It happens to me all the time. Even some of my clients do it. It’s not intentional on their part, and it’s even understandable considering the plethora of titles, designations, and certifications that exist in the financial services industry.
Someone will refer to me as a “financial planner” or a ”financial adviser” or perhaps even a “broker.” I refer to myself as an “investment portfolio manager.”
What’s the difference and why is it important?
There are many websites that you can wade through to determine the specific (or non-specific) differences between titles and designations. Some even include exhaustive lists of requirements in order to be certified.
But I think there is a simpler way that cuts to the heart of the matter. Look at the noun in the title or designation.
For example, a planner is compensated for making a plan. An adviser is paid to provide advice. A broker is paid to, well, “broker a transaction.” And a manager is paid to manage.
This is important to understand because it ties into what, realistically, a client can expect from the service provider. If you hire someone to provide advice and you subsequently take action on that advice, the responsibility for the success or failure is ultimately yours. You made the decision to follow (or not follow) the advice.
By the same token if you hire someone to create a plan it is not appropriate to blame him or her if the execution of that plan is less than satisfactory. If an architect designs a house for you but the builder uses sub-standard materials in the construction, it’s not the architect’s fault if the house falls down. It’s the builder’s fault (or your fault for hiring the builder).
‘Advice’, ‘plan’, ‘analysis’, ‘counsel’, etc tend to be rather abstract and suggest passive involvement. ‘Management’, on the other hand, suggests active involvement with some level of decision-making authority (and accountability commensurate with such authority).
This issue of accountability is one of the reasons that titles and designations are so confusing in the financial services industry. In a society so quick to assign blame and to litigate, most firms (and individuals) will naturally counter by doing their best to imply performance while simultaneously attempting to avoid accountability in case of non-performance.
This isn’t necessarily good or bad; it all depends on the value you receive from the service. Paying a 1% “advisory fee” to Jim Cramer may or may not deliver as much value as paying a 1% “management fee” to Warren Buffett. It all depends on what you are wanting to achieve and the credibility and performance of the provider.
To add to the confusion, some advisers also do planning and managing. Some planners provide advice and management. And some managers offer advice and planning.
So how can you determine the extent to which their efforts are devoted to each area?
I suggest looking for two things:
1. Does your service provider have discretionary or non-discretionary authority over your investment account? ‘Discretionary authority’ means that he or she can execute transactions in your account without first asking your permission. ‘Non-discretionary’ means that you must agree to each transaction beforehand, which is in fact accepting the advice of the professional.
2. Is there a benchmarking metric in place to evaluate the service provider’s performance against agreed objectives? Due to its passive nature, the quality of ’advice’ can be difficult to measure, benchmark, and track. Managing to specific goals and objectives, on the other hand, implies the presence of a process by which this may be accomplished. Large institutions such as non-profits and endowments use a document known as an Investment Policy Statement (IPS) to define their objectives, the investment boundaries, and the quality control metrics that will be used to evaluate performance. From this document a dashboard can be generated that allows the institution’s leadership to see at a glance if their investments are on track.
So, if your financial services provider has discretionary authority over your account, and you have worked with the provider to develop an IPS and dashboard, then you have effectively hired a manager for your investments.
If not, you are paying primarily for advice and/or planning.
