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Although the terms financial advisor and financial planner are often used interchangeably, there are distinct differences between these two types of professionals.
If you’re hesitating between a financial advisor and a financial planner, here’s what you need to know.
What is a Financial Advisor?
A financial advisor has passed the licensing and certification exams necessary to provide advice on investments and financial matters. Financial advisors can help clients make a variety of money decisions, including saving for retirement, buying a home, or investing in a business. They can also arrange insurance coverage for clients and help develop estate planning strategies, although you’ll always want a lawyer to draft wills or trusts.
There are many different types of advisors, each offering their own set of strategies and services, as well as their own specialty. Most have passed certain licensing exams. This is usually the Financial Industry Regulatory Authority (FINRA) series 7 exam or possibly the series 65 exam (required for registered investment advisers). Some financial advisors are also financial planners, but not all earn this designation.
Financial advisors generally charge an annual fee for their services. Some also charge commissions on the products they sell, such as mutual funds and annuities. These fees can vary widely, although annual fees often range from 0.5% to 1% of assets under management (AUM) with commissions of up to 6% of the transaction amount.
What is a Financial Planner?
A financial planner is a special type of finance professional who leverages advanced knowledge and tools to create personalized financial plans for clients. These encompass everything from saving for retirement to organizing end-of-life planning to developing asset transfer strategies.
Many financial advisory firms have one or more Certified Financial Planners (CFPs) on staff to work with clients or advisors to prepare comprehensive plans for clients. These can then be used in conjunction with other tools and strategies to execute trades and manage client finances.
Like financial advisors, financial planners often charge a fee for their services. Depending on the specific services provided, these fees can be monthly, quarterly, annual, or project-based.
Some planners also earn commissions on the products they sell. Commissions are generally the same as for financial advisors, and hourly fees can range from $50 to $150 per hour (or at least $1,000 per project).
Differences Between Financial Advisor and Financial Planner
Although financial advisors and financial planners work with clients and provide helpful advice, there are key differences between the two. For example, while many financial advisors assist their clients over a long period of time, some only assist clients with specific transactions or investments.
Financial planners, on the other hand, tend to take a more holistic approach to clients’ finances and develop long-term plans that address all aspects of a client’s financial life. These are usually reviewed every few years, with clients’ investments or strategies being adjusted as plans are updated.
Another key difference is that financial advisors may earn commissions on some of the products they sell, while financial planners more often charge hourly or flat-rate fees for their services.
Finally, while financial advisors and planners often have many of the same licenses, they typically have different certifications, including the CFP designation.
When should you call on a financial planner rather than an advisor?
If you’re looking for help with your finances, a financial advisor and planner may be able to help. The best option largely depends on your situation.
For example, if you have short-term problems or need help with specific questions or investments, a financial advisor can usually be of great help. However, if you want help developing a comprehensive long-term plan for your finances, it may be best to work with a financial planner.
A financial planner might be the best person if you:
- Need help developing a long-term financial plan
- You want to gain a comprehensive understanding of how your finances are likely to change over your lifetime
- are going through a major life change, such as getting married or having a baby
- You’re nearing retirement and want to make sure you’ve saved enough
- Need help managing debt, saving for college, or creating a budget
- You want to start strategizing on transfers of key assets to heirs and other beneficiaries
Alternatively, a financial adviser may be more appropriate if you:
- Looking for help with a specific investment strategy or decision
- Do not feel comfortable making financial decisions on your own
- Have a comfortable financial situation and are simply looking for someone to provide occasional advice
- You already have a complete financial planner and need someone else to help you use investments and other tools to execute your plan
How to Find a Financial Planner or Financial Advisor
If you’re interested in working with a financial planner or advisor, there are a few things to keep in mind. Follow these tips when choosing a financial advisor or planner to help you with your finances:
- Choose someone who is licensed. Before deciding who to work with, check them out using FINRA’s BrokerCheck tool or the Public Disclosure Database of Investment Advisors on the Security and Exchange Commission’s (SEC) website.
- Check the certifications of the professional. You can search for CFPs on the Certified Financial Planner Board of Standards website.
- Make sure they are well suited to your specific needs. Learn about their experience, investment philosophy and fees. Be sure to check references and read reviews before hiring someone.
- Understand the relationship. Make sure you are clear about what services the financial planner or advisor will provide and how they will be compensated.
- Know their limits. Ask questions to make sure you understand the advisor or planner’s approach to money management. Are there strategies they can’t help with or products they can’t offer?
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