We often casually use the titles financial advisor and financial planner in the financial domain to refer to the same financial professional; however, there’s a great difference in their roles and responsibilities and most importantly how they function.
Before you start your journey to get your finances managed and build wealth, read this blog to get a better understanding of the roles and responsibilities of a financial advisor and a financial planner and how they may be able to help you.
“Financial advisor” is a generic and an expansive term used for a professional who provides financial assistance and helps an individual in creating an investment strategy. Simply put, these professionals help and assist in managing your finances.
A financial advisor provides a vast spectrum of services such as the purchase of stocks, creating an estate plan, etc. depending upon the need of an individual. Though a few financial advisors hold credentials to provide a specific service but most professionals who work as stockbrokers, investment advisors, accountants, bankers, financial agents, estate planners, and bankers also refer to themselves as financial advisors.
On the other hand, a “Financial planner” is a qualified investment professional who works with companies and individuals to help them meet their financial goals. A financial planner creates a holistic plan with an aim to save, invest and grow their client’s money. A planner evaluates and analyses the client’s current situation and makes appropriate recommendations to meet their goals.
A financial planner holds specific credentials/licenses to operate in a specialized area such as retirement planning, education planning, tax planning, risk management, and asset allocation. They undergo rigorous training and pass specific examinations to earn their qualifications.
If certifications and credentials are essential criteria for you to evaluate a financial planner, then you must work with a Certified Financial Planner (CFP). Some of the other common qualifications who become a professional financial planner are Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC) and Certified Investment Management Analyst (CIMA). Most importantly, a certified financial planner carries a fiduciary responsibility and provide their advice or recommendations based on their clients’ best interest.
Working relationship: One of the significant differences between a financial planner and an advisor is their working relationship with their clients.
A financial advisor works on a suitability standard of care, i.e. they can sell and recommend financial products to the clients based on their need without informing the nuances of investing. Also, they don’t follow a regulated or legal requirement and hence don’t take much effort to educate their client on alternative investments.
However, in case of a financial planner, they work on fiduciary standard of care which means that they are registered with Registered Investment Advisory firms (RIA) and act only for their client’s best interest.
Education qualification – You must know the qualification of your financial advisor or a planner before you start your journey. While a financial advisor may have a relevant skill and experience on providing advice and recommendations whereas a financial planner has to be certified from the CFP board and adhere to the four Es - Education, Examination, Experience, and Ethics.
Meeting frequency – An advisor may require one or two meetings which are specific to the client’s issue/ requirement until the purpose is solved. But due to the nature of the consulting relationship, a financial planner may hold several meetings on an ongoing basis - monthly or quarterly. These meetings help both the parties to sync and stay updated on the progress.
Cost – Make sure you understand how your financial planner or advisor is compensated. There’s no one-size-fits-all cost for advisors or planners and so it may be a bit challenging to figure out how they charge for their services as they steer you in particular directions.
In general, the financial advisors are compensated in one of three ways - fee-only, fee-based or by a commission. A financial planner charges a percentage on an ongoing basis based on asset or portfolio under management or may charge an hourly or flat rate for their services.
List down your financial goals – be it long-term or short-term goals such as paying off your mortgage, credit card debts, planning an exotic vacation, or to create a contingency fund.
Create your strategy or a plan to achieve your goals and write down the necessary steps and actions you must take to realize your goals. While this exercise may seem cumbersome but if you are unsure about how to achieve your goals and are unable to make a comprehensive plan, then you likely may need to hire a financial planner.
Take a deep dive into your investment portfolio. It is a crucial step before you step out to look for a professional help. Introspecting your finances will provide an accurate view of your current status and will help you create a strategy to make changes at the right time.
Also, this exercise will help you to analyze if your portfolio is diversified and covers all aspects of your goals, age, and circumstances. In case you aren’t happy with your portfolio and are unable to decide where to invest money in the future then you may have to consult a financial planner for unbiased advice and recommendation.
Determine a golden number for your retirement and review your current state vs. the desired state. This will ensure that your plan serves you well at the right time horizon. It is important to take right actions to reach your desired state. If you are doubtful about your planning, then it is a right time to consult a financial planner and get the necessary help before it’s too late.
Deciding on whether to work with a financial advisor or a financial planner is a tough call and which is why it requires intense research, some shopping around and meticulously doing some homework. A point to remember is that one bad decision can become a long-term burden and can take away your sleep.
With markets growing more complex and volatile, planning and investing is becoming multifaceted which ultimately drives people to look out for professional help for guidance. If you are interested in investing your hard-earned money in creating a secured financial future and achieving your life’s objective – and most importantly, not become a victim of investment fraud – then it is wise to choose a financial planner, a certified professional who will strive towards long-term success.
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