Long-term financial goals can be hard to achieve alone. Fortunately, there is no shortage of experts—financial advisors and financial planners—willing to help. Unfortunately, it isn’t always easy to determine which type of expert is the best match. While their names might seem interchangeable, there are important distinctions that can make a big difference.
What is a financial advisor?
A financial advisor, sometimes called a wealth advisor when working with high-net-worth individuals, is a specialist in one or more financial service areas—like investments, taxes, or insurance. Some financial advisors provide objective financial guidance about retirement planning, estate planning, debt repayment, and taxes. Other types of financial advisors, like investment advisors, can make investments on behalf of a client.
An investor thinking about working with a financial advisor may consider whether:
- A financial advisor has more expertise, knowledge, and objectivity than you would likely be able to acquire on your own.
- A financial advisor can reduce the hassles of personal investing, especially if a client doesn’t have the time or inclination to follow the markets closely.
What is a financial planner?
A financial planner is a type of financial advisor that develops a “big picture” strategic plan for achieving a client’s financial goals. The planner covers all areas of wealth management—investments, taxes, insurance, savings, debt repayment, retirement, and estate planning. The financial planner devises a step-by-step program for the client or someone else (like the planner) to follow. A financial planner can serve as “head coach,” directing a team of financial advisors licensed to do business for the client.
An investor may also want to consider when thinking about whether to work with a financial planner:
- A financial planner takes an integrated approach to investments, taxes, insurance, estate management, and retirement planning—all moving together towards long-term financial goals. This can help reduce confusion and stress over your current and future financial picture.
- Certified financial planners have a fiduciary responsibility to put the client’s needs first, so they don’t accept commissions, must disclose conflicts of interest, and by law must follow strict duties of care and loyalty, unlike non-fiduciary professionals.
4 main differences between a financial advisor and financial planner
Both financial advisors and financial planners bring expert advice to clients. To distinguish between them, you can think of advisors as the tactical experts who lay the groundwork and planners as the strategists who chart a path towards the client’s goals.
1. How they work
- Comprehensiveness. Financial advisor is a catch-all term covering many specialized roles, from investment advising to retirement planning. A financial advisor is unlikely to provide each and every service across the financial spectrum. A financial planner, however, takes a high-level, more comprehensive approach to wealth management. The plans they develop touch all areas of your finances.
- Meeting frequency. A financial advisor meets with clients, maybe, once or twice a year. By comparison, a financial planner tends to take a more “hands-on” approach, likely meeting with clients more frequently.
2. Standard of service
Some financial advisors follow the “suitability” standard in relationships with clients. Suitability means that the advisor recommends financial options in the client’s interest. However, they are not obligated to lay out all options. The financial advisor doesn’t have to tell the client whether another party is paying them a commission from the recommended financial products.
Typically, credentialed financial planners are held to a stricter fiduciary standard than financial advisors. Certified Financial Planners (CFP’s) have a fiduciary duty to work in the client’s best interest, rather than their own. This brings more transparency to the client relationship. (Note that some financial advisors—Registered Investment Advisors (RIAs)—have a fiduciary responsibility, too.)
Financial advisors are compensated in one of three ways: fee-only, fee-based, or on commission.
- Fee-only charges a flat-rate or works on retainer.
- Fee-based will charge a percentage of assets being managed.
- Commission earns money based on assets sold or accounts opened.
Financial planners are more likely to charge an hourly rate or flat rate, though some will be fee-based, too.
A financial advisor may hold one or more certifications in an area of specialization such as retirement planning, estate planning, tax advising, or investment portfolio management. If a financial advisor buys and sells securities for a client, they must pass the Financial Industry Regulatory Authority (FINRA) exams and register with FINRA, state regulators, and the Securities and Exchange Commission (SEC).
Many—but not all—financial advisors hold licenses that determine the kind of services they can offer. Among the most common licenses:
- Series 6 license. A financial advisor needs this to sell mutual funds, insurance, and variable annuities for a commission.
- Series 7 license. A financial advisor needs this to sell individual securities (stocks and bonds, not commodities and futures).
- Series 65 license. A financial advisor needs this to charge for investment advising services.
For financial planners, two important certifications that are relatively difficult to obtain:
- Certified financial planner (CFP). This requires a bachelor’s degree and three years of full-time financial planning experience, plus rigorous coursework and an exam administered by the Certified Financial Planner Board of Standards.
- Chartered financial consultant (ChFC). This professional designation is granted by The American College of Financial Services after taking eight college-level courses across a span of planning topics—from insurance to retirement—plus, 30 hours of continuing education.
What are some things to keep in mind when choosing between a financial planner and financial advisor?
Investors considering a financial advisor or financial planner may want to consider their short- and long-term financial goals and the expertise they need. Generally speaking, investors might make the decision based on their need for specialized tactical advice versus strategic direction for their full financial picture.
- If an expert is needed in one specialty such as investing or taxes, consider hiring a financial advisor.
- If an expert is needed to strategize and direct most or all areas of finance, seek out a financial planner.
Investors might also consider:
- Does the planner or advisor have an investment philosophy that’s compatible with yours?
- Does the planner or advisor have the appropriate experience and credentials?
- Is the planner or advisor credentialed? Investors can check credentialing organizations like the CFP, which maintains a searchable database of certified professionals. Or, go to FINRA’s BrokerCheck system and pull up Form ADV—the paperwork that registered investment advisors file with the SEC—to learn about an advisor’s services, clientele, fee schedule, any problems with clients or regulators, and reported disciplinary actions. Additional regulatory information is searchable via the SEC’s Investment Adviser Public Disclosure database.
- What is the planner or advisor’s standard of service—suitability or fiduciary? Remember, an advisor with the suitability standard might recommend “good enough” financial products, with no obligation to lay out the best options for the client.
- Is the financial advisor or financial planner transparent about how they will be compensated? “Fee-only” compensation tends to have the most transparency.
Keep in mind that the same person can hold the titles financial planner and financial advisor. What matters are the credentials, the types of financial services being offered, how they will be paid, and personal fit.
The bottom line
Both financial advisors and financial planners are investment management experts who can help to realize your financial goals. Advisors are useful when a specialist is needed in one or more areas of finance and when you want to make specific investments. Planners, on the other hand, are best at high-level strategy and managing all areas of your financial life holistically, including investment management. Investors can perform due diligence to help understand which specialist is the better match. This process can include reviewing the credentials and licenses, as well as how the advisor or planner is compensated.