Financial Advisor vs. Financial Planner: How To Decide

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Financial advisor and financial planner are two of the most confusing titles in the financial industry. The names sound almost identical, but each one offers a particular service. You’ll need to do your research to make sure it matches the right service for your specific needs.

The short version

  • Although the two names sound similar, financial advisors and financial planners perform very different services.
  • Financial advisors are primarily concerned with investment management, while financial planners focus on general financial advice. Compensation for both advisors and planners can be based on a flat fee or commissions.
  • To find the right advisor or planner, you should check their credentials, get references, and never be afraid to buy.
  • Make sure you are hiring the right professional; you don’t want to hire an insurance agent to manage your investments or a financial advisor to manage your estate plan.

Financial advisor vs. financial planner

The terms “financial advisor” and “financial planner” are often used interchangeably. And while there’s no doubt that 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. Instead, a financial planner is more likely to be involved in your overall financial picture.

This may include managing investments, but will likely involve spending and saving strategies and long-term planning.

What is a financial advisor?

Simply put, a financial advisor is a financial professional who helps you manage your money, primarily your investment activities. This mainly involves managing your investment portfolio.

A financial advisor can build your investment portfolio, buy and sell stocks and other investments, and periodically rebalance it or even make necessary reallocations.

Although not a requirement, financial advisors typically have a bachelor’s or master’s degree in finance, or a related major. Because they are engaged in providing direct investment advice and management, they must hold a FINRA Series 65 license, which requires specific qualifications and behavioral standards.

Financial advisors are self-employed or work for companies. For example, it is common for financial advisors to be affiliated with large investment brokers such as Edward Jones, Ameriprise or Raymond James. They will invest your wallet through this broker, including executing trades and allocating your wallet.

It’s also not uncommon for financial advisors to work with professionals such as estate planners, attorneys, and CPAs.

How do financial advisors make money?

Financial advisors usually charge fixed fees or commissions or both. The flat fee structure can be based on the total work expected, an hourly rate or a percentage of the assets under management. Typically, this percentage will be between 1% and 2% of the portfolio size. They might charge a lower fee for larger portfolios.

If the financial advisor is on commission, they will earn commissions every time they make a transaction in your wallet. Alternatively, the financial advisor may earn a commission based on the performance of your portfolio. In this case, the commission is a percentage of the increase in the value of your portfolio.

While the overall cost of a fee-based financial advisor may be lower than a commission-based advisor, it creates an incentive for the advisor to place as many trades as possible to maximize revenue.

Experts generally recommend using a financial advisor who charges a flat fee. This will remove the incentive for the advisor to “return your account” to generate higher income.

What is a financial planner?

While financial advisors are primarily concerned with managing your investments, financial planners tend to work in a broader scope. While there may be some involvement with investment management, a financial planner is more likely to focus on your bigger financial picture. This will include helping you develop and implement strategies to achieve your financial goals, or even help you identify what those goals are.

For example, a financial planner may be involved in helping you 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 educational standards, or hold a professional license. For example, an insurance agent may call himself a financial planner because he helps clients develop long-term financial plans using insurance policies.

However, many financial planners have specializations and professional designations to go along with this experience. Examples include Certified Financial Planners (CFPs) and Chartered Financial Analysts (CFAs).

How do financial planners make money?

Compensation for financial planners works similarly to financial advisors. Let’s say the advisor provides your overall financial services, such as budgeting, savings goals, retirement and estate planning. In this case, they may charge a flat fee based on the amount of work. There may even be a fee schedule based on each service the planner offers.

If there is a fee-based compensation structure, the planner is more likely to represent a specific service provider, such as an insurance company. While this financial planner can offer advice on different areas of your financial life, the main goal is to set you up with one or more insurance policies. In this example, the planner would likely receive a commission based on the policies sold.

How can I find a financial advisor or planner?

As with almost any service provider, referrals from trusted people are the best place to start. If you know someone who works with a financial advisor or financial planner and have had a good experience with that person, this is an excellent starting point.

And if possible, you should try to get more than one referral. After all, this planner or advisor can help you manage your finances for a long time.

Personal references are especially important if you’re looking for a financial planner, as they don’t need to be licensed.

Check third-party sources, such as the Better Business Bureau. If there is a financial planner 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 this advisor.

Finding a financial advisor can be made easier as they must be licensed. First, you can check the National Association of Personal Financial Advisors (NAPFA) database. It is an industry organization that will provide a list of commission-only fiduciary financial professionals.

Fiduciary qualification is essential. A fiduciary is a professional legally bound to take action for your benefit, not their own. The rating ensures that the advisor implements strategies that are in your best interest, not to increase their income.

You can also check to confirm that 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 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 this opportunity to interview the person. You can get an estimate of the work they will provide and how much it will cost, and you can also assess whether the services they offer are consistent with what you are looking for.

Some more specific things to consider are:

  • cost The cost of the service provided by the adviser or professional should not exceed the benefit you expect to receive.
  • Wallet size. This is important with a financial advisor, but probably not with a financial planner. Many have minimum 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 finance your children’s college education. 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 relationship This is an important and often underestimated aspect of dealing with financial professionals. You’ll be building a professional relationship, so it’s important that you and the supplier click. If you feel intimidated by the advisor or planner, or if you feel that they may be difficult to communicate with, it may be best to move on to the next option.

Working with a financial advisor or financial planner is a long-term commitment. Be sure to review your options carefully.

Bottom Line: Should You Choose a Financial Advisor or a Financial Planner?

A financial advisor is the right choice if your main interest is to get the benefit of professional management of your investments. But if you’re looking for broader financial advice, such as retirement planning, estate planning, budgeting or saving money, you’ll need the services of a financial planner.

In any case, carefully review your options. Take advantage of free consultations and review any fees before hiring one of these professionals to manage your finances.

Learn more about financial professionals:

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