Blog

Are You An Investment Advisor or Financial Planner?

Gerald D. FaheySeptember 21, 2018

Financial Planning

A friend recently asked if we were investment advisors or financial planners and is there a difference between the two?  So, we thought we’d highlight some of those details in our blog.

For starters, before you hire any financial professional – you should identify the services you need and compare that to the services to be delivered.  Sometimes there are limitations on what the professional can recommend or sizable differences in how much those services cost, or even how the advisor or planner gets paid.

Scope of Work

You may have heard the expression that most financial planners are investment advisors but not all investment advisors are financial planners?  Investment advisors and financial planners do share some similarities – both may help manage your assets and receive compensation for their services.

However, the range of services provided may differ in significant ways.   Advisors who limit their professional services to investment choices are usually known by some variation of the title Investment Advisor.  Their primary function is to place your money (usually long-term but not always) within an appropriate investment strategy, based on your financial situation, investment risk tolerance and time frame.  Some investment advisors may call themselves financial planners, but they may be able to recommend only a limited range of products based on the type of securities license they have or that are not even securities.  Investment advisors could also be stockbrokers – whose expertise may be in trading stocks, but these types of professionals are not necessarily financial planners. 

Financial planners, on the other hand, will typically assess many aspects of your financial life – including savings, college, investments, insurance, taxes, retirement, and estate planning.  They may help develop a detailed strategy to meet your goals, generally most of which are financial.  Maybe there is a specific financial goal in mind – such as saving to buy a house or pay for college.   Planners may also help focus on cash flow or opportunities for additional savings in your budget—perhaps attributed to the differing short, medium and long term “buckets” of your various assets. 

Financial planners and investment advisors may also differ from accountants, who might help lower your tax bill or insurance agents who may steer your investable cash into a term or permanent life insurance policy, or the representative at your local bank or fund company who might advise you to buy a mutual fund or a certificate of deposit. 

Financial planners and investment advisors may specialize in retirement or estate planning, while others may operate in a niche market within a region, perhaps located near a large defense contractor or pharmaceutical or medical employer.

Fiduciary Duty

The word fiduciary, from the Latin “fiducia”, meaning trust, is a person with the power and obligation to act for another under circumstances requiring total trust, good faith and honesty. The fiduciary standard requires that an advisor put the clients interest first and is adhered to by Registered Investment Advisors (RIA) and enforced by the Securities and Exchange Commission (SEC).

Registered investment advisory firms, such as our firm, operate under a fiduciary standard, which means we must operate in a client’s best interests. Additionally, advisory firms such as ours are registered with the U.S. Securities and Exchange Commission (SEC).

However, in our industry some financial professionals make recommendations which are deemed “suitable” for a client’s personal situation, but the standard does not require the advice to be in the client’s best interest.  Some of these professionals, who may have titles such as  Investment Advisors, brokers or registered representatives, are held to this suitability standard, which is enforced through a self-regulatory organization called Financial Industry Regulatory Authority (FINRA).  They do not necessarily have to do what is best for the client, nor disclose the amount of commissions or bonuses that are paid, nor any other factors that may influence their recommendations.

Some planners may have the Certified Financial Planner (CFP®) designation and these professionals are held to a fiduciary standard by the CFP® Board of Standards. This standard is not enforced by a government agency, such as the SEC or DOL.

Other planners may be Chartered Financial Consultants (ChFCs), are held to a fiduciary standard by the American College of Financial Services’ Code of Ethics. This designation covers the same core curriculum covered by the CFP designation, plus additional electives on personal finance.

Consumer research indicates that most investors don’t even understand the difference between fiduciary and suitability standards, so it is advisable to ask your financial professional this direct question before establishing any relationship with them.

Compensation

We thought it made sense to conclude with a segment of the different compensation structure for financial professionals, basically summarized as fee-based, fee-only and commission-based.  The fees vary, based on the specific advisor and services you have identified that you need.  An investment advisor generally is compensated through one of three ways:

  • They may charge you an hourly fee, a flat rate or a percentage of the investments they manage for you,
  • They may sell you financial products, from which they’ll earn commissions or some combination of those two.
  • Investment advisors who charge a percentage of investments typically charge anywhere between 0.2% – 2.0%.

A typical fee for a comprehensive financial plan prepared by a financial planning firm ranges between $1,000 – $5,000.   These fees may vary depending upon on the type of planner or firm you choose.  Fee-only and fee-based planners may earn money from the financial plans they create, while commission-based planners only make money from financial products they sell to clients.

Conclusion

As outlined in this narrative, financial professionals may differ based on many different characteristics including scope of work, fiduciary or suitability standard and cost structure for services rendered – the most important consideration is to find the best fit for you!

Sources

Smart Asset – Investment Advisor vs. Financial Planner
Forbes Article – What is the difference between an Investment Advisor and a Financial Planner
Legal Dictionary – Fiduciary
Forbes Article – Difference between Fiduciary and Suitability Standards
Benefits Pro Article – There’s a difference between Adviser and Advisor
Forbes Article – What you need to know before looking for a Financial Advisor
How to Tell if a Financial Advisor is a Fiduciary
Sound Financial Planning Article
CFP Board expands duty for Financial Advisers
Kitces – The 4 different types of Financial Advisors
WSJ – How to choose a Financial Planner