Financial advisor or 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 nearly identical, but each provides a particular service. You will need to do some research to make sure you match the right service for your specific needs.

The short version

  • Although the two names sound similar, financial advisors and financial planners offer very different services.
  • Financial advisors primarily deal with investment management, while financial planners focus on overall financial advice. Remuneration of advisors and planners can be based on fixed fees or on commissions.
  • To find the right advisor or planner, you need to check their credentials, get referrals, and never be afraid to shop around.
  • Make sure you hire 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

Often people use the terms “financial advisor” and “financial planner” interchangeably. And while there’s no doubt that the two are closely related, the differences make every personal finance professional unique.

Generally speaking, a financial advisor mainly deals with investment management. In contrast, a financial planner is more likely to be involved in your overall financial situation.

This may include investment management, but will likely have spending and saving strategies and long-term planning.

What is a Financial Advisor?

In short, a financial advisor is a financial professional who helps you manage your money, primarily your investment activities. This primarily 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. Since they are engaged in direct investment advice and management, they must hold a FINRA Series 65 license, 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 large investment brokers like Edward Jones, Ameriprise or Raymond James. They will invest your portfolio through this broker, including executing trades and allocating your portfolio.

It is also not uncommon for financial advisors to work with professionals such as estate planners, lawyers and CPAs.

How do financial advisors make money?

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

If the financial advisor earns a commission, he will earn a fee every time he transacts 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.

Although the overall cost of a commission-based financial advisor may be lower than that of a paid advisor, this incentivizes the advisor to trade as many as possible in order to maximize their income.

Generally, experts recommend using a financial advisor who charges a fixed fee. This will remove the incentive for the advisor to “churn your account” to generate higher revenue.

What is a Financial Planner?

While financial advisors are primarily concerned with managing your investments, financial planners generally work within a broader framework. Although there may be some investment management involvement, a financial planner is more likely to focus on your overall financial situation. This will include helping you develop and implement strategies to achieve your financial goals – or even helping you identify those goals.

For example, a financial planner can help you 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 may call themselves a financial planner because they help clients develop long-term financial plans through insurance policies.

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

How do financial planners make money?

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

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

How do I find a financial advisor or planner?

As with almost all service providers, recommendations from people you trust are the best place to start. If you know someone who works with a financial advisor or financial planner and has had a good experience with that person, this is a great place to start.

And if possible, you should try to get more than one recommendation. After all, that planner or advisor could help you manage your finances for a very 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, like the Better Business Bureau. If a financial planner is on the website, it 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 easier since they must be licensed. First, you can check out the National Association of Personal Financial Advisors (NAPFA) database. This is an industry organization that will provide a list of fee-paying fiduciary financial professionals.

Fiduciary qualification is essential. A fiduciary is a professional legally bound to act for your benefit, not theirs. Qualification ensures that the advisor implements strategies that are in your best interest, not to increase their income.

You can also verify that the financial advisor is registered on the Financial Industry Regulatory Authority (FINRA) website.

Learn more >>> How to find a financial advisor you can trust

How do I know if this is the right advisor or financial 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 vendors to find the best one for you.

Since many counselors and planners 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 provide are what you are looking for.

Here are some more specific things to consider:

  • Cost. The cost of the service provided by the counselor or professional should not 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 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 fund your kids’ 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 report. This is an important and often underestimated aspect of dealing with finance professionals. You will establish a professional relationship, so it is important that you and the supplier “click”. If you feel intimidated by the advisor or planner, or if you feel it may be difficult to communicate with them, it may be best to move on to the next choice.

Working with a financial advisor or financial planner is a long-term commitment. Be sure to check 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 benefit from professional management of your investments. But if you’re looking for broader financial advice, like retirement planning, estate planning, budgeting, or saving, you’ll need the services of a financial planner.

Either way, consider your options carefully. Take advantage of free consultations and review fees before hiring one of these professionals to manage your finances.

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