Do I Need a Portfolio Manager or an Investment Advisor?

It is highly advised to consult a financial advisor to help manage your finances. However, looking for the right professional can be a little tricky and overwhelming since there are so many different kinds of financial professionals available to you - investment advisors, portfolio managers, financial planners, wealth managers, asset managers, etc. Broadly speaking, these professionals can be grouped into two distinct groups - portfolio managers and investment advisors. Both portfolio managers and investment advisors are experts when it comes to money management. However, they differ when it comes to advising their clients on their finances. Investment advisors are professionals who can assist you when it comes to investment management, retirement planning, estate management, tax management, budgeting, debt management, etc., whereas portfolio managers are primarily focused on helping you invest and manage your investment portfolio.

An investment advisor is a broader term that encompasses and includes portfolio managers. According to the Securities and Exchange Commission (SEC), most investment advisors or financial planners are portfolio managers, but not all portfolio managers offer all financial services provided by investment advisors and financial planners. Financial planners evaluate every aspect of your life that is related to money such as savings, budget, spending, investments, taxes, retirement, estate planning, etc. These professionals assist you in creating a comprehensive strategy to optimize these areas and achieve your financial goals. On the other hand, portfolio managers are focused on offering investment recommendations such as which securities to invest in, the expense ratio of investments, documentation required, etc. They help you design a portfolio that takes into account your risk tolerance, financial objectives, and investment horizon. In addition, they monitor your investments and suggest changes over time to help you achieve your goals. One should note that portfolio managers do not offer professional support in matters related to tax optimization, retirement planning, estate management, etc. that are essential for securing one’s finances.

But, before making a decision on which financial advisor to hire: a portfolio manager or an investment advisor, it is vital that you must understand your financial needs as well as the expertise of the concerned professional. You should know the kind of services they offer, their scope, the fee model, and other remuneration details.

Let’s find out everything you need to know about portfolio managers and investment advisors and the key differences between the two:

Who is a portfolio manager?

A portfolio manager is a professional who creates and manages an investment account for you. As per the SEC, a portfolio manager advises and issues reports on individual securities to clients in lieu of compensation. The portfolio manager does not restrict his guidance to individual securities alone but also advises on asset allocation and market trends, as well as oversees and manages your investment portfolio end-to-end. A portfolio manager earns his paycheck through the commissions by selling financial securities.

Also known as money managers, investment consultants, investment advisors, etc., not all portfolio managers offer the same scope of services, which is why you need to understand their area of expertise and the kind of short they can offer in managing your investment portfolio.

What does a portfolio manager do?

After taking into consideration your preferences to your risk tolerance, investment horizon, and financial goals, a portfolio manager recommends securities that will fit your profile. They also help you choose, design, manage a portfolio of stocks, bonds, mutual funds, target-date funds, exchange-traded funds (ETFs), or other alternative investments to make sure you reach your financial goals. In addition, portfolio managers are responsible for making day-to-day trading decisions concerning your portfolio and are focused on meeting your financial needs through the rate of return from your portfolio. Also, these professionals rebalance your portfolio to sync it with your investment preferences and risk appetite.

Who is an investment advisor?

An investment advisor is a professional who offers holistic financial advice as per your needs in return for fees or commission. After evaluating your needs, these advisors provide you counsel in financial aspects, such as budgeting, debt management, tax management, retirement planning, estate planning, succession management, healthcare management, etc. In addition, investment advisors can assist you in building an emergency corpus, save for your child’s education, or achieve your financial goals, such as buying a house, retirement, and more. Typically, a vast majority of these services are offered by a financial advisor. However, some advisors may offer specialized services such as retirement planning or tax management. Each kind of investment advisor holds different degrees, certifications, and professional licenses and uses different types of fee structures to charge for their services. Generally, investment advisors make use of the fee-only method as a means of compensation, where they charge as per the assets under management (AUM) or a pre-defined fee.

All investment advisors are bound by a fiduciary duty wherein the advisor must place your needs before their own. Fiduciary investment advisors follow an ethical code of conduct where they lawfully pledge to act in your best interest at all times. These advisors focus on minimizing disputes and ensuring transparency in all financial dealings.

What does an investment advisor do?

Investment advisors provide more exhaustive financial advice compared to portfolio managers where they try and understand your overall financial standing, financial goals, investment preferences, life stage, risk tolerance, etc. After they have assessed your needs, they offer you sound financial advice to help you reach your financial objectives. Investment advisors help you:

  • Design a budget and reach your savings goals
  • Establish an emergency fund and ensuring it has sufficient funds that meet the standard requirements i.e. at least three times your monthly income
  • Determine ways to lower your debt
  • Set short-term and long-term financial goals
  • Design an investment portfolio that matches your risk appetite, financial goals, and investment period
  • Build a sound retirement plan and accumulate retirement assets
  • Maximize retirement account benefits and other government financial aid programs like Social Security benefits
  • Set up a college fund for your child
  • Minimize your taxes
  • Create an exhaustive estate plan and draft succession planning documents, if needed

How do portfolio managers and investment advisors charge fees?

Both portfolio managers and investment advisors use different methods to charge fees for their services:

  • Portfolio managers use a fee-only cost model wherein they professional earn through commissions. These professionals receive a specific percentage of commission on the financial products sold by them to you. Portfolio managers do not levy any fixed, retainer, hourly, or asset-based fee and rely solely on the products (company shares, bonds, insurance, mutual funds, etc.) you buy through them. Typically, portfolio managers receive 3 to 4 percent commission. For example, if a portfolio manager recommends that you invest $1,000 in a mutual fund scheme that levies a 4% commission, you would pay $40 as commission to the portfolio manager and invest $960 in mutual funds.

  • Conversely, in the investment advisor fee model, advisors charge a flat fee, hourly rate, or an asset-based rate (AUM) for their services. Herein, the financial advisor charges a specific percentage on the market value of the assets (ranging from 0.50% to 2% annually) they manage on your behalf.
  • When you compare both the fee models, the commission-based fee model has a higher risk of bias. The advice offered by portfolio managers may tend to favor their interests since they earn their remuneration through commissions. On the other hand, there is a lesser risk of bias when it comes to investment advisors. Since they are earning a flat fee, on an hourly rate, or charging an AUM fee, they get no benefit in offering specific financial products. Instead, these professionals benefit more from the growth of your assets as with a rise in the value of your assets, the amount that they earn will increase simultaneously too.

Key differences between a portfolio manager and investment advisor

Both portfolio managers and investment advisors share one key aspect - they assist you in the management of your money-related affairs. However, there are some key differences in the services that they provide you. Let’s discuss them further.

Portfolio Managers Investment Advisors
These professionals offer you advice, data, and analysis to help you choose the right investments and effectively manage your investment portfolio. These advisors provide exhaustive advice  across several matters such as budget, retirement, taxes, estate planning, healthcare planning, etc.
Though portfolio managers help you in designing your portfolio and its management, they may not evaluate your overall financial goals. Investment advisors first assess your present financial situation and then design a financial plan to help you meet your goals.

Possibility of being offered biased advice since portfolio managers can sell you financial products for their benefit.     

There is a reduced chance of being offered biased advice since investment advisors earn a fixed percentage from you meaning your growth is beneficial for the advisor and has a direct bearing on their earnings.
Portfolio managers are not investment advisors. Investment advisors can offer their clients services related to portfolio management.

Portfolio managers are mandated to register themselves with the state and the SEC as well provided they manage assets worth more than $100 million.         

Investment advisors come under the jurisdiction of FINRA (Financial Industry Regulatory Authority) and SEC if they manage assets worth more than $100 million.

Typically, portfolio managers help you manage your investments and securities as well as create a foolproof investment portfolio based on your current financial situation and risk tolerance. Based on the analysis, the portfolio manager suggests an investment strategy that can help meet your targets. You can also offer your portfolio manager the power to invest on your behalf. Since these professionals have a thorough understanding of market trends and volatility, they can propose the most effective strategy for investing in stocks, mutual funds, and other securities based on your financial situation.

On the other hand, investment advisors offer portfolio management services in conjunction with other professional financial services such as budgeting, taxes, insurance, estate planning, and retirement. These advisors assess your financial situation and suggest a plan to achieve your financial goals. If an investment advisor manages assets worth $100 million or more, they are also called registered investment advisors (RIAs).

Who to pick: a portfolio manager or an investment advisor?

The decision to choose between a portfolio manager or an investment advisor should be based on your needs and financial goals. If you need investment-related counsel then choosing a portfolio manager would be the prudent choice. However, if you want more thorough financial support, including investment-related advice, then picking an investment advisor would be a wiser choice.

If you’re still not sure which of the two to choose, then you can apply the following scenarios to get an idea of which type of professional you should hire:

  • Investment support only: If you wish a professional to create and manage your investment portfolio then engaging the services of a portfolio manager would be the way to go. The professional can help you invest and create a retirement corpus while designing a portfolio aligned with your risk tolerance, financial goals, and investment horizon. To ensure that the portfolio manager you hire should be a registered investment advisor or RIA.

  • Exhaustive financial planning coupled with investment advice: If it is extensive financial counsel that you require pertaining to retirement planning (setting up a 401(k) or an IRA) or buying that dream home of yours, then you need to engage an investment advisor to help sort things out for you. Investment advisors can also be a great help when it comes to tax planning, saving for your child's education, or maximizing retirement contributions, creating a sound budget, etc., to increase your savings. An investment advisor should ideally be either a certified financial planner (CFP) or an RIA.

  • Financial planning without investment advice: If you already have a 401(k) plan and do not require any investment-related advice, but are still in need of assistance with creating a budget, first home purchase, long-term healthcare planning, etc., then you can consider hiring the services of an investment advisor. To ensure that the advisor offers financial planning services along with investment advice. Herein, you can choose an investment advisor who is a CFP and may or may not be an RIA.

How to find a portfolio manager or an investment advisor

If you're looking for a portfolio manager or an investment advisor, follow these steps to find the right professional who can help you meet your goals:

  • Understand your financial needs: First and foremost, you should identify and understand the areas where you require financial advice. If it is only investment-related advice that you need, then you would be better served by hiring a portfolio manager, however, if you are looking for comprehensive financial support, then you should consider choosing an investment advisor. You should be clear and precise as to the reasons why you need an investment advisor along with the areas where you require professional help such as needing help when it comes to retirement planning or tax planning or both.

  • Begin your search: Once you're sure of what you need, you can start your search to find the right professional for you. Ask your colleagues, family, and friends or you can use our advisor match tool to help you find advisors (portfolio managers and investment advisors) based on their experience, fee structure, and licensing related to SEC and FINRA.

  • Shortlist and interview the candidates: Once you have a group of prospective advisors to choose from, you can shortlist them by using FINRA’s BrokerCheck tool. The tool provides information related to the professional’s registration, employment history, regulatory actions, licenses, complaints, and arbitrations if any. After you've reviewed the details, you can interview the candidates. Let's take a look at some of the questions you should ask prospective portfolio managers and investment advisors:

    • What are your qualifications and certifications?
    • What licenses do you hold?
    • Which area do you hold expertise in, and what services do you provide?
    • What kind of clients do you serve?
    • What is your investment philosophy or approach towards financial planning?
    • How do you charge for your services?
    • Do you work in a team or independently?
    • How will the relationship work, and what will be the mode of communication?
    • What metrics will be used for assessing your performance?

  • Hire the ideal professional for your financial needs and goals: After you've received satisfactory answers to the aforesaid questions, you can assess the pros and cons of the shortlisted professionals. You can also evaluate the fee models used by them and decide which individual or firm best suits your budget and meets your requirements.

To conclude

The decision to pick between a portfolio manager and an investment advisor should be made based on your financial needs. No matter which financial advisor you choose to go with, you'd benefit from the services of both these professionals. These professionals can assist you in setting realistic investment targets and achieve them. Furthermore, it has been found through several studies that professional financial advice can help an individual withstand market volatility, minimize taxes, create a retirement plan, and do much more.

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

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