The terms “financial advisor” and “financial planner” sound synonymous—and in some cases, they are—but not all financial advisors are financial planners.
“Financial advisor” is a broad term that can refer to a variety of individuals who help people manage their money. For example, a robo-advisor, which requires no human supervision, is considered a financial advisor.
A financial planner is a type of financial advisor, but a financial advisor isn’t always a financial planner. Read on to understand the difference between the two and decide what type of professional to hire.
What Is a Financial Advisor?
A financial advisor refers to any professional who helps manage your money. This can include a variety of services, from budgeting and tax planning to retirement planning and estate planning.
Here are the main types of advisors:
- Registered investment advisor (RIA): These individuals provide personalized investment strategies and can manage your investment portfolios directly. RIAs are held to a fiduciary standard, so they’re legally required to act in your best interest and must meet professional qualifications. They have to register as investment advisors at the federal level with the Securities and Exchange Commission (SEC) or at the state level with a state securities regulator.
- Broker: Brokers primarily buy and sell stocks, bonds, and other securities on your behalf. Brokers are legally required to register with FINRA, pass exams, and get licensed by state securities regulators. Brokers may earn a commission when they buy or sell an investment for you.
- Robo-advisor: These online platforms use an algorithm to build an investment portfolio tailored to your financial goals, timeline, and risk tolerance. They can automatically rebalance your portfolio to keep you on target.
- Wealth manager: Wealth managers and advisors tend to work with high-net-worth individuals and offer holistic financial planning and investment advice. To work with a wealth manager, you typically have to have millions of dollars of investable assets.
- Financial coach: A financial coach is a very basic version of a financial advisor—they won’t provide investment recommendations or help manage your portfolio, but they can offer advice about saving money, budgeting, and other personal finance basics.
Insurance agents, accountants, estate planners, bankers, and attorneys may also consult on financial decisions and sometimes fall under the financial advisor umbrella.
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
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What Is a Financial Planner?
A financial planner is a type of financial advisor who provides comprehensive planning services. Think of a tree diagram, with “financial advisor” being the central item at the top. The branches below it include the terms listed above, as well as “financial planner.”
Financial planners focus on creating plans to help their clients reach their money goals. They take a holistic approach, gathering information on your personal finances, understanding your goals and dreams, and constructing a comprehensive financial plan to get you there.
While almost anyone can call themselves a financial planner, you’ll want to work with one who holds specific licenses or designations, including:
- Certified Financial Planner (CFP): The CFP certification is considered the gold standard of financial planning. It requires specific education and training, thousands of hours of experience, and passing the CFP Exam. CFPs are held to a fiduciary standard, so they have to act in the client’s best interest.
- Chartered Financial Consultant (ChFC). Like CFPs, ChFCs earn a distinguished certification in financial planning after completing extensive coursework, passing exams for each course, and having three years of relevant business experience. They’re also held to the fiduciary duty.
- Chartered Financial Analyst: A Chartered Financial Analyst (CFA) is a fiduciary who has completed over 4,000 hours of relevant work and passed multiple CFA exams. CFAs are skilled at financial analysis, investment advice, portfolio management, and risk management, and they often work for corporations.
Financial Advisor vs Planner: What’s the Difference?
Financial advisors and planners both provide financial advice; however, there are some key differences between what financial planners and some other types of financial advisors do.
For example, some financial advisors focus on short-term investment goals rather than more comprehensive long-term goals.
Financial planners have a broader focus, providing financial guidance that could apply to multiple areas of their client’s life, from saving for college to investing in real estate or launching a small business.
A financial planner can also differ from other types of financial advisors in the way they charge clients. Financial planners typically charge flat annual or hourly fees for their financial services. Meanwhile, some other financial advisors who act as stockbrokers might earn commissions when they buy or sell securities for clients.
How to Choose the Right Financial Professional
Financial planners and other types of financial advisors can help you meet your financial needs. Here are a few factors to keep in mind to choose the right financial professional.
- Vet each candidate: Use sources like the FPA, the National Association of Personal Financial Advisors site, and the Certified Financial Planner Board of Standards to verify an advisor’s background and certification. You can also read reviews from clients, ask friends for referrals, and check out potential candidates’ LinkedIn profiles.
- Understand the fee structure: It’s important to understand how advisors make money. For example, many fee-only advisors charge an assets under management (AUM) fee, where they take a small percentage of the assets they’re managing, usually 1%. Some advisors may also charge a commission, making money when they sell an investment for you. This can be anywhere from 1-6% of your investment.
- Know your needs: To choose the right type of financial advisor, it’s important to understand what types of services they offer and consider how they align with your specific investment needs and financial goals.
- Ask questions: To understand what an advisor has to offer and choose the one that best fits your goals, it’s important to ask questions. Ask potential advisors about their background, philosophy on investing, specialties, strategies, and limitations to determine whether you should hire them or not.
Should I Hire a Financial Advisor vs Financial Planner?
To choose the right professional to work with, spend some time thinking about exactly what you need.
Do you need help preparing for retirement or other major future expenses, like kids or a home, while also juggling everyday costs? If so, you might want to work with a financial planner.
Even if you’re years away from retirement, hiring a financial planner could be an excellent investment. There’s no age or career point at which it becomes “the right time” to work with a professional.
Oftentimes, people could benefit from financial planning in their 20s and 30s when they’re juggling paying down student loans or credit card debt with major purchases like their first home or car.
If you only have a couple of specific money questions about stock options or employee benefits, then an hourly advisor specializing in the topic you have a question about might make sense for you.
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