Financial planner vs advisor: which one to choose?

When it comes to managing your finances, the guidance of a professional can be invaluable.

However, with titles like "financial planner" and "financial advisor" often used interchangeably in the finance industry, it's crucial to understand the differences to ensure you're getting the right kind of help.

Quick take: Financial planner vs. financial advisor

What is a financial planner?

A financial planner is a professional who helps individuals create a strategy to meet long-term goals. Financial planners typically have a broad view of your financial situation and can guide you on a variety of topics including budgeting, saving, investing, insurance, tax planning, retirement planning, and estate planning.

Certifications and qualifications

Most reputable financial planners hold certifications that demonstrate their expertise. The CFP designation (Certified Financial Planner) is one of the most respected in the industry, requiring candidates to pass a rigorous exam and adhere to a strict ethical standard.

Services offered

Financial planners offer comprehensive services that cover the spectrum of financial management:

• Budgeting and Saving: Creating a budget that aligns with your financial goals.
• Investing: Guidance on where and how to invest.
• Tax Planning: Strategies to minimize tax liabilities.
• Retirement Planning: Planning for a secure and comfortable retirement.
• Estate Planning: Ensuring your assets are distributed according to your wishes after death.
• Insurance: Assessing your need for insurance to protect your financial plan.

What is a financial advisor?

A financial advisor is a broader term that includes any professional who helps you manage your money. This can include investment management, estate planning, and tax advice. Financial advisors often focus on portfolio management and investment products.

Qualifications and certifications

Financial advisors may hold various designations, but not all are required to have a certification. A Chartered Financial Analyst (CFA) is one of the highest distinctions in the investment management profession.

Services offered

The services offered by financial advisors are often more focused on investments:

• Investment Strategies: Developing a strategy that matches your risk tolerance and investment goals.
• Portfolio Management: Ongoing management of your investment portfolio.
• Financial Products: Advising on the selection of financial products like mutual funds, stocks, and bonds.

Key differences: Financial advisor vs planner

While both financial planners and advisors can offer investment advice, the key difference lies in the scope of services and the approach to your financial life.

• Services: Financial planners take a holistic view, while financial advisors may focus more on investments.
• Qualifications: CFPs are certified to offer broad financial planning, whereas CFAs focus on investment analysis and portfolio management.
• Regulatory Environment: Financial planners who are CFPs are bound by the fiduciary standard, meaning they are required to put their clients' interests first. Financial advisors may or may not be fiduciaries, depending on their certifications and the services they offer.
• Compensation Models: Financial planners often work on a fee-based model, charging for the plan they create, while financial advisors may also earn commissions on the products they sell.

Understanding fee structures

When selecting a financial planner or advisor, it's essential to comprehend how they are compensated, as this can influence the advice they provide. Here are the primary fee structures you might encounter, including the often-used Assets Under Management (AUM) fee:

• Fee-Only: This model means the planner or advisor is paid directly by the client for their services at an hourly rate, a flat fee, or a retainer. They do not receive any commissions from selling products, which helps to minimize conflicts of interest.
• Fee-Based: Professionals operating under this model charge a fee for their advice and may also receive commissions from financial products they sell to clients. This dual revenue stream can potentially lead to conflicts of interest, so it's important to understand how your advisor is compensated.
• Commission-Based: Advisors are paid commissions by the providers of the products they sell. Their income is directly tied to the financial products they recommend, which may influence their recommendations.
• Assets Under Management (AUM): Many advisors charge a fee based on a percentage of the assets they manage for you. This fee is typically a percentage of your total account balance and is often tiered—the more assets you have under management, the lower the percentage you might pay.

Each fee structure has its own set of incentives, which can affect the advice you receive. It's important to ask your financial professional to explain their fees and how they're calculated so you can make an informed decision that aligns with your financial goals and preferences.

How to verify credentials

Before entrusting someone with your financial future, it's essential to verify their credentials. Here's how you can check the qualifications of a financial planner or advisor:

• CFP Board: If they claim to be a Certified Financial Planner, check the CFP Board's website. The CFP Board has a verification tool to confirm the certification and check for any disciplinary action.
• BrokerCheck: Run by FINRA, BrokerCheck is a free tool to research the background and experience of financial brokers, advisers, and firms.
• Investment Adviser Public Disclosure: The SEC’s IAPD provides information on both registered investment advisors and those who have been barred or suspended.
• Professional Associations: Many financial professionals are members of associations like the National Association of Personal Financial Advisors (NAPFA) or the Financial Planning Association (FPA), which also have member directories and standards.
• Ask Directly: A reputable financial professional will not hesitate to provide their credentials, details of their experience, and references upon request.

Taking the time to verify financial credentials can give you peace of mind and help ensure that you're working with a qualified professional who is capable of addressing your financial needs.

Financial planning and advising in different life stages

Financial planning and advising play a dynamic role throughout an individual's life, adapting to changing goals and circumstances. For those in their 20s and 30s, these services are pivotal in laying the groundwork for a secure financial future.

In your 20s: Laying the foundation

Your 20s are about setting the stage for financial success. Key areas of focus should include:

• Debt Management: Learn strategies to manage or pay off student loans and avoid consumer debt.
• Budgeting: Establish a budget that accounts for your income, expenses, and savings goals.
• Emergency Fund: Start building an emergency fund to cover unexpected expenses.
• Retirement Savings: It's never too early to start saving for retirement. Even small contributions to a 401(k) or IRA can grow significantly over time due to compound interest.
• Insurance: Evaluate your need for insurance, including health, disability, and possibly renters' insurance.

In your 30s: Building and protecting wealth

As you move into your 30s, your financial planning needs often become more complex:

• Career Growth: Maximize your earning potential through career advancement or further education.
• Family Planning: If you're starting a family, you'll need to plan for additional expenses and life insurance to protect your loved ones.
• Homeownership: For many, this decade includes purchasing a home. Financial advisors can help with saving for a down payment and understanding the impact of a mortgage on your finances.
• Investment Strategy: This is a critical time to develop a robust investment strategy. Diversification and risk management become key components of your financial plan.
• Estate Planning: Begin creating or updating your will and consider setting up trusts or other estate planning instruments.

For individuals in their 20s and 30s, financial planning and advising are not just about wealth accumulation but also about establishing smart financial habits and protections that will serve as the backbone for future stages of life. Engaging with a financial planner or advisor during these formative years can help ensure that you're making the most of your financial opportunities and setting a course for long-term stability and prosperity.

The bottom line

Understanding the distinct difference between a financial planner vs. advisor is crucial in choosing the right professional to help you achieve your financial goals. 

Your choice between a financial planner and an advisor should be based on your specific financial needs:

• Complex Financial Situations: If you have a complex financial situation involving multiple goals and assets, a financial planner may be more suitable.
• Investment Advice: If you're primarily looking for help with your investment portfolio, a financial advisor might be the way to go.