What is a financial advisor?
“Financial advisor often is a shorthand for investment manager,” says Taylor Matthews, co-founder and CEO of wealth management firm Farther.
When people talk about financial advisors, they’re often referring to professionals who manage investment portfolios for their clients. But, financial advisors can provide other services as well, such as tax planning or evaluating your insurance needs.
What is a financial planner?
Professionals who market themselves as financial planners typically offer more holistic planning, looking at your entire financial life and creating a comprehensive plan that will help you achieve your goals.
“Often, you would benefit from having a plan of how to manage this money, and that’s what a financial planner is really there to do,” Matthews says. “They take your situation, income, assets, the entire balance sheet, as well as your goals—what are your aspirations and what do you want to invest for, build your life towards—and take all of that together and create a plan to help you get there.”
However, the types of services they offer can vary depending on the individual you’re working with. A financial planner might offer investment advice or manage their clients’ portfolios, for example, similar to a financial advisor. Or they might sell certain financial products, like insurance or annuities.
Differences in services and focus
Traditionally, financial advisors focus more on their clients’ investment portfolios while financial planners help clients create financial plans that consider the client’s budget, savings, taxes, insurance needs, retirement plans and more.
But in practice, there’s often an overlap between what these two types of professionals offer. A financial advisor who manages your investments might also provide more comprehensive financial planning as part of their services (or as an additional service you can pay for). Likewise, a financial planner might also offer investment management services.
Instead of focusing on whether a financial professional says they’re an advisor or planner, look at the services they provide. That will tell you if they’re a good fit for your needs. Their credentials can also tell you whether they’re qualified to give financial or investment advice.
Compensation and fee structures
How financial advisors and financial planners are compensated varies, but typically you’ll pay a fee that’s a set dollar amount or a percentage of your portfolio. There are three common fee structures financial professionals also use:
- Commission: With this structure, the advisor receives a commission when you buy certain products.
- Fee-based: A fee-based advisor might earn commissions on certain products in addition to charging fees for their services.
- Fee-only: The financial advisor is paid by the client for their services, and no commissions are involved.
End says most advisors charge a percentage of the assets they manage for you. Hourly, project-based and annual fees are also common.
“But then some of them will also have commissions and other revenue streams from their recommendations,” End says.
An advisor or planner should be transparent about whether they earn commissions on any of the products they recommend to you. If you’re working with an advisor who’s a fiduciary, they’re required to act in your best interest, meaning they can’t encourage you to buy certain products just because they’d earn a higher commission.
If you don’t want to work with an advisor who earns commissions, look for professionals who advertise as fee-only.
“I think the most important thing is, find someone you trust who’s going to be transparent with you around those fees,” End says.
Qualifications and credentials
The credentials your financial advisor or financial planner has might tell you what types of services they provide.
A certified financial planner (CFP) designation, for example, indicates that the advisor has completed the financial planning coursework required by the CFP Board and passed an exam. CFPs are also held to certain ethical standards and must act as fiduciaries.
Other common designations include chartered financial analysts (CFAs), who focus more on investment management, and chartered financial consultants (ChFCs), whose required coursework is similar to CFPs. If an advisor provides tax planning services, they might also be a certified public accountant (CPA).
Financial professionals who give investment advice have to pass an exam and be registered with the Securities and Exchange Commission or their state’s regulator.
When to choose an advisor versus a planner
Because there aren’t strict definitions of these two terms, you should focus more on the services they provide and their qualifications when searching for a financial advisor or financial planner.
Think about what kind of financial assistance you’re looking for and seek out professionals who can meet your needs.
If you’re looking to focus on investments and grow your portfolio, for example, an advisor who specializes in wealth management might be a good fit. Or if you want someone to put together a comprehensive financial plan for you, you might specifically look for someone with a CFP designation.
“If you’re really looking for financial planning, you probably want to lean on an advisor who has a CFP,” Matthews says.
FAQ
Is a financial planner always a financial advisor?
The terms “financial planner” and “financial advisor” don’t have strict definitions, and many financial professionals offer a range of services that include both financial planning and advising on specific investments or financial products.
Can someone be both a planner and an advisor?
Yes, someone can be both a planner and an advisor. Many advisors who oversee clients’ investment portfolios also offer financial planning services.
What questions should I ask when evaluating financial advisors and planners?
The most important questions to ask a financial advisor or financial planner include whether they’re a fiduciary, how they’re compensated, what services they offer, what their qualifications are and if they can provide references from previous clients.
Are financial planners held to a fiduciary standard?
Planners aren’t always held to a fiduciary standard, but many are. CFPs are held to a fiduciary standard, as are Registered Investment Advisers (RIAs). You can ask a financial planner if they’re held to a fiduciary standard when making financial recommendations.
Do planner services cost more than advisor services?
It depends. Paying a flat fee for a simple financial plan might cost less than having an advisor who charges a percentage of your assets to manage a large portfolio, for example.
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