There are many terms used interchangeably within the financial industry. Titles aren’t regulated whatsoever. Therefore, just about anyone can call themselves whatever they want from an investment advisor, financial planner, financial advisor, retirement specialist, and so on.
However, there are distinct differences between professionals based on their formal business structure and credentials that determine how clients are served, what services a financial professional can offer, and how they are paid.
Understanding these distinctions is helpful in determining the qualifications of a financial professional and the types of services they offer.
The Primary Difference Between a Financial Planner and an Investment Advisor
There is no doubt that the financial services industry makes things feel confusing when it comes to titles, terms, and designations. Here is what I can tell you as a fee-only financial advisor. The primary difference between an investment advisor and a financial planner is that a financial planner leads with financial planning and views money and investing as a tool to help clients achieve financial goals, objectives, and lifestyle outcomes.
An investment advisor, on the other hand, is typically focused on the best ways to invest assets and grow money. Generally speaking (because I can’t speak on behalf of every investment advisor), financial planning is not a primary focus of an investment advisor’s practice.
A Tale of Two Business Structures
There are two primary environments for independent financial advisors to operate: RIA (Registered Investment Advisor) and Broker-Dealer.
Registered Investment Advisor (RIA):
Some RIAs are investment advisors and some are true financial planners. The RIA business structure allows for both financial planners and investment advisors to operate harmoniously. The RIA structure is held to the highest fiduciary standard over other advisory models like wirehouses and broker-dealers.
- Can be a firm or individual who helps clients choose and manage investment accounts
- Has a fiduciary responsibility to put their clients' needs first depending on their compensation structure
- Fee-only RIAs are registered with the state and the Securities and Exchange Commission (SEC) if they have more than $100M in assets under management
- Builds and manages your investment portfolio
- Can provide financial planning services
- Must disclose any conflicts of interest to clients
- Compensation is usually fee-only or fee-based, but any commissions earned are clearly disclosed within the firm’s Form ADV
As an investor, what you need to know is that not all RIAs operate the same way or abide by the same compensation model. If you want to work with a firm that offers a focus on financial planning, look for fee-only RIAs who also hold the CERTIFIED FINANCIAL PLANNERTM designation. More about that in just a moment.
Financial advisors can also be employed at Broker-Dealer firms. These firms are setup to help facilitate the sale of financial products to a consumer. There are independent broker-dealer firms, and also bank-owned, insurance-owned, and wirehouse firms. Independent broker-dealer firms are free from the constraints of wirehouses and can provide a much wider range of financial products and services without incentivizing the sale of one company’s financial products. That said, they do earn a commission on the financial products and services they sell. Just like their associates offering financial services at an RIA, independent financial advisors at a broker-dealer firm are also investment advisors and may offer financial planning.
- Broker-dealer advisors are regulated by FINRA
- Builds and manages investment portfolios
- Can provide financial planning services
- Can sign a fiduciary agreement, but most are governed by a suitability standard instead
Some investment advisors work at both RIAs and Independent Broker-Dealer firms. Financial planners can also work at an RIA and a Broker-Dealer firm. Therefore, the business structure alone doesn’t provide a clear distinction between the two, but a financial designation can signal a financial planning core competency.
Don’t Ignore the CERTIFIED FINANCIAL PLANNER(TM) Designation
A financial planner with a CFP® designation has been thoroughly trained on all core aspects of comprehensive financial planning. A CERTIFIED FINANCIAL PLANNERTM is someone who has earned their designation through a series of tests and experience through the CFP® Board. These professionals have specialized training, education, and experience building financial plans for clients.
- A qualified professional who assesses your financial situation and helps you create and maintain a complete financial plan
- They can work at RIAs and Broker-Dealer firms
- Are held to the highest fiduciary standard and must put its clients’ interests first
- They are trained in the art of true, comprehensive financial planning and are required to maintain training with extensive continuing education to stay abreast of changes in the industry
- A CERTIFIED FINANCIAL PLANNERTM must write out their designation like this in all caps and uses the (CFP®) designation with their name
Is it Important To Work With a Financial Advisor?
Given how muddled the financial services business can be, it’s no surprise that only a shocking 17% of American adults choose to work with a financial advisor. Most people want to retire well and know that they are making the right decisions with their money. But people aren’t always sure who to trust and most people may not think they “qualify” to have a financial advisor because of the traditional AUM (assets under management) pricing model that only made sense for people with a lot of financial assets already saved. There was, and still can be, a huge barrier to qualifying as a client under these parameters.
- Here are some of the other reasons why more people don’t seek out a financial advisor:
- Some Americans feel it’s only for the wealthy.
- Some Americans feel confident to DIY their finances.
- Many people are saving for retirement in state or federal retirement systems.
- Americans may not know what a financial advisor can do to support their future.
- The subject of money is taboo.
But the fact is, most Americans simply aren’t on track or properly prepared for retirement! Why be among four out of five Americans who hit retirement age underfunded, overly stressed, and on a tight budget? Working with somebody who has built hundreds of plans before can be crucial to the success or failure of one of the most important areas of your life.
What Type of Financial Advisor Should You Choose?
We Recommend Using a Fee-Only Registered Investment Advisor or Financial Planner with a CFP® designation
- They offer unbiased advice. Since these types of financial professionals are getting paid by you, the client, and not the product, they act in your best interest at all times. A fee-only financial advisor takes time to discover your investment goals and objectives and recommend the appropriate products and investment vehicles based on that.
- The cost is predictable and transparent. A fee-only financial advisor may charge a management fee, by the hour, or an annual flat rate.
- You’ll work with him or her to create a comprehensive plan. This financial advisor will understand different aspects of your life, insurance, taxes, retirement, and investments, not just your retirement plan. It’s like having a Chief Financial Officer on retainer that can help your household make strategic financial decisions.
- A fee-only advisor will take the time to work with other people on your team. If you have a trusted lawyer, estate planner, CPA, or insurance broker you work with, a financial advisor works with them to find cost-saving solutions that put money in your pocket and sets your family up for a secure future.
Understanding these nuances can help you choose the right solution for you. If you have questions about what a fee-only advisor can do for you, please schedule a conversation with me today.