Need help with a comprehensive plan for your financial life? Or are you just looking for someone to manage your investments and other assets?
This article covers the professionals who can help with those needs – namely financial planners and financial advisors.
Financial planners offer big-picture strategies and comprehensive plans that typically cover many years and several stages of your life. Financial advisors, by contrast, are more focused on your investments alone; for example, they’re more likely than planners to provide hands-on management of your portfolio.
Despite those distinctions, though, there’s overlap in the services each of these pros provide. Here’s a deeper dive comparing financial planners and financial advisors, with guidance on which you may need to help manage your finances.
What are financial advisors?
Financial advisors primarily engage in overseeing your investments. They may manage portfolios directly, and tailor the assets they contain to match the client’s financial goals and tolerance for risk. This work often includes recommending specific investments, buying and selling those on the client’s behalf and keeping the client apprised of the portfolio’s performance.
Financial advisors may also offer planning guidance, although it’s usually focused on managing your investments to meet certain financial milestones and goals. For example, they’re less likely than a financial planner to offer advice on budgeting, debt management, home and auto insurance or housing costs.
While being a financial advisor requires no formal certification, some advisors hold the designations of Chartered Financial Analyst (CFA) or Certified Investment Management Analyst (CIMA).
What are financial planners?
A financial planner is a strategist for your financial life, providing guidance that encompasses all aspects of your finances for years to come. The plans they create may include strategies to save and invest for retirement, pay for college, manage existing debts, minimize taxes and ensure that you’re adequately insured.
Like investment advisors, many financial planners will manage your investments, too. Some may even require you to agree to such management before they take you on as a planning client. But many financial planners will provide advice without managing your portfolio. This means that you can receive financial planning guidance without necessarily signing on to have your investments managed.
The financial planning process begins with a deep dive into you and your money, including gathering details on your income, savings debts and other obligations. You’ll be asked about your goals, financial and otherwise, and the risk level you’re comfortable with for investments.
After the plan is presented to you and discussed, the planner – whether or not they are managing your portfolio – will likely suggest regular meetings to assess how the recommendations are working and whether any changes are required.
While no formal license is required to offer comprehensive financial planning, many planners hold the Certified Financial Planners (CFP) designation. Becoming a CFP involves extensive coursework, accumulating a certain amount of experience and passing an exam on a wide range of planning topics.
Some financial planners hold the Chartered Financial Consultant (ChFC), a CFP alternative offered by the American College of Financial Services, or a Personal Financial Specialist (PFS) designation, which allows certified public accountants (CPAs) to offer financial-planning services.
How might I be billed by either financial professional?
There’s no single formula for how you’ll pay for an advisor or planner, nor a standard amount their services will cost.
Both types of professionals may be compensated through fees. These are sometimes a one-time payment – for example, you could pay between $1,000 to $3,000 for the preparation of a comprehensive financial plan. Alternatively, you might pay for the plan’s preparation via an hourly fee, usually at least $100 and up.
Many planners and advisors work on a fee-only basis – for either or both of preparing plans and managing portfolios – and so receive no compensation from the companies whose products they recommend to clients or buy on their behalf. In other cases, though, the professional may receive commissions from such sales, either as their sole compensation or in combination with also charging a fee to the client.
Such a system can raise concern that the professional will choose investments based on their commissions, rather than being guided entirely by what’s best for the client.
The CFP designation held by many financial planners and some advisors requires that the professional act in a fiduciary manner – that is, guided only by the client’s best interests. Before hiring a professional who is not a CFP, it’s wise to ask if they are a fiduciary.
Both financial planners and financial advisors who buy and sell securities must also adhere to compliance requirements set by regulatory bodies like the Securities and Exchange Commission, a U.S. government agency that regulates securities markets and protects investors, and the Financial Industry Regulatory Authority, a non-profit, self-regulatory organization that regulates broker-dealers and brokers in the United States.
Clients are often billed for portfolio management as a percentage of the assets under management (or AUM). That charge typically ranges between 1% and 2% of the assets being managed, although the rate may be significantly less for large portfolios and markedly more for the smallest investment holdings.
When do I need a financial advisor?
The typical reason to seek out a financial advisor is for wealth management, especially if your investment portfolio has become too demanding or stressful to handle.
Having an advisor manage investments makes the most sense for high net-worth individuals who have portfolios in the millions or even tens of millions of dollars – and for clients who lack financial savvy.
In part, that’s because professional management may not be available for those of modest means. Some fee-based advisors do agree to manage assets worth as little as $20,000 to $50,000, but minimum values in the six- or seven-figure range are common. And even if an asset manager accepts you as a relatively low-worth client, the relatively high fees you’ll pay may eclipse any additional return from having an advisor manage your investments.
If you’re an investor with a modest portfolio – and modest investing know-how – alternatives to hiring an advisor include a simple investing plan focused on one of the best index funds. These mutual funds assemble a representative sample of stocks and bonds, which provide protection against any one investment type dropping in value. And because they aren’t actively managed, index funds tend to have lower fees and expenses than other mutual funds.
If you’re an investor with a modest portfolio – and modest investing know-how – alternatives to hiring an advisor include a simple investing plan focused on one of the best index funds. These mutual funds assemble a representative sample of stocks and bonds, which provide protection against any one investment type dropping in value. And because they aren’t actively managed, index funds tend to have lower fees and expenses than other mutual funds.
When do I need a financial planner?
A comprehensive financial plan prepared by a professional can be invaluable at any stage of your life. It’s especially useful at times of transition, or when a major change looms in your life – the approach of retirement, say, or the need to start saving for a child’s college education. Through the planning process, you can take stock of your current financial situation and identify the moves needed to navigate the changes and reach your goals.
Be ready for the planner – and the plan they prepare – to take a long view. For example, let’s say the impetus for engaging the planner was the upcoming birth of your first child, and the need to adjust to new expenses and perhaps a reduced family income. A plan will address those immediate challenges, but should also look ahead to anticipate the moves you need to make to fund the child’s eventual college costs and even to begin building your nest egg for retirement.