As the economy improves, people are seeking financial direction. A recurring question concerns the difference between investment advisors and financial planners. Knowing the distinctions can guide a person to the best choice for their needs.
For starters, before hiring any financial professional, identify the services you require, and compare them to those offered. Sometimes there are limitations on what can be recommended. Often, there are sizable differences in the cost of services or even how the advisor or planner gets paid.
You may have heard the expression: Most financial planners are investment advisors, but not all investment advisors are financial planners. Investment advisors and financial planners do share some similarities, such as helping to manage client assets for a fee.
However, the range of services provided by a planner may differ in significant ways from those proffered by an advisor. Advisors who limit their professional services to investment choices are usually known by some variation of the title investment advisor. Their primary function is to place your money (usually long-term, but not always) within an appropriate investment strategy, based on financial situation, investment risk tolerance and time frame. Although investment advisors sometimes call themselves financial planners, they may be able to recommend only a limited range of products based on the type of securities license they have; their suggestions may not always be securities. Investment advisors could also be stockbrokers with expertise in trading stocks, but they may not necessarily qualify as financial planners.
Financial planners, on the other hand, typically assess many aspects of their clients’ financial lives, including savings, college, investments, insurance, taxes, retirement and estate planning. They may help develop a detailed strategy to primarily meet financial goals, such as saving to buy a house or pay for college. Planners often help clients focus on cash flow or opportunities for additional budget savings, which could be attributed to a differing of the short, medium and long-term bucket (grouping of allocation) of various assets.
Financial planners and investment advisors may also differ in their roles from others in money-related careers. Accountants, for example, might help lower tax bills. Insurance agents may steer investable cash into a term or permanent life insurance policy. Your local banker or fund company representative could advise you to buy a mutual fund or a certificate of deposit. Some counselors may operate in a niche market within a region — one located near a large defense plant or pharmaceutical employer — while financial planners and investment advisors usually specialize in retirement or estate planning.
A financial advisor has a fiduciary obligation and the power to act for another individual under circumstances requiring total trust, good faith and honesty. The fiduciary standard requires that an advisor puts clients’ interests first, while adhering to the Registered Investment Advisors (RIA) mandates. The standard is also enforced by the U.S. Securities and Exchange Commission (SEC). Registered investment advisory firms operate under these fiduciary standards, and are registered with the SEC.
Some financial professionals, who may practice as investment advisors, brokers or registered representatives, make recommendations deemed suitable for a client’s personal situation, but they are not required to give advice, which is in the client’s best interest. They are held to the suitability standard, which is enforced through a self-regulatory organization called Financial Industry Regulatory Authority (FINRA). They do not have to disclose the amount of commissions or bonuses that are paid, nor any other factors influencing their recommendations.
Some planners carry the Certified Financial Planner (CFP®) designation. They are held to a fiduciary criterion established by the CFP® Board of Standards. This standard is not enforced by a government agency, such as the SEC or Department of Labor. Other planners are Chartered Financial Consultants (ChFCs). They are held to a fiduciary standard set by the American College of Financial Services’ Code of Ethics. This designation, comprised of the same core curriculum as the CFP designation, includes additional personal finance electives. Consumer research indicates most investors don’t understand the difference between fiduciary and suitability standards. Thus, it’s advisable to ask potential financial professionals to share their designations before deciding to establish a relationship.
It’s also important to be fully aware of how the financial professional you select is paid for their services. Compensation can be fee-based, fee-only or commission-based. An investment advisor may charge an hourly fee, a flat rate or a percentage of the investments managed. Or, they could receive a commission from the financial products they sell. If they change a percentage of investments, it typically ranges from 0.2 percent to 2.0 percent.
A normal fee for a comprehensive financial plan prepared by a financial planning firm ranges from $1,000 to $5,000. These fees may vary depending upon on the type of planner or firm chosen. Fee-only and fee-based planners may earn money from the financial plans they create, while commission-based planners only make money from financial products they sell to clients.
In summary, financial professionals’ contrasts are based on characteristics, including scope of work, fiduciary or suitability standards and cost structure for services rendered. Selecting a financial professional, who is best for you requires research. In addition, you should trust the individual, and feel comfortable giving them the responsibility of managing your financial future.
Pete Hoover was destined to be a financial advisor. He has always been intrigued by numbers and money matters. They represent captivating puzzles to be analyzed, shaped and fit into place as pictures of financial solidarity. For nearly 40 years, Hoover has tackled those financial puzzles. In 2005, he launched Hoover Financial Advisors, located in Malvern. Hoover can be reached by emailing pete@hfaplanning.