In this episode of Thimbleberry U, Jon Gay and Amy Walls dive into the differences between investment advice and financial advice, a distinction often misunderstood. Amy starts by explaining that investment advice primarily focuses on managing and growing an investment portfolio. This type of advice is transactional, with recommendations on specific actions—buying, selling, or holding certain securities like stocks and bonds. The goal is to maximize returns while managing risk, ensuring that decisions align with an individual’s financial goals, but it tends to be isolated to just the investments themselves.
On the other hand, financial advice, or financial planning, takes a broader and more comprehensive approach. It encompasses every aspect of a person’s financial life, from budgeting and cash flow to debt management, tax planning, retirement, and estate planning. Amy highlights that financial planning is about creating a roadmap tailored to individual goals and life circumstances. It's not just about managing investments, but rather helping people make smarter financial decisions across all aspects of their life, ensuring their puzzle pieces—such as income, taxes, healthcare costs, and family goals—fit together to create a cohesive financial picture.
The conversation further explores the importance of looking at long-term financial health. While investment advice can grow wealth, Amy emphasizes that without a financial plan, people might miss out on maximizing their financial potential or addressing risks like healthcare costs or tax inefficiencies. Financial planning adds purpose and intentionality to the money management process by linking investment strategies to broader life goals. This holistic approach is key for most people, as few live their lives in silos, and their financial decisions are deeply interconnected.
While investment advice serves those with specific portfolio management needs, financial planning offers a complete, integrated approach for those with broader, more complex financial goals. Amy underscores that most people would benefit from financial planning due to the interconnected nature of life and money.
Thimbleberry U 121 - Investment vs Financial Advice
Speakers: Jon Gay & Amy Walls
[Music Playing]
Jon Gay (00:07):
Welcome back to Thimbleberry U. I'm Jon JAG Gay with Amy Walls of Thimbleberry Financial. Amy, good to be with you as always.
Amy Walls (00:13):
Jag, it's always great to talk to you.
Jon Gay (00:16):
So, we're talking today about the difference between investment advice and financial advice. This is a really key topic because I feel like a lot of people get these two things confused, or maybe even conflated, and they're different, but complimentary, I think. So, let's start with investment advice first. What exactly is investment advice?
Amy Walls (00:36):
Jag, I'm glad you started there with the questions because I think this is simpler. And it is embedded in financial advice or financial planning. So, investment advice is advice that is specifically about managing and growing your investment portfolio.
So, it involves recommendations on which stocks, bonds, mutual funds, or other securities to buy sell or hold, if you will.
With investment advice, particularly, the goal is to maximize returns while managing risk according to your preferences. So, it's growing money to grow money, while allowing you to sleep. The advice is often going to focus on how to allocate your assets, like what's the right mix of stocks and bonds, different kinds of stocks, different kinds of bonds for you.
It also tends to be more transactional. So, it's really about making specific decisions or taking specific actions related just to investments.
So, to further drive that point home, a financial advisor or an advisor might suggest investing in a particular stock because they believe it's going to increase in value, benefit the client. Or they might recommend selling a particular investment out of a portfolio to realize those gains or to cut losses or maybe to capture losses.
Jon Gay (02:06):
Got it. So, that's pretty straightforward on the investment advice piece of it. How does that differ from, I would probably guess, the broader financial advice?
Amy Walls (02:14):
Financial advice or specifically financial planning is much more comprehensive than investment advice. Investment advice is one tiny piece of financial planning.
Financial planning encompasses every aspect of your financial life. Like I said, not just your investments. Financial planning includes things like budgeting, cashflow, saving, debt management, tax planning, realizing or reaching certain goals and how best to do that. It also encompasses estate planning.
So, basically, it's creating a roadmap for your financial future, and it includes specific strategies tailored to your unique goals and life circumstances. We've talked about in the past that you can take the picture of what you and your wife want out of life, and we can stick that picture on a puzzle. Now those two images are not perfectly aligned. They never are.
But it's what you are striving for together and financial planning is about making all aspects of your financial life and even things that don't feel financial sometimes move towards making that puzzle picture as beautiful as it can be.
Jon Gay (03:32):
It sounds like the overall picture you're describing here that financial planning is much more holistic. So, let's drill down a little bit more. What exactly does financial planning cover, Amy?
Amy Walls (03:42):
Let's start with budgeting and cash flow. So, as a financial planner, comprehensive financial planner, we're going to look at income and expenses to create a cash cashflow model that supports you and your goals.
With management, if that's something that someone needs, we're going to help you manage and reduce that debt in that cashflow picture in a way that's sustainable and also still gets you to your goals.
So, it's not isolated. I think that's the big difference, going back to your prior question of investment advice versus financial planning. The investment advice is isolated when it's just investments.
Then we have risk management. So, auto insurance- insurance planning really protects you from unexpected events that can blow up your overall financial plan, especially if you've been saving for retirement using retirement accounts and something big happens, and you don't have the cash reserve or money set aside on the side. Well now you've just invaded retirement and potentially are paying some pretty big penalties.
Tax planning- this is something that while definitely money related, people might go to their CPA and wants their CPA to help them save money this year. In financial planning, we're looking at that tax picture. Does it make more sense for you to save a little bit of money today or does it make sense for that to compound and you to save more money in taxes later on?
And which one better enables you to reach your goals and maybe even have a more beautiful puzzle picture than what you would have if you just save a little today?
Jon Gay (05:24):
That goes back to a previous podcast that a CPA often looks back at the previous year where a financial planner or financial advisor looks forward to the next year.
Amy Walls (05:33):
Exactly. And not just the next year, but every year for the rest of your life. Another topic, retirement planning, it's not just about saving money for retirement, but how you'll generate income in retirement, which account you're going to pull money out of when, what does your tax picture look like in retirement and how do you need to protect against risks like inflation and longevity?
And that investment advice ultimately plays a role in once you've figured out what the picture needs to look like.
I'll jump to education planning next. It's similar to retirement planning. How are you going to pay for those costs, if you have them, in ensuring your kids have the education that you're hoping they will have?
Estate planning- this is wills and trusts and financial planners aren't typically putting these things in place because we're not attorneys. But we know a lot about it and what you do in your estate planning ties directly to what's going on with your investments and that whole picture, so that money goes where you want it to appropriately, and your accounts are set up appropriately for your goals today and for your lifetime, but also after you're no longer here.
And then one that again, ties to protection planning, but it's long-term care and health planning. We've definitely talked about this and it's something financial planners really should be looking at is what happens if you have healthcare costs that are bigger than normal or even average.
On average when someone needs long-term care, it's for three years. Most people don't know what that costs. So, how do we factor that in and are you still okay?
Jon Gay (07:22):
Spoiler alert, it's a lot.
Amy Walls (07:24):
Yeah. It is. So, hopefully that gives you a taste.
Jon Gay (07:28):
It does. That is certainly a lot of ground to cover, Amy. But it makes sense because life is complex and, well, so are finances. So, why might somebody not reach their financial goals with just investment advice but could with financial planning?
Amy Walls (07:43):
Great question. Let's go back to the analogy I used of the puzzle with all these different puzzle pieces and-
Jon Gay (07:49):
You’re all about the puzzle today.
Amy Walls (07:50):
I love the puzzle. So, the puzzle pieces I didn't go into, and for listeners that maybe haven't heard us talk about this in prior podcasts, I probably should. So, when we're looking at that puzzle picture, the pieces are the things you've done so far.
They are things like your income today, your income tomorrow, your tax situation today, your projected tax situation tomorrow. They are if you have kids, what's going on with your kids and what expenses you expect to have happen. They could be future health. It could be a second home. All of those are parts of that puzzle because they're creating this picture.
So, what I didn't mention as puzzle pieces are your different investment accounts. And where you're saving and how much you're saving into them. Those are important pieces. Those still are not investment advice. Investment advice is specifically what you invest in inside of an account.
Jon Gay (08:53):
Okay. That's an important point of differentiation.
Amy Walls (08:55):
So, Jag, if you were to say to me, “Amy, should I contribute to an IRA or a Roth IRA?” That is financial planning, not investment advice.
As we look at those puzzle pieces, some of those pieces are also, let's say inside the IRA or inside the Roth IRA, how do you actually need to invest to get the growth that you need? That's where we start from.
And in this puzzle, our job as financial planners, unlike a puzzle at the kitchen table, is to recommend swapping pieces in and out, shaving pieces down so that that picture can be as beautiful as it can be.
So, the reason someone might not reach their financial goals with just investment advice is that with investment advice, you're growing money to grow money. But there's no tie-in to specific goals unless you have taken a step back and incorporated the whole big picture in financial planning.
So, you can be getting a great return in your IRA, but guess what? You actually need tax free income to reach your goals because the money's not going to stretch far enough. Investment advice isn't touching that - or - you don't know, but you're going to have some big healthcare costs in retirement that you haven't thought about.
It's just maybe lifestyle, a simple back of the envelope calculation. And that IRA isn't going to cover you once the taxes are factored in.
Here's Jag, another way that investment advice may not help someone reach their goals, is really around cashflow management. I talked about creating that projection of cashflow based on what someone's spending.
Well, in financial planning we may identify that you need to save $30,000 this year to a brokerage account that's ultimately invested moderately. And here's the allocation. If we're focused on investment advice, it's about, “Hey Jag, how much do you want to save this year? How much do you want to put in?” Okay, I need to know that for building this portfolio.
So, it's not telling you what targets you need to hit and just like going on a road trip and just driving down the road without having an idea of where you're going or how to get to where you're going, you're probably not going to get there.
Jon Gay (11:20):
This speaks to something we've talked about in previous episodes and that is the psychology of money and investing. I think on the surface, we all want money. We all want as much money as possible. I think that's stating the obvious.
But it makes a lot more sense to have that whole picture of the why, figuring out what you want and using money as a means to achieve your goals as opposed to, I just want as much money as possible.
Amy Walls (11:43):
Yeah, absolutely. I think the word that came to mind as you were saying that was intentionality. There can be intentionality of just “grow my money to grow my money.” But intentionality of purpose for those dollars is so important and that's really the difference between financial planning, which includes investment advice and just getting investment advice.
Jon Gay (12:05):
Amy, I think the misnomer is that when you talk to a financial advisor or a financial planner, that you're just talking about those investments and its investment advice as opposed to financial advice.
So, I'm really glad you've cleared that up for us today. And it is clear that financial planning really is key to achieving that long-term success as we were just saying. So, in the end, who might benefit from each piece of this and why?
Amy Walls (12:26):
So, first let's talk about investment advice. Pure investment advice might be suitable for someone who has a specific focus on their investment portfolio but doesn't need or want to address broader financial issues.
Perhaps it's somebody who's really comfortable with their savings, managing their cashflow, maybe even obtained money in an inheritance in a large sum. So, they are very confident that they are going to be okay.
Financial planning is ideal for anyone with multiple financial goals and who wants to incorporate these ideas and make sure that the pieces tie together. So, again, examples like we've talked about would be planning for retirement, family, saving for education.
Those are two competing goals. And anyone navigating complex financial situations - people in tech are one of our specialties with equity compensation- and people in healthcare.
Jon Gay (13:32):
And if you're in one of those two fields, I encourage you to go back and listen to our entire catalog of episodes because we have a big focus on those two areas.
Amy Walls (13:40):
We do. A lot of business owners, it's not an area we focus on, but there's complex issues in there that are important to address to make that whole picture work well.
The thing Jag, that I hope our listeners take away is that most people benefit from financial planning because life is interconnected. We don't live our life in silos. And so, all of these areas relate, and they do have an impact on each other.
And so, I believe, and it's the reason I'm a financial planner and somebody who gives just investment advice is I'm not doing the best for my clients. I don't feel I could be a fiduciary just giving investment advice because there's so much other stuff that plays a role.
Jon Gay (14:27):
I think that's really well put and it is clear why somebody would want financial planning rather than just the investment advice and to each their own. If they want just the investment advice, they might have a better fit somewhere else. But I understand what you do especially looking at the whole picture.
Amy, if somebody does want the financial advice piece of it and that holistic look at everything and wants to come talk to you and your team at Thimbleberry Financial, how do they best find you?
Amy Walls (14:48):
They can find us online at thimbleberryfinancial.com or by giving us a call at (503) 610-6510.
[Music Playing]
Jon Gay (14:58):
Great stuff. We'll talk again in a couple weeks.
Amy Walls (15:00):
That sounds great, Jag, look forward to it.
Jon Gay (15:02):
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.