Financial planner vs advisor: which one to choose?

Although they may sound the same, a financial planner and a financial advisor have differences that are important to understand if you’re seeking help with wealth-building for your financial future.

What is a financial advisor?

A financial advisor is a broad term that includes any professional who helps you manage your money. Financial advisors often focus on portfolio management and investment products. The services offered by financial advisors are often 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.

Financial advisors don’t need any specific certification, but there are some options they can consider. For example, a Chartered Financial Analyst (CFA) is one of the highest distinctions in investment management.

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 various topics, including:

• 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 Planning: Assessing your need for insurance to protect your financial plan.

Most reputable financial planners hold a CFP designation (Certified Financial Planner). It’s a marker of their expertise because it’s one of the most respected financial certifications in the industry, requiring candidates to pass a rigorous exam, log thousands of hours of experience, and adhere to a strict ethical standard.

How are they different?

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.

Scope of service

Financial planners take a holistic, long-range, and comprehensive view of their client’s financial life. On the other hand, financial advisors may specialize in specific areas such as investment management, estate planning, or insurance.

Qualifications

CFPs are certified to offer broad financial planning after rigorous testing and acceptance of ethical standards. Meanwhile, CFAs focus on investment analysis and portfolio management but don’t need any particular certifications. 

Regulatory Environment

Financial planners who are CFPs are bound by the fiduciary standard, meaning they have to put their clients' interests first. Financial advisors may or may not be fiduciaries, depending on the certifications they’ve earned and the specific services they offer.

Compensation Models

Financial planners often work from a fee-based model, charging for the plan they create and any ongoing maintenance, while financial advisors make money through structured fees as well as commissions on the products they sell.

How to find a financial planner or advisor that you trust

After reading this far, you may now be asking yourself, “Is a financial advisor worth it?” For those of you who’ve decided to find a trusted finance guide to help you achieve your financial goals, follow these steps.

Listen to what people are (or aren’t) saying

Ask for recommendations from people you already trust, such as friends, family, or colleagues who have had positive experiences with financial professionals. Word-of-mouth can be a powerful indicator of trustworthiness. 

Additionally, look for professionals who prioritize transparent communication and take the time to educate you about their recommendations. A trustworthy financial planner or advisor should be interested in understanding your financial goals, ensuring you’re both on the same page and tailoring their guidance to you. 

Understand how their fee structure works

It's also important to ask your financial professional to explain their fees and how they calculate them. Each fee structure has its own set of incentives, which can affect the advice you receive. 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, though CFPs have to disclose any such arrangement.
• Commission-Based: Providers pay advisors commissions to  sell their products. Since an advisor’s income is directly tied to the financial products they recommend, it 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.

5 ways to verify their credentials

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

1. 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.
2. BrokerCheck: Run by FINRA, BrokerCheck is a free tool to research the background and experience of financial brokers, advisers, and firms.
3. Investment Adviser Public Disclosure: The SEC’s IAPD provides information on registered investment advisors and those barred or suspended.
4. 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.
5. 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 you secure a qualified professional who can address your financial needs.

The Playbook take: Let your goals be your guide

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 the two 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.