There are many terms and jargon used interchangeably in the financial industry. Further, there is effectively no regulation of job titles. So just about anyone can call themselves whatever they like 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, the types of services they offer and whether you want to partner with them.
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 we can tell you as a fee-only financial advisor.
A financial planner leads with a financial plan and views money and investing as an important and necessary tool to help clients achieve financial goals, objectives, and lifestyle outcomes.
An investment advisor is typically focused on the best ways to invest and grow assets. Generally speaking, financial planning is not the 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: Registered Investment Advisor (RIA) and Broker-Dealer (BD).
Registered Investment Advisor (RIA):
Some RIAs are just investment advisors and some are true financial planners. The RIA business structure allows for both financial planners and investment advisors to operate as they choose. The RIA structure is held to the highest fiduciary standard over other financial advice models like broker-dealers. Here are some examples of what RIAs do:
- Help clients choose build 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(s) they operate in, or the Securities and Exchange Commission (SEC) if they have more than $100M in assets under management (AUM)
- 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, focus on fee-only RIAs who also hold the CERTIFIED FINANCIAL PLANNER® designation. More on that below.
Broker-Dealer Firms
Financial advisors can also be employed at Broker-Dealer (BD) firms. These firms are set up to facilitate the sale of financial products to a consumer. There are independent, bank-owned, insurance-owned, and wirehouse broker-dealers. Independent broker-dealer firms are free from the constraints of captive 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
- Help clients choose build and manage investment accounts
- Can provide financial planning services
- Can sign a fiduciary agreement, but most are governed by the best-interest standard
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, so a professional designation can signal a financial planning focus and competency.
Look for a CERTIFIED FINANCIAL PLANNER® Professional
A financial planner with a CFP® mark has been thoroughly trained on all core aspects of comprehensive financial planning. A CERTIFIED FINANCIAL PLANNER® is someone who has earned their certification through an extensive comprehensive exam as well as an experience requirement through the CFP® Board. These professionals have specialized training, education, and experience building financial plans for clients.
- A professional who assesses your financial situation and helps to create a complete financial plan
- Can work at RIAs and Broker-Dealer firms
- Are held to the highest fiduciary standard and must put clients’ interests ahead of their own
- They are trained in the art of comprehensive financial planning and are required to maintain training with regular continuing education to stay abreast of changes in the industry
- You will see the certification written as CERTIFIED FINANCIAL PLANNER®, in all capital letters and use of the CFP® mark 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 know they are making the right financial decisions to achieve their goals. But people aren’t always sure who to trust and many others don’t think they “qualify” to have a financial advisor because of the traditional assets under management (AUM) pricing model which only makes sense for people with a lot of financial assets already saved. This can be a huge barrier to qualify as a client under these parameters.
Here are some of the other reasons why more people don’t seek out a financial advisor:
- Feel it’s only for the wealthy
- Confidence in their ability to DIY their finances
- Only have savings in state or federal retirement systems
- Not knowing what a financial advisor can do to support their future
- Feel the discussion of money is taboo, or a feeling of inadequacy
The fact is, most Americans simply aren’t properly prepared for retirement! Why be among the 80% of Americans who reach retirement age and have underfunded savings, more stress, and are forced to live on a tight budget? Working with a firm with the experience and the credentials to help investors reach their goals is crucial to the success 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 the CFP® mark
- 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.