The short version
- Though the two names sound similar, financial advisors and financial planners perform very different services.
- Financial advisers are primarily concerned with investment management, while financial planners focus on big-picture financial advice. Compensation for both advisors and planners can be based on either a flat fee or commissions.
- To find the right advisor or planner, you should check their credentials, get references, and never be afraid to shop.
- Be sure you’re hiring the right professional; you don’t want to hire an insurance agent to manage your investments or a financial advisor to handle your estate plan.
Financial advisor vs. financial planner
Often people us the terms “Financial advisor” and “financial planner” interchangeably. And while there’s no doubt the two are closely related, the differences make each professional unique in the personal finance space.
Generally speaking, a financial advisor is primarily concerned with managing investments. In contrast, a financial planner is more likely to be involved in your overall financial picture.
That may include investment management but will likely have spending and saving strategies and long-term planning.
What is a financial advisor?
In a nutshell, a financial advisor is a financial professional who helps you manage your money, primarily your investing activities. That mainly involves managing your investment portfolio.
A financial advisor may create your investment portfolio, buy and sell stocks and other investments, and periodically rebalance it or even make the necessary reallocations.
Though it isn’t a requirement, financial advisors typically have either a bachelor’s degree or a master’s degree in finance, or a related major. Since they are engaged in providing direct investment advice and management, they must hold a FINRA Series 65 licence, which requires specific qualifications and standards of behavior.
Financial advisors are either self-employed or work for companies. For example, it is common for financial advisors to be affiliated with major investment brokers like Edward Jones, Ameriprise or Raymond James. They’ll invest your portfolio through that broker, including executing trades and allocating your portfolio.
It’s also not unusual for financial advisors to work with professionals like estate planners, attorneys, and CPAs.
How do financial advisors make money?
Financial advisors typically charge either flat fees or commissions or both. The flat fee structure may be based on the total expected work, an hourly fee, or a percentage of assets under management. Typically that percentage will be between 1% and 2% of the portfolio size. They might charge a lower rate for more extensive portfolios.
If the financial advisor is on commission, they will earn fees each time they make a trade in your portfolio. Alternatively, the financial advisor may earn a commission based on the performance of your portfolio. In that case, the commission is a percentage of the increase in the value of your portfolio.
Though the overall cost of a commission-based financial advisor may be lower than that of a fee-based advisor, it creates an incentive for the advisor to make as many trades as possible to maximize income.
Generally, experts recommend using a financial advisor who charges a flat fee. That will eliminate the incentive for the advisor to “churn your account” to generate higher income.
What is a financial planner?
If financial advisors are primarily concerned with managing your investments, financial planners typically work within a broader scope. Though there may be some involvement with investment management, a financial planner is more likely to focus on your bigger financial picture. That will include helping you to develop and implement strategies to reach your financial goals – or even to help you to identify what those goals are.
For example, a financial planner may be involved in helping you to develop a budget, save money, pay off debt, develop a plan to fund your retirement and your children’s education, and even set up an estate plan.
Financial planners work in a less structured professional environment. They may not be required to pass industry exams, meet minimum education standards, or hold a professional license. For example, an insurance agent can may call himself a financial planner because he helps clients develop long-term financial plans through insurance policies.
Many financial planners do have specializations and professional designations to go along with that expertise, however. Examples include certified financial planners (CFPs) and chartered financial analysts (CFAs).
How do financial planners make money?
Compensation for financial planners works similarly to that of financial advisors. Suppose the advisor provides your overall financial services, such as budgeting, savings goals, retirement, and estate planning. In that case, they might charge a flat fee based on the amount of work. There may even be a schedule of fees based on each service the planner provides.
If there is a commission-based compensation structure, it’s more likely that the planner represents a specific service provider, like an insurance company. While such a financial planner may provide advice in different areas of your economic life, the primary focus is setting you up with one or more insurance policies. In this example, the planner would likely get a commission based on the policies sold.
How can I find a financial advisor or planner?
As with almost any service provider, referrals from people you trust are the best place to start. If you know someone working with either a financial advisor or a financial planner and has had a good experience with that person, that is an excellent starting point.
And if possible, you should attempt to get more than one referral. After all, that planner or advisor might help you to manage your finances for a very long time.
Personal referrals are especially important if you’re looking for a financial planner since they don't have to be licensed.
Check third-party sources, like the Better Business Bureau. If a financial planner is on the website, they will have a letter grade ranging from A+ to F –. The BBB also lists consumer complaints and their resolutions. If you see any complaints, read them to get an idea of what to expect from that advisor.
The search for a financial advisor may be easier since they must be licensed. First, you can check the National Association of Personal Financial Advisors (NAPFA) database. It’s an industry organization that will provide a list of fee-only, fiduciary financial professionals.
The fiduciary qualification is essential. A fiduciary is a professional legally bound to take actions for your benefit, not their own. The qualification ensures that the advisor implements strategies that are in your best interest — not to increase their income.
You can also check to confirm the financial advisor is registered through the Financial Industry Regulatory Authority (FINRA) website.
Read more : How to find a financial advisor you can trust
How do I know if this is the right financial advisor or planner for me?
When choosing a professional as important as a financial advisor or a financial planner, you should always shop around. Consider three or four possible providers to find the best one for you.
Since many advisors and planners will offer free consultations, you should take advantage of that opportunity to interview the individual. You can get an estimate of the work they will provide and what it will cost, and you can also evaluate if the services they provide are consistent with what you’re looking for.
A few more specific things to consider are:
- Cost. The cost of the service provided by the advisor or professional shouldn’t outweigh the benefit you expect to receive.
- Portfolio size. This is important with a financial advisor, but probably not with a financial planner. Many have minimal portfolio sizes ranging from $100,000 to $500,000.
- Specializations. An insurance agent probably won't be a good choice if you’re looking for a financial planner to help you finance your children’s college educations. You may also be part of a group such as the LGBTQ community, and there may be investors who specialize in meeting your specific needs.
- Personal rapport. This is important and often underestimated aspect of dealing with financial professionals. You’ll be building a professional relationship, so it’s important you and the provider “click.” If you feel intimidated by the advisor or planner, or sense they may be challenging to communicate with, it may be best to move on to the next choice.
Working with a financial advisor or a financial planner is a long-term engagement. Make sure you vet your options carefully.
The bottom line: Should you choose a financial advisor or financial planner?
A financial advisor is the right choice if your interest is primarily in getting the benefit of professional management for your investments. But if you’re looking for broader financial advice, like retirement planning, estate planning, budgeting, or saving money, you’ll need the services of a financial planner.
In either case, vet your options carefully. Take advantage of free consultations and review any fees before bringing on one of these professionals to manage your finances.
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