a wealth management, the manager charges in the form of percentage of the portfolio of the client. The percentage of remuneration revolves around from 1% to 2% of the client’s portfolio and it is generally on a yearly basis.   

Conclusion 

From the above discussion on the difference between the strategies adopted in both financial planning and wealth management, it can be concluded that the process of financial planning goes throughout the span of an individual’s life span whereas the need of wealth management comes at a later stage in the life of an individual when he has accumulate a considerable amount of wealth. The wealth management stage can arrive earlier if the individual has inherited wealth. Though both the processes are related to management of money, they are quite different in their approach.  

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