Portfolio Management vs Wealth Management :Detailed Comparision

The portfolio management vs wealth management debate is an important one if you’re looking for the right financial solution to safeguard your assets and grow them for the future. The key thing to remember here is that both services are distinct but related. While they both aim at growing and protecting your wealth, they have considerable differences in terms of their purpose, depth, and overall scope. This guide will help you choose the right service based on your financial objectives and how they both fit your needs. 

What is Portfolio Management?

Portfolio management services are the process of choosing, supervising, and controlling a diverse mix of investments, ranging from stocks and bonds to other assets. The goal here is maximizing returns while managing risks as per your particular financial goals. This covers the allocation of assets and diversification along with periodic rebalancing for syncing with your investment horizon and risk appetite. 

In this scenario, there may either be active (managers aim at outperforming the index) or passive (replicating index performance) portfolio management. Some other types include discretionary (manager makes decisions on the client’s behalf), non-discretionary (manager offers advice and executes trades only after the client’s approval), and advisory (the manager only recommends, but the execution depends on the client). 

What is Wealth Management?

Wealth management services are extensively tailored financial advisory services for HNIs (high-net-worth individuals) that blend financial planning, investment management, estate planning, and tax optimization. The end-goal is building, managing, and safeguarding wealth in this case. However, it goes well beyond basic investments towards a more long-term and holistic blueprint for managing all aspects of your financials. 

Some of the main components of wealth management include financial planning (retirement planning, cash flow, lowering financial stress), investment advisory (customized strategies for allocating assets to meet particular objectives), and legal and tax strategy (optimizing tax liabilities and organizing estate plans like trusts and wills). It also includes risk management to safeguard assets from volatility in the market. 

Key Differences Between Portfolio Management and Wealth Management

The difference between portfolio management and wealth management can be understood through the table given below. 

Scope of Services – Investment vs Holistic Planning

Another key aspect of PMS vs wealth management revolves around the scope of services. The differences in scope include the following: 

Portfolio Management Services (Focused on Investments): 

• Objective- Maximizing returns and minimizing returns, while growing the investment capital 
• Focus Area- Bonds, stocks, mutual funds, and other alternative investments 
• Scope- Manages investment portfolios specifically, mostly with a portfolio-first approach 
• Suitable for- Investors who are mainly looking to grow the wealth that has been invested

Wealth Management Services (More Holistic Planning): 

• Objective: Safeguarding, growing, and transferring wealth, thereby syncing life goals and finances 
• Focus Area- Extensive planning, tax mitigation, investing, retirement planning, estate planning, philanthropy, and insurance 
• Scope- Plan-first outlook that accounts for the entire financial life/journey, inclusive of expenditure, liabilities, and income 
• Suitable for- HNIs who need complex and integrated financial services 

This is the core area that needs understanding if you have to crack the portfolio management vs wealth advisory debate. 

Role of the Manager – Portfolio Manager vs Wealth Manager

The manager’s role determines the differences between portfolio management and wealth management for HNIs in India. Let us look at these aspects in more detail below. 

• Scope- Portfolio management is more about growing and investing in assets. Wealth management, on the other hand, includes various personal finance aspects like estate planning, optimizing taxes, and managing risks. 
• Focus Area- Portfolio managers aim to generate higher returns and minimize risks. Wealth managers, on the other hand, focus on long-term preservation of wealth, extensive financial advice, and intergenerational transfer. 
• Type of Relationship- Portfolio managers mostly focus on the performance of a particular managed portfolio. On the other hand, wealth managers build ongoing and wider relationships for managing financial affairs. 
• Target Clients- Both may serve HNIs, although wealth managers are mostly inclined towards ultra-HNIs who need more complex planning of their finances. 

Who should choose portfolio management services? You should choose PMS if you already have a financial blueprint, estate planner, and tax strategies. This means that you only need your investments to be managed professionally. You may consider a wealth manager if you want a one-stop and all-inclusive for complex financial planning and scenarios. This will include tax guidance, retirement planning, investment management, and estate planning. 

Customization and Personalization

When it comes to customization and personalization, here are some things worth keeping in mind. 

Portfolio Management- 

• Portfolio-level customization is ensured in this model 
• They have shifted from generic models to bespoke and actively managed investment accounts for individual clients 
• Rather than fixed portfolios, managers usually customize the mix of debt, equity, and alternative assets. This is done on the basis of your individual goals, time horizon, risk appetite, and preferences
• Portfolio managers directly apply the MPT (Modern Portfolio Theory) for building portfolios that may have specific asset mixes, i.e. aggressive growth-oriented stocks for capital appreciation or high-dividend stocks for income generation 
• Investors may also specify their preferences, including ESG (environmental, social, and governance) criteria or exclude particular sectors 
• The portfolios are managed to lower tax liabilities with steps like leveraging tax-advantaged accounts or particular tax-efficient instruments 
• Portfolio managers may go by tactical asset allocation which adjusts portfolios to leverage short-term opportunities in the market, thereby safeguarding against volatility 

Wealth Management- 

• In this case, the entire framework is goal and life-stage-based wealth planning 
• Investments are tailored around actionable and specific life goals instead of going after high returns only 
• Every investment has a specific purpose, with managers building dedicated sub-portfolios or buckets for various goals. Each is matched with the suitable time horizon and level of risk
• This method lowers emotional selling during downturns, with investors looking at the long-term goals instead of day-to-day volatility 
• Wealth managers also tweak strategies based on the current life phase, understanding that financial goals and priorities may evolve with time 
• Hence, there could be more focus on accumulation at the early career stage with equity-focused and high-growth investments and stability at the mid-career level to sync with milestones like home purchases or education planning. Pre and post-retirement plans may involve shifting more towards safer and fixed-income assets and generating steady income for a longer time respectively. 

Cost Structure and Fees

Here is a closer look at the fees and cost structure for both PMS and wealth management. 

PMS: 

• Management fees of 1-2.5% of AUM (assets under management) annually 
• Performance fees of 10-20% of profits, charged only above the hurdle rate
• Exit/Entry loads may be 1-3% for one-time entry or early withdrawals 
• Added costs may include custodian fees, brokerage, and administrative charges 
• Some PMS providers may also fuse a lower fixed fee with a reasonable profit-sharing percentage. 

Wealth Management: 

• Management fees of about 1% of the total assets which are AUM-based fees, but the service range is wider 
• Flat/Fee-Only charges may be taken by advisors by the hour or annually, varying between ₹15,000 to ₹50,000+ every year
• Comprehensive pricing models are often followed, bundling tax planning, investment management, estate planning, and insurance 

Risk Management and Tax Planning

There are some risk management and tax planning differences between PMS and wealth management. These include the following: 

• Portfolio management focuses on investment risks, mitigating threats linked to market volatility, fluctuations, and the performance of specific assets (credit risks). The goal here is optimizing returns 
• Wealth management focuses on broader risks, including preservation of total wealth. So, there is asset protection, insurance, managing liabilities, and ensuring long-term financial safety 
• Portfolio management usually limits tax planning to minimizing tax liabilities on the investment gains (tax-loss harvesting within portfolios)
• Wealth management offers extensive tax blueprints, including income structuring, estate tax planning, and tax efficiency optimization throughout multiple financial assets, income streams, businesses, etc. 

Suitability – Who Should Choose Portfolio Management?

You should only choose portfolio management services if you match the following aspects:

• HNI with a sizable investment corpus and a desire for personalized investments and direct ownership 
• An active investor looking for alpha or outperforming the benchmark through bespoke blueprints and direct equity/debt instead of diversified and passive mutual funds 
• An individual who wants to grow capital with specialized risk management and asset allocation knowledge without requiring legacy or tax planning holistically 
• An investor who is okay with the higher cost, risk, and complexity, while desiring custom strategies and wealth creation simultaneously 

Suitability – Who Should Choose Wealth Management?

You may choose wealth management if you are:  

• A HNI or UHNI with sizable assets (mostly exceeding ₹5 crore) and want specialized and bespoke wealth preservation and management 
• An entrepreneur or business owner who wish to manage personal and corporate finances better, plan for succession, and tackle irregular cash flows 
• Someone who needs strategies to lower capital outflow, optimize taxes, and structure assets for better transfer 
• A near-retiree or retiree who is transitioning to wealth preservation and income generation from wealth creation
• An individual focused on legacy or estate planning through creating wills and trusts 
• Someone with lower time and energy to manage wealth and diverse portfolios, properties, insurance and assets 

Can Portfolio Management and Wealth Management Work Together?

It is possible for portfolio management and wealth management to function together as integrated solutions. Wealth management will define the holistic long-term strategy, goals, tax planning, and estate planning. Portfolio management in this case will be the execution-oriented engine for targeted investment strategies to achieve specific goals. They can together enable a balanced approach towards wealth preservation and growth. 

A portfolio manager can work with a wealth manager to sync investment decisions with the financial blueprint and risk profile of the client. Wealth managers adjust strategies and portfolio managers rebalance investments to fit the changing life stages and priorities of clients. Portfolio management will look to scale up returns, while wealth management will ensure that the gains are maintained post taxation. 

Conclusion

So, is wealth management better than portfolio management? It depends on your life stage, financial circumstances, goals, and what you need, i.e. growing and managing investments or a more holistic approach towards planning your financial life.