Though the terms financial planner and financial advisor are often used interchangeably, I believe in today’s financial world, both are necessary and provide value, however, I would suggest there is a difference and the difference is important for consumers when engaging with one or the other or possibly both.
When I first entered the financial service business, in the late 1970s, the financial world was much different. In addition to banks, the financial service world consisted primarily consisted of stockbrokers and life insurance agents with income generated to them and their firms by commissions from products sold. Their primary objective was to sell their products.
In the fall of 1984 when I started what eventually became the wealth management firm I sold at the end of 2016, I could see changes coming in the financial service business. Later, in 1989, after passing all the exams required to become a Certified Financial Planner® [CFP®], I thought financial planning was beginning to become a stand-alone profession.
Today, looking forward, the differences between a financial advisor and financial planner, in my estimation, are distinct. The following are the differences I would suggest.
Education and Credentials
A financial planner has the education, experience, and credentials in all areas of financial planning. These areas include, but are not limited to cash flow, debt reduction, tax planning, both pre and post-retirement planning, money management, risk management, and estate planning.
For individuals and households looking for a financial planner, I would suggest engaging a planner who is a Certified Financial Planner® [CFP®]. This certification assures the potential client the planner has met the academic requirements in all areas of financial planning and the planner has passed a comprehensive exam. In addition, to obtain the CFP® designation, the planner has to satisfy experience requirements. Finally, CFP's® are required to meet ongoing continuing education requirements. It has been estimated that about 20% of all financial advisors have obtained the CFP® designation. For more information on CFP's® check out the website Let's Make A Plan.
Many financial advisors have credentials, but it is not unusual for these credentials to have minimal academic merit and/or are tied to selling a specific financial service product.
A financial planner is compensated directly by the client. A financial advisor can be paid a commission or fee by a third-party company they represent. Even if the advisor is on salary, the company may be grossing its income from either commissions or fees.
This is very important. An advisor who works for and is paid by a company, investment, or insurance or both has a vested financial interest in serving the company's interests. The following are some examples.
Advisors who work for broker-dealers, investment companies, and/or insurance companies are often governed by the suitability standard, not the fiduciary standard. The suitability standard means the broker or representative is required to make recommendations that are suitable based on a client’s personal situation, but the standard does not require the advice to be in the client’s best interest. As outlined below, the fiduciary standard is the highest standard of professional responsibility.
Advisors, even if CFP’s®, who are registered representatives, insurance agents, and/or work for a company are often paid a commission or management fee on products sold. This is not bad in itself but can lead to a conflict of interest between advisor and client.
Some advisors are a combination of fee and commission. In this scenario, it is very important for the client to understand what services are being provided for the fee and the products which are generating a commission and the amount of the commission. Again, there can be a conflict of interest.
An advisor whose primary source of income is a product sold by a company, life insurance or annuity, for example, has a personal financial interest in selling these products. In situations like this, it may not matter what the question is, the answer is often this product.
Working with a service representative who is employed by large institutional investment and/or insurance company and is on salary is no guarantee or assurance of impartiality. The representative may be very good at answering questions regarding this company’s product line and services, but this does not mean they are qualified to provide broad financial planning services. The representative may also have a vested interest in promoting their company's products and services.
I would suggest it is best for consumers who wish to engage a financial planner to limit their selection to independent planners who are compensated directly by the client. CFP’s® must disclose if they are fee-only, commissions, or a combination of both. Limiting a search to fee-only eliminates other possible conflicts of interest.
Fee options include hourly, flat fee, retainer, and assets under management [AUM]. Though the AUM has been the most popular model, I believe this will gradually be replaced by flat fee, hourly, or retainer. The reason is, for a planner or firm whose income is primarily through AUM, there is an incentive to retain and increase assets under management. Retainer, flat fee, and hourly, because they do not care if the assets are managed by them or not, do not have this conflict. In all cases, fees should be discussed and disclosed in advance for work to be done on behalf of the client.
For clients looking for a long term relationship in today’s financial world and going forward, I would suggest a retainer is the best option. For clients looking for a one-time planning event, flat fee or hourly is the best option. Keep in mind, either flat fee or hourly does not mean the relationship ends after one event, just means each event is separately scheduled and implemented.
Finally, because a planner is fee-only, the planner can recommend investment and insurance products that do not pay a commission and/or have lower fees which can mean the cost of the planner's fees may be more than offset by the overall reduction in commissions and fees being paid by the client.
A financial planner who is a CFP's® has a fiduciary responsibility. In CFP Board's Code of Ethics in Section A-1, it states "a CFP® professional must act as a fiduciary, and therefore act in the best interests of the Client". This is the highest standard of professional responsibility.
I would suggest most if not all individuals or households should meet with an independent qualified financial planner. Remember, it is not possible to know what you do not know and a CFP® is able to address all parts of the financial planning process.
Our Pre-Retirement and Post-Retirement Check-Ups provide a review of all areas of financial planning and relate to all of the following:
- Some, who have developed a solid financial plan may not learn a lot, but confirmation of a well-planned life strategy is beneficial in itself.
- Others, the majority in my experience, will find the process and resulting information, analysis and recommendations beneficial and well worth the money spent.
- Finally, for those who, based on the above criteria, believe they are working an advisor, not a planner, engaging a planner to simply review the overall financial plan providing a second opinion may be beneficial.
If you do choose to engage a planner, verify the following criteria before so doing.
- The planner is a fee-only CFP®.
- The only form of compensation is fees paid directly by the client. As part of this, verify the planner or the planner’s firm has no other source of income or compensation other than fees paid directly by the client. All fees should be disclosed in advance along with the services provided for the fees.
- The planner has a fiduciary responsibility to the client.
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