If you are thinking about getting professional help with your money, you may be confused about who to turn to. There are so many titles and types out there, but for the sake of this article, let's stick to two – a portfolio manager and an investment advisor.
An investment advisor helps you figure out your investments, such as where to put your money, how to manage your assets, and more. But your investments do not exist in isolation. Together, they form your portfolio. This is an arena where a portfolio manager may shine. Their job is to make sure everything in your portfolio works well together.
So, which one do you need?
That depends on what you are looking for. Do you want someone to tell you what to buy, or do you want someone actually to do the buying and selling for you? Your answer to that question will tell you who to hire.
Read this article to find out the difference between an investment advisor and a portfolio manager and decide who makes the most sense for you right now.
What is the difference between an investment advisor and a portfolio manager?
An investment advisor can tell you where and how to invest your money. They can explain market trends to you and help you create a plan that accommodates your financial goals and risk tolerance. Some investment advisors can also act on your behalf if you give them discretionary authority. They can make certain investment decisions on their own without needing to check with you every single time. However, their main focus is advice, and they work on helping you understand your options and make informed investment decisions.
A portfolio manager, on the other hand, is more hands-on. They offer financial advice and, at the same time, also actively manage your entire portfolio. They can decide which assets to buy or sell, when to rebalance your holdings, and how to make sure your investments stay aligned with your long-term financial objectives. They consider market swings, global events, tax laws, sector-specific news, and other factors that could impact your investments.
The key difference between the two professionals is the extent and manner in which they work on your portfolio and investments. An investment advisor helps you make the right choices by keeping you informed, while a portfolio manager executes the strategy and actively manages your money day-to-day.
What are the duties of an investment advisor?
An investment advisor essentially tells you what to invest your money in and how. Let's understand their role by considering the following situations:
1. You do not understand multiple investment options in the market
The sheer number of choices in investing can be overwhelming. With the many stocks, bonds, mutual fund options, and now cryptocurrencies, there is so much to learn about every day. Many people end up either doing nothing because they are afraid to make a mistake or investing their money everywhere without having a personalized plan.
The solution: An investment advisor offers expert advice
An investment advisor considers your unique situation, such as your age, income, goals, existing savings, debt, and most importantly, your comfort level with risk. Based on this, your investment advisor can recommend investments that are actually designed to help you.
2. You have a fear of missing out
Markets can be emotional. And, unregulated emotions can derail even the most thoughtful investor. You may see headlines about the latest market crash, and suddenly be tempted to act impulsively. Are you familiar with FOMO? Well, it is the fear of missing out, and whether or not you are familiar with the term, you would definitely have experienced it at some point in your life, especially in personal finance.
The solution: An investment advisor gives you clear guidance
Your investment advisor helps you make sense of what is happening in the market. They explain the headlines and how you should be reacting to them, if at all. Some investment advisors may even offer regular market updates so you can prepare and anticipate future movements. Having someone experienced talk you through these moments helps you stay calm and stick to the plan.
3. You are concerned about the time and complexity of investments
Even if you know what you should be doing, you may not have the time to monitor your portfolio every day or jump into action when the market shifts. This can be unnerving for some people.
The solution: An investment advisor can be given discretionary authority
Many investment advisors can act on your behalf if you give them permission. This is called discretionary authority, and it allows them to make quick decisions when timing is critical. For example, if the market dips and your investment advisor wants to rebalance from stocks into bonds right away, they can do it without waiting for your approval. Not all advisors offer this, but it is an option if you do not want to monitor and adjust your portfolio yourself.
4. You want trust and transparency
It is natural to wonder whether the advice you are getting is truly in your best interest or just something that is suitable for a large group of people in general.
The solution: An investment advisor can have fiduciary standards
Registered Investment Advisers (RIAs) are legally required to act in your best interest. If they manage more than $100 million, they must register with the Securities and Exchange Commission (SEC). Otherwise, they typically register at the state level. Asking whether your advisor is a fiduciary is one of the most important things, and the answer will help you assess how seriously they take their duty to you.
The final benefit: Peace of mind
With an investment advisor guiding you, you do not have to figure it all out alone. You get a clear plan and someone to help you stick to it. This can be just as valuable as the returns you earn.
What are the duties of a portfolio manager?
A portfolio manager does a lot of work. Right from understanding your needs to executing your plans, they are omnipresent in your financial journey. Let's understand their role by considering the following situations:
1. You are faced with too many investment choices
It is possible to be overwhelmed by choice. Between stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), real estate, and even cryptocurrencies, there are endless options to invest in. Trying to pick the right mix on your own can feel like a perplexing task. You may end up chasing things that are not right for you, settling for the wrong options, taking too much risk, or sticking to too much safety, which could cause your portfolio to fall apart later.
The solution: A portfolio manager can offer you a personalized strategy
A portfolio manager would first get to know you. They would inquire about your goals, your timeline, and how much risk you can afford to take on. They would find out why you need them. For instance, are you saving for retirement, or are you interested in fulfilling your lifelong dream of owning a house in the heart of the city? They take all of this into account and create a strategy that would work for you.
2. You are worried about market volatility wreaking havoc on your portfolio
Markets are unpredictable. Isn't this something you always hear or read? You have also likely seen it. Let's not go back too far and talk about a recent event. Remember the global event, like the 2020 pandemic, that disrupted entire industries in just a few weeks? The interest rates fluctuated, sectors toppled, people lost jobs, and the stock market was in a frenzy. Whenever something like this happens, your portfolio can take a hit. If you are managing things alone, you will panic and may even make emotional decisions that could worsen the situation.
The solution: A portfolio manager can actively monitor and rebalance your portfolio
A portfolio manager's job is to keep an eye on all these changes so you are prepared and know exactly what you need to do when the situation arises. They adjust your portfolio when necessary. They may move money away from sectors that may struggle during volatile times and focus on those that carry a better growth potential. For instance, during the pandemic, many portfolio managers increased exposure to healthcare because the sector was growing. This active rebalancing with the help of a professional can help protect your money and allow you to take advantage of opportunities.
3. You may struggle with staying disciplined
Even with a plan, you may find it hard to stay the course. You may be tempted to buy or sell something just because your friend raved about a stock. You may panic in case of a downturn and want to sell your stocks in fear that the prices can drop. In many cases, this could be the exact opposite of what you should be doing.
The solution: A portfolio manager can offer professional, long-term guidance
A portfolio manager can keep you focused on the big picture and remind you of your long-term financial goals. They can help you be financially prudent and not act from a place of fear, anxiety, or even greed.
The final duty: Peace of mind
Portfolio managers are bound by fiduciary duty, so they are legally required to put your interests first. That ensures responsible and transparent management of your money. This way, you can focus on living your life while your investments stay on track.
Investment advisor vs portfolio manager – Which one should you choose?
Investment advisors focus primarily on providing guidance. Many investment advisors are also fiduciaries, especially if they are RIAs. But you must note that not all financial professionals have a fiduciary standard. And not all would be registered with the SEC. So, you should check if the professional you select checks these boxes. Investment advisors can give personalized advice and, if you grant them discretionary authority, can make investment decisions on your behalf. This can be helpful if you want a hand-off approach.
Portfolio managers, on the other hand, carry fiduciary responsibility, which makes them legally and ethically bound to put your best interests first. This more or less guarantees that your money will always be managed by someone who puts you first. They are also likely to have access to industry trends and advanced analytical tools that help them make informed decisions, which can, in turn, fuel your financial growth. Their main job is to actively manage your portfolio by adjusting your investments to keep them aligned with your long-term goals and reacting to changes in the market or economy. In short, when you hire a portfolio manager, you get a hands-on partner who takes care of your portfolio of assets for you.
Some people choose to work with both. You can do the same. You can hire a portfolio manager and an investment advisor. However, this would also depend on the size and value of your portfolio and your future goals. The investment advisor can help design the strategy by laying out a clear plan based on your needs, while the portfolio manager can actively execute and monitor it.
The final step: Choose with confidence
You may need one of the two or a mix of both. But no matter what you choose, you should understand the roles of these professionals properly so you can make a choice that best fits your financial goals and your comfort level with investing. Make sure to check the professional's fiduciary status and assess what would make you more comfortable – a fiduciary standard or a suitability standard. Also, research well. And, meet with a lot of professionals before you dot your i's and cross your t's.
Be thorough and opt for legitimate sources when hiring a financial professional. For instance, you can use our free advisor match tool. This is a verified, online tool that helps you connect with seasoned portfolio managers and investment advisors in your area.