When looking for someone to advise you on how to properly manage your finances, you will almost certainly have to make a decision re: financial advisor vs. financial planner vs. investment advisor vs. financial specialist and so on. This myriad of different terms to refer to people who perform very similar tasks can be very confusing to the uninitiated. In this article we will focus on shedding some light on two of the most common terms you will encounter. These are: Financial Advisor and Financial Planner.
Properly managing your finances can take up a lot of your time and energy, and unless you are experienced and qualified in the area of personal finance then it is very difficult to ensure you are making the correct decision. No wonder then that many people choose to employ the services of financial advisors or planners to do the work for them. Both financial planners and advisors provide advice on personal finance issues; they can give advice on stocks, shares, mortgages, tax, retirement accounts, emergency funds and a whole host of other financial issues. However, although the two terms, “financial planner” and “financial advisor,” are often used interchangeable there are several key differences between them and the roles these professionals perform. Understanding these differences can help you make the right decision when deciding whose services to employ to help you manage your finances and, in many cases, secure your financial future. There are five major differences between financial advisors and financial planners.
Firstly, let’s look at how the terms, “financial advisor,” and “financial planner,” are commonly used. Usually when you hear these terms, they will be used in a very general sense. The term, “financial advisor,” is often used by people, both inside and outside the industry, as a catch-all term to refer to anyone who advises a member of the public on his or her financial affairs. Under this umbrella term are included industry professionals such as financial planners, investment advisors, financial specialists and so on. It is only when you look at their different roles in more detail that it becomes more clear what the differences are.
The second major difference, and a very important one, is that a financial advisor usually works either on a commission basis or a fee per transaction basis. This means that you can call on the services of a financial advisor for particular issues and need not, necessarily, have a long-term relationship with them. Financial planners on the other hand are usually paid a monthly fee to handle your affairs; they do not commonly work on a commission basis. This means that when choosing a financial planner you must be extremely sure— even more so that when choosing a financial advisor — that you choose someone with whom you can work on a long-term basis.
Thirdly, financial planners and financial advisors differ in the qualifications they can choose to obtain. Financial Planners can choose to be certified by the Certified Financial Planner Board of Standards, Inc. To become certified they must pass examinations in four major areas: ethics, experience, examination, and education. In addition, they are required to undertake ongoing education and are closely monitored by the Certified Financial Planner Board to ensure that they are acting in a manner befitting a certified planner. Similarly, financial advisors can, if they choose, elect to become CFA (chartered financial analyst) certified. This certification demonstrates that the financial advisor has an advanced knowledge of the processes necessary to understand and analyse financial statements. An important point to note, regarding these qualifications, is that anyone can call themselves a financial advisor or financial planner, even if they have not taken these qualifications, and even if they have little or no experience in the industry. Therefore, you would be well advised to check that any financial advisor or planner you are considering employing has indeed been either CFP or CFA certified. If they have, these letters will invariably be prominently displayed after their names.
Fourthly, lets look at the roles they perform; this makes up the fourth major difference. Generally speaking financial planners tend to take a holistic approach to your finances. They will examine your portfolio as a whole and give long-term advice on all aspects of it. In this way, they will (hopefully) safeguard your current and future assets. By contrast, again generally speaking, financial advisors tend to work on particular issues. You might, for example, contact a financial advisor if you were interested in investing a set sum of money that you had come into, and were unsure where you should best place it; or, for example, if you wished to receive advice on a particular tax issue. If instead, for example, you were more interested in learning how to invest all of your current and future funds over the next decade or so, you might prefer to contact a financial planner. To confuse the issue just a little, however, if you were happy with the work a financial advisor had performed for you, there is no reason that he couldn’t take over the role of a financial planner for you, or vice versa.
And finally, our fifth major difference is that of fiduciary duty. This is an extremely important concept that you should be aware of. A certified financial planner must always demonstrate fiduciary duty. This means that they must always have your best interests at heart and, as long as they are in your employ, will inform you of any changes to your situation so that you can make the correct adjustments. This is their clear legal obligation. With financial advisors, however, the situation is a little hazier. On some transactions, they are required to demonstrate fiduciary duty and others only to demonstrate that they have made a suitable choice for you at the time they were advising you; that’s not quite the same thing, and it doesn’t protect you in quite the same manner. In any case, as you will likely not be paying your financial advisor a monthly fee, they may not be around to inform you of any changes to your financial situation that need your attention.
To conclude, financial advisors and financial planners perform similar functions. That is, advising you on how to manage your personal finances. The term, “financial advisor,” however, is often used as a generic term encompassing a range of different financial professionals. Moreover, financial advisors and financial planners are generally paid in a different manner, with financial planners, being employed on a more long–term basis. Financial advisors and financial planners also differ in the qualifications they may choose to obtain with advisors becoming CFA certified and planners becoming CFP certified. In addition, financial planners tend to address all aspects of your financial situation whereas financial advisors tend to be employed to perform one-off transactions or to offer advice on a one-off basis. And, very importantly, certified financial planners must legally have your very best financial interests at heart while with financial advisors this issue may vary depending on the kind of advice they are offering you or function they are performing.
Choosing a good financial advisor or financial planner is no simple task and should be undertaken seriously.