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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Investment Management vs Financial Planning | Making Jargon Arrests!

Knowing if you want investment management vs financial planning is a key element in finding the right advice. In this episode, we gently sort out the marketing from the reality.

You know the financial industry jargon zone: wealth Management, investment management, financial planning, fee-only, fee-based. These words mean something specific to regulators, but marketers throw them around to get your attention.

What's a real person to do when the powerful combination of the financial industry teams up with the creativity of the marketing industry?

This video helps you sort out who's who and what's what when looking for a financial advisor.

00:00 Welcome!

01:38 Definitions of Financial Planning and Investment Management

05:38 John talks about the tool in financial planning

10:43 Wealth Management

11:46 Family Offices

12:16 Fee-based vs fee-only

John's firm website:

For advisors around the US:

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Bridget: Investment management versus financial planning. When people are looking for financial help, they immediately enter the jargon zone. In this episode we're going to define the differences between investment management and financial planning and talk about what's really included in both, so you can make the best decisions. We'll also talk about fee-only versus fee-based, and we'll talk a little bit about how the industry marketing machine works so that people are confused about this and what you need to do to know before you are looking for someone. My name is Bridget Sullivan Mermel, and I'm a fee-only financial planner in Chicago, Illinois.

John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And Bridget, before we start, I want to remind everybody to hit that subscribe button. Subscribing to our channel helps other people to find this content online. And I'm excited to talk about this idea, and I love the “jargon zone.” When we get into these things, we try really hard to talk in plain English to people, but it's just hard in general.

And then you've got the marketing machines, all the buzzwords and all the things, and I often think, “How does a regular person make sense of these things?” It all sounds the same, like me going into my doctor's office and the language that goes on there sometimes. This idea of how there can be a difference is really interesting. Let's talk about investment planning versus financial planning.

Bridget: Yeah, investment planning versus financial planning. Financial planning starts with the question what is your goal? What are you trying to accomplish? Investment management or investment advising starts with the idea that your goal is more money. Do you think that's fair to say?

John: I think that is. Interesting as we're thinking about this, I think about when people say, “Well, what do you do for a living?” I say, “I'm a financial planner.” And their first question is: “How is the market doing? What do you think about the stocks today?”

Bridget: And that is investment management.

John: Right.

Bridget: So as financial planners we do investment management.

John: Right.

Bridget: We do. That's one of many things that we do. But if people who really just want somebody to manage their investments and never want to ask them another question about something else, investment managers are probably a good choice.

John: Yeah. And that's the sort of marketing machine at work. Part of the messaging is that the most important thing in our financial lives is your investments and what type of performance you get. And that's important. I mean it is important, but it is not the most important thing and it's not one of the top two or three or four most important things in my mind. But that's the message, that's in general what we feel like: “Oh, financial planning, we got to do well in our investments.” And no, the idea is not doing well in investments, necessarily, in a vacuum. So some of the questions should consider other things.

We just had new prospective clients come in, and they were talking with one of the big brokerage firms—you’d recognize the name. They decided to hire them to do some things, and they're charging a percentage of their assets. And I said, “What are they doing in financial planning for you?” And they said, “Well, yeah.” I said, “Well, can you tell me what they said when they looked at your tax return?” They responded, “No, they didn't look at the tax return.” I added, “And how about when they looked through your wills or your living trust?”

And they said, “Well, jeez, they didn't look through that at all.” And so, we had this conversation about, golly, how much you pay in taxes is important. How are they going to give advice, even though it says on the big website, “We do tax planning,” if they're not looking at the taxes. How do you do those things if you're not looking at those things and taking that big picture? I use the term holistic a lot in my practice, and I'm not sure that's the right term, but it sort of pictures that whole thing, which is financial planning as I see it.

Bridget: Yeah. And I think of it as comprehensive. Also, another important area in financial planning that we haven't talked about yet is insurance. And that's interesting, because is the person looking at your home insurance and your auto insurance, or are they really just trying to get you to buy life insurance? That is a question that I have.

John: Years ago, when I built the office that we have now, I had somebody that I sort of knew, and he came to the open house, and he was in the financial world, and I said, “Oh, geez, nice to meet you. Tell me a little bit about your business.” He said, “I do what you do. I even look at people's insurance.” And I'm thinking, “Oh, you even look at their insurance. I guess you do exactly the thing that I do not.”

Bridget: Right.

John: But as a financial professional, he thought, “Oh, yeah, we do the same thing. I even look at their insurance.” And that's what the trend is, but it's changing. We're changing the dialogue with it. But financial planning starts with the question: What's the goal? And then investments are a tool. Tax management is a tool. Risk management and insurance are tools. All those things are tools to help put the goal first. I talk about it as putting the horse in front of the cart.

Bridget: Yeah. And I want to give a couple of examples of what we've done in the last couple of years with financial planning that had nothing to do with investments, but I felt were good. To use a baseball analogy, they were good singles. They weren't home runs, but they were good singles. The first was reviewing people's mortgages. Two years ago, mortgage rates were at an all-time low.

And so, we said, “Let's take a look at your mortgage and what rate do you have. Let’s double check that, because a lot of times people think they have something, but then they look at it and something different. Okay, let’s go through the effort of refinancing now.” Okay, two years later, everybody understands actually what we mean by inflation protection from getting a fixed interest 30-year mortgage. So that was one big hit.

John: Let me jump in on that, if you don't mind, Bridget. The person who was working with the big company, said, “Well, jeez, I could go there, and I got a friend, and they do everything for me, and they can do mortgages for me, but I don't know if I need that.” And I said, “Well, just exactly your point.” Number one is identifying what doesn't make sense to do.

The other one, and I know that you do this with people too, is different mortgage originators, the bank, the credit union, a mortgage company, charge different fees, and you think, “Well, hang on a second, the rate is 3% or 3.5%, or today, 5%. I know what the rate is.” But those underlying cost comes on that two-page disclosure, and there're something like 97 numbers on there, and only one section makes a difference in the cost. And personally, we did, shop the mortgage rate, same interest rate, and it was a $2,000 or $3,000 difference between the top cost and the bottom cost.

And you say, “We're not changing people's lives. It's a single. We're not winning the game by saving $1,000, but this is meaningful money. And as a regular person, you think, “Well, I go to this place or that place or the other. If I'm getting 3.5% or 5.5% today, what's the difference?” And there is a material difference, and that's financial planning. It's got nothing to do with investments.

Bridget: Yeah. Second example of something that we were talking about with every client who was applicable was during COVID the PPP loans. So we have probably, maybe quarter of our clients have small businesses, and some of them are really small, and they were really busy with their lives and were not tuned into PPP loans. I forget at this point what that even stands for, but we had a lot of clients to whom we said, “Get these, and go to this bank.” We knew how to help them through the process to some degree, and we got a bunch of people PPP loans. Again, it's a single, but it helped them at the time they were eligible for it. And again, I've never heard of an investment manager giving anybody that kind of feedback.

John: Right. Another one just popped into my head as we're talking about this is another prospective client coming in and said, “Here's what my plan is. Can you help me with this? Here’s what we're going to do for Social Security when my wife retires, and I'm spending this money now.” And so one of the questions I had for him was, “Well, listen, one of the things that if you hire us that we would do for you is to figure out if that is the right and look at those different options, and probably the right thing to do is what you're planning, but let's look at all the options to make sure that you make the right decision for you." And so, it has zero to do with investments, but that's probably more than a single if there's something that means making a lifetime irrevocable decision about cash flow for the next 30 or 40 years. That’s a pretty big deal. And what does that have to do with investments? Again, that's a big zero. That's financial planning.

Bridget: Another thing I think that people want to understand is that people who are investment managers a lot of times are active managers, and so they're going out and trying to pick the winners in the stock market, either with mutual funds or in whatever category. We believe that the research that has come down from Nobel Prize winners is that you can't pick the winners and you're better off just going slow and steady in index funds or we also use dimensional fund advisors, or DFA, and that just put the money in, rebalance it once every year, make it no drama, year after year, is how to get the best returns. Not be paying investment managers just to do that.

John: Right. Yeah. Slow and steady wins the race. I agree with that. One thing that you mentioned in our introduction is this idea of wealth management. Of course in our world we've heard that a lot. Reaction unscripted. I like that. Let's talk about that a little bit. Wealth management, financial planning, what’s the jargon there.

Bridget: People with marketing backgrounds study our industry extensively and try to figure out what words attract people to different advisors. And I think that advisors who want to fashion themselves as working with wealthy people call themselves wealth managers, but that there's generally no difference. It's more of just a marketing distinction. There's no actual significant difference..

John: …between that and financial planning.

Bridget: Right.

John: So investment management versus wealth management. Those are two different things. But wealth management, financial planning, it's jargon zone.

Bridget: Yeah. And it's really more of a marketing distinction. There can be what's called family offices and that's when you have enough money so that you can hire somebody to manage your whole family's finances. So that is to me actual wealth management. But that's a different thing where you hire somebody in your office to do it, and it's truly people that really have a lot of need for entire family planning.

John: As long as we're in the jargon zone, before we wrap up, I want to make sure we hit on that idea of fee-based versus fee-only, because that is definitely deep in the jargon zone.

Bridget: Yeah exactly. So fee-only came in play with NAFA, the National Association of Personal Financial Advisors and they said that we want to distinguish people who are fiduciary and working in clients best interest and not taking commission. And so they came up with this idea of fee-only. The marketers in the industry—we can call them the dark side—said that the people who charge commission said, “Well we like that fee something and so we'll call it fee-based.”

John: Right.

Bridget: And so, fee-based is really you're paying a commission and an extra fee, like you do with fee-only. I have a negative view of fee-based. I hate to tell all the fee-based advisors that.

John: Well and to me it's more that it sounds similar. Oh there's traction here, so now we're going to muddy the waters and just to be real clear on that, that fee-based and fee-only are two different things. And for me anyway, it's a matter of knowing what you're getting. Don't confuse the two. I don't think there's as much of a difference these days, but it's a matter of knowing what you're talking about; know what you're getting. And don't confuse investment management with financial planning. Those are two different things. Don't confuse fee-based with fee-only. Those are two different things. And being informed is power as a consumer.

Bridget: With that, I think it's a good time to wrap it up. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And I want to remind everybody to hit that subscribe button. Help other people find this show online and this information. And I also want to say, I'm interested in knowing what you guys think about this financial planning and the jargon zone and what things you're hearing, so drop a note in the comments and let's have some dialogue about what's going on and that might help us for some future episodes to provide more value to you. And with that, until next time.

Bridget: Thanks, John.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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