Saturday, July 13

Financial Advisor vs. Financial Planner: What Are the Differences?

Studies show that roughly one-third of people are financially literate. That trend extends throughout most countries in the world.

Regardless of the reasons for this statistic, it’s important that people have access to professional help with their finances. Financial advisors and financial planners are often the first professionals that come to mind.

Choosing a financial advisor vs. financial planner can be a difficult choice. People often get “financial planner” and “financial advisor” confused, but there are numerous differences to be aware of.

We’re going to take a look at this distinction today, giving you some insight into your resources for professional financial help. Hopefully, the information below will give you a solid understanding of your options.

Let’s get started.

What’s the Difference: Financial Advisor vs. Financial Planner

The first distinction to make is that “financial planners” fall under the umbrella of “financial advisors”.

Financial advisors are those that manage your money in one way or another, helping you to achieve goals or come to a better understanding of your finances. That category includes numerous subcategories, though.

The requirements for becoming a financial advisor are slim-to-none depending on what subcategory you want to work in.

That isn’t to say that there aren’t a lot of very helpful and important financial advisors out there, though. Most advisors are well-qualified and equipped to help you get your finances in order. Let’s look at some of the categories that financial advisors might fall into.

1. Investment Management

Investment managers are financial advisors. In many cases, stockbrokers fall into this category as well.

These are individuals who help you plan your investments and take action upon them when necessary. The stock market is a tricky thing to understand if you’re not trained in its trends and operations. It’s possible to invest for yourself, but you might have better luck with someone who does it professionally.

Investment managers typically work with a firm, although they might operate on their own. You don’t need a lot of wealth to start investing with a manager.

They take your money and put it places where it’s likely to grow, requiring that you pay a regular fee or offer a percentage of your returns in exchange for their services.

2. Insurance Agents

Insurance agents also fall into the purview of the “financial advisor” category.

These individuals help you to protect your property and wealth from unforeseen disasters. Depending on the type of insurance, they might also have a close relationship to your finances and the way that they pan out.

For example, life insurance policies delve deeper into a person’s intimate finances than, say, renter’s insurance policies do. Insurance professionals might offer numerous strategies for you to develop your wealth and protect it.

3. Estate Planners

Estate planners aid you in the process of distributing your wealth in the event that you pass away. All individuals can benefit from estate planning, as personal possessions tend to cause familial strife if they’re not planned for.

One family member might think they should inherit your home, for example, while two others feel the same way. That tends to cause litigation, broken relationships, and general turmoil.

The process is easier on all parties if your wealth and property are all accounted for in advance of your death. Naturally, death isn’t always foreseeable so it’s important to start planning early.

Estate planners are the people to call.

4. Tax Professionals

People who work on your taxes are financial advisors as well. Depending on the scope of your financial situation, you might require their services a great deal. If you own and operate a business, for example, tax services are lifesavers.

The same is true if you’re a freelancer or self-employed individual who works with multiple clients. Tax services might help you save tens of thousands of dollars that you would otherwise pay to the IRS.

They can also help you prepare for tax season by employing different strategies to reduce the amount of money you need to pay. They often have a profound impact on your short-term and long-term financial health.

5. Generalist Finacial Advisors

There are some advisors that serve as “Jacks or Jills of All Trades.” This category is the one where you should use the most caution before proceeding.

There are certainly some professionals here that do wonderful work and help your finances greatly. You should always make sure to look at past clients and check references before moving forward with these individuals, though.

That isn’t to say that there isn’t real value in generalist financial planning, but it’s a vague category that doesn’t have strict guidelines. So, you could fall prey to someone who has the wrong intentions or doesn’t know what they’re doing.

That’s why references and past clients are so important to review. Make sure to ask these professionals precisely what they plan to do to help you, what safeguards are in place to protect your money, and why should you choose them over someone else?

You might find some overlap between personal financial help, spending habits, investment strategies, life coaching, and business opportunities with these individuals. Those are all great things, but they’re all ill-defined aspects of financial advice.

When to Hire Financial Advisors

Generally speaking, there’s never a bad time to hire a financial advisor. Someone who understands money can help you to grow your wealth.

It’s always best to come to that decision on your own, however. It’s typically a bad sign if you’re solicited by a financial advisor. If you need to be convinced to let someone help you with your finances, the person doing the convincing often has an angle.

All financial advisors have vested interests in making money for themselves, as we all do. It’s important that you have a clear idea of how the planner makes their money, what their services actually are, and whether or not you need their help.

If there’s any uncertainty about where your money is going or if the planner has ulterior motives, it’s time to find someone new.

What Is a Financial Planner?

A financial planner is someone who can offer similar services to the ones described above, except for that there’s one twist: they have to be certified to do so.

Financial planners need to be certified by The Certified Financial Planner Board of Standards. This is commonly referred to as the CPF board. This group is a highly renowned one and offers a few strict requirements for entry.

The four key stables of the CPF board are education, exams, experience, and ethics. A person must prove themselves in all four areas before they pass the exam and move on to work as a professional financial planner. There are a few specific steps that a person has to complete.

  • Complete a 4-year college degree
  • Take CPF coursework
  • Pass the Certified Financial Planner exam
  • Gain experience in the field
  • Meet certain ethics requirements
  • Receive the CPF certification

Generally speaking, certified financial planners work in the finance industry before they make the leap to become certified. The do so to earn a better salary, establish more credibility in the field, and learn new skills that will truly help their clients.

So, what are all of those skills? What can a qualified financial planner really do for you?

1. Comprehensive Planning

A key aspect of financial planning is the professional’s ability to give you well-rounded advice. These individuals are more personalized and capable of looking at the broad scope of your financial situation to give you help.

Your life goals and personal ambitions fit into the discussion and the professional can work with you to explore your options moving forward. This is great for anyone, regardless of your current position. If you’ve been broke for a long time and you’re ready to start moving onward, a financial planner can help.

Alternatively, those who have some money and want to turn it into something bigger can benefit from a certified financial planner as well.

2. Legal Responsibility

Remember those generalists we discussed above? Financial planners might vaguely sound like that at first, but there’s a key distinction to make and one that should put your mind at ease.

Fiduciaries are individuals that are people who have a legal obligation to act in the interest of their clients. Further, they can’t benefit directly from the success of your assets.

In other words, there are safeguards in place to prevent individuals from taking advantage of you. They get their rate, but they don’t get dividends from your assets like investments, properties, and more.

3. Tax Help

CFPs have to be versed in taxes and tax law before they can serve clients. This is an excellent thing for clients. Without a financial planner, individuals have to designate their finances to numerous different professionals who might not know the full scope of their situations.

Alternatively, financial planners are aware of your income and investments so they can better approach your taxes. They can even manage those assets in such a way that anticipates tax season and provides benefits to you when it comes time to pay.

Making certain decisions in advance of investments or life changes can set you up a lot better for smaller taxes. There’s nothing illegal or shady about this, it’s just a way to intelligently handle your money so you’re able to keep as much of it as you can legally.

4. Estate Planning

As we mentioned before, estate planners are those who handle your finances in such a way that makes it easier for your family to distribute things after you pass. Having a professional on your team is also a reassurance that your finances will be handled according to your wishes.

Financial planners include estate planning in their arsenal of skills.

5. Investment Strategy

Finally, financial planners can help you with your investment strategy. This is a big bonus when you’re thinking about retirement or you’re just looking to generate wealth for years to come.

Keep in mind that investments range from stock purchases to the purchase of a home. Any number of investments can set you up for a healthy financial future, but it’s not always easy to know which way to go.

Further, it’s often hard to make the specific choices involved when you do make a decision about the market you want to invest in.

Imbalanced Specialties of Financial Planners

There are a few negative things about some financial planners. Mainly, some of these professionals won’t have a lot of experience in some of the areas described above.

All CFPs need to have training and knowledge of estate planning, taxes, investment strategy, and more, but that doesn’t mean that they’re experts in those subjects.

The other kinds of financial advisors might have more specialty in particular areas. You can take a look at Consilium for more ideas on specialists that might be able to help you.

Keep in mind, though, that most financial planners were financial professionals before they got their certification as CFPs. That means that a lot of these individuals do have extensive experience in one or two areas. There’s a good chance that they have experience in all of the areas listed above.

That’s not always the case, though, so it’s important to be mindful of that. Do a lot of research on your CFP of choice and see what their qualifications are. How much time have they spent in the industry?

What is their educational background and does it apply to your situation? What have previous clients had to say about this professional’s services?

When you get a good feeling about someone and their credentials, it’s a smart move to hire a financial expert of some kind. Your wallet will be better for it.

Want to Learn More About Finances?

So, what’s the difference between a financial advisor vs. financial planner? An advisor is someone who tends to specialize in a particular area, whereas a planner can help you in almost all areas of your finances.

There’s a lot more to learn about personal finance, though. We’re here to help. Explore our site for more ideas on how you can improve your finances, make changes in your life, and a whole lot more.