If you’re thinking about hiring a financial professional, you may be considering either a financial planner or a financial advisor. While there’s some degree of overlap between these two professions, there are several notable differences in their duties, licensures, and what they offer their clients. So, who should you hire? To help you make this choice for yourself, read on to learn about the differences between a financial planner vs financial advisor.
What Is A Financial Planner?
A professional financial planner may hold a CFP® professional designation; they help clients manage their financial affairs by taking into account the entirety of their financial health. Your financial health describes the collective well-being of your financial affairs, from savings to credit scores and investments.
Financial health combines these individual metrics to tell a complete story of your personal finances: how you spend, borrow, save, and plan. Focusing on your overall financial health often proves to be a better method than simply focusing on a single metric, like your credit score, when creating a financial plan. For example, consider when you apply for a loan. Your credit score may not be excellent or good, but if you have a notable debt-to-income ratio and healthy savings, you’re more likely to get approved.
This holistic approach allows you to consider multiple aspects of your financial health and discover ways to improve it.
Duties of a Financial Planner
A financial planner is responsible for helping you implement a holistic approach to your finances by guiding you toward understanding and maintaining various parts of your finances. These duties include:
A financial planner will analyze your income and expenses to help you develop a custom budget that works for your lifestyle and personal goals.
#2 Debt Management
A financial planner can also audit your debts and associated interest rates to strategize which debts to prioritize to save money in the long term.
#3 Retirement Planning
A financial planner can manage your retirement accounts and investments. Since part of the role of a financial planner is to help you meet both short-term and long-term goals, retirement is naturally part of the financial planning process.
#4 Estate Planning
Estate planning is the process by which you determine where your assets will go after you die. Financial planners can assist you in this process by showing you how to take an accurate inventory of your assets and file the necessary paperwork. In some cases, the financial planner can also provide advice about how you may want to distribute your assets.
Some financial planners assist their clients with insurance—whether by referring them to an insurance provider or by selling the policies themselves.
The CFP® Professional Certification
Keep in mind that some financial planners operate without licensure. These individuals perform the duties of a financial planner, but they do it without oversight or regulation. Additionally, these individuals do not have to complete any specialized education.
CFP® professional certification comes after an individual completes a set of rigorous requirements that include:
- Earning a bachelor’s degree
- Finishing 4,000 hours of training
- Meeting certain ethical requirements
- Passing a six-hour, 170-question test
CFP® professionals are considered to be the gold standard in the financial industry because they have the knowledge, education, and experience to plan out their clients’ financial health. They also offer investment guidance, strategies, and insights.
Last but not least, CFP® professionals are required to perform their jobs as fiduciaries. A fiduciary is defined as someone who makes financial decisions on behalf of their client. They are legally required to act in their client’s best interests.
What Is A Financial Advisor?
Put simply, a financial advisor is a professional job title for someone who advises clients on finances—usually investments. They are not obligated by law to adhere to the duties of a fiduciary. A financial advisor’s primary focus is on managing their client portfolios while also building wealth and monitoring investment performance.
What Does a Financial Advisor Do?
A financial advisor’s principal responsibility is to monitor your portfolios and investments with your financial goals and needs in mind. While some financial advisors may conduct their business similarly to financial planners, that’s typically not what clients should expect. Instead, a financial advisor may make decisions on behalf of their client by investing their client’s wealth or savings where the advisor deems appropriate.
Financial Advisor Certifications
There are a few options for professional credentialing for financial advisors, and the National Association of Personal Financial Advisors (NAPFA) is among the most common. NAPFA is a nationally recognized association that offers credentials to financial advisors who operate on a fee-only business model. A financial advisor with NAPFA credentials is required to:
- Work as a fiduciary
- Pursue continuing education
- Take a holistic approach to financial advising
While uncredentialed advisors can help you meet your financial goals, an individual who is creditionaled through NAPFA may provide you additional knowledge and experience.
Financial Planner vs. Financial Advisor
The roles of financial planners and advisors have areas of overlap since they’re both working with your financial health. For the best experience, you should work with someone who offers a combination of both planning and advising (in other words, investment management) so you get the best of both worlds.
Additionally, it’s wise to work with someone acting as a fiduciary, who has a license or credentials, and who is held accountable by industry regulations. The financial professional you choose will largely depend on what you need them to do for you.
Do you need help with your budget? Do you need help planning your estate? Do you have all of that under control, and you simply want someone to focus on building your wealth through investments?
Where Financial Planners and Advisors Work
Financial planners and advisors usually work at firms offering financial services, or they work for themselves as private entities.
How They Get Paid
Depending on each one’s business model or the firm, there are a handful of ways in which financial planners and advisors get paid for their work.
The fee-only model is where the financial advisor or planner charges an hourly, annual, or flat fee for their services.
The commission model is more common among financial advisors than it is with financial planners. The commission model allows financial advisors to get paid through the investments they make on your behalf. When they sell an investment, they take a commission on it.
Fee and Commission Model
This model combines the fee-only model with the commission model. Financial advisors or planners may use it. To do so, they charge a set of fees, but they will also make a commission as they build your wealth.
4 Questions to Ask When Choosing a Financial Professional
When choosing a financial professional to help you manage your finances and build your wealth, here are some questions to consider asking.
#1 Are You a Fiduciary?
If you are paying for financial services and putting your financial health in someone else’s hands, you want to trust that they are acting in your best interests.
#2 How Do You Get Paid?
You want to know from the start how the financial professional you’re working with is making their money.
#3 What Financial Services Do You Offer?
Your life is ever-changing. Perhaps you start in your early 20s working with a financial professional. Maybe estate planning isn’t high on your priority list at that point, but when the time comes, you want a professional who can help you with asset planning.
#4 What Is Your Finance Philosophy?
Get an idea of what the professional’s approach to financial planning is.
Some financial professionals tend to be more risk-averse, while others have a higher tolerance for risk when it comes to investing. You should work with a professional who shares your approach to finances and your outlook on taking risks.
Finding the Right Financial Professional for You
We hope you’ve enjoyed this guide on the differences between a financial planner vs financial advisor. If you’re still not sure which financial professional is best for you, the next best step is to interview a few professionals in your community. If you are a Charleston, SC, resident, Good Life Financial Advisors of Mt. Pleasant is here to help!
As proud CFP® professionals affiliated with the Financial Planning Association, we’re happy to sit down and answer all your questions with a complimentary discovery call. This meeting is a no-obligation consultation where we will discuss your current life circumstances, financial situation, and long-term money goals. It is also an opportunity for you to learn more about us and determine whether you feel comfortable moving forward with our team of financial professionals.
If you’re ready to discover the Good Life, contact us today to schedule your free discovery call.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.