Financial Advisor vs Financial Planner: Which Do I Need?
Generally, Financial Advisors can provide helpful direction for a person’s investment portfolio, but do not engage in broader financial topics like insurance, taxes, retirement, and estate planning. These concepts are components in an all-encompassing financial strategy that can be obtained through a Financial Planner. In either case, you should only hire a fiduciary to give you financial advice or manage your assets.
We recently started writing a post titled “Do I Need a Financial Advisor?”
Normally, I aim to hit somewhere between 1500 and 2500 words in a post. Any shorter and it feels weak and empty; much longer and you may fall asleep reading it.
So, when this one hit 4,000 words we decided it was time to split it in half.
I recommend going back and reading that previous post, then following up with this one if you’re interested in learning more.
Types of Financial Advisors and Planners
Since the range in qualifications for financial advisors is so broad, further explanation is needed to help identify those that you may or may not want to look to for help.
We’re going to cover the ways different advisors make money and some of the licensing/certifications they may have. As a result, an advisor may fit within one or more of these categories.
Commissioned
Commissioned advisors earn money by selling products to their clients.
They receive a commission based on the products they sell which could be anything from traded securities to insurance products.
The most infamous commissioned-based advisors sell life insurance annuities and have single-handedly given annuity insurance products a less-than-stellar reputation.
Fee-Only
Fee-only advisors earn income by charging a fee for the advice they give.
This could be paid at an hourly rate, a flat fee for a given product, service, or plan, or by withholding a percentage of the client’s assets under management (AUM).
The most common way fee-only advisors are paid is through the AUM format or a combination of AUM with flat fees. However, there are advisors that are paid through a combination of commissions, fees, and AUM.
Naturally, fee-only advisors have no incentive to sell any particular product to their clients, so this format removes a conflict of interest that is significant in my opinion.
Series 6, 7, 63, 65, & 66 Exams
As we mentioned before, advisors technically do not need any formal education to be licensed.
In sitting for the exams referenced below, candidates will have to register with FINRA (Financial Industry Regulatory Authority).
The Series 6 is a two-hour exam designed to test one’s knowledge about packaged securities products like annuities or mutual funds. A score of 70% is required to pass and doing so allows candidates to sell packaged securities.
The Series 7 exam covers everything the Series 6 does but adds testing for knowledge about individual securities like stocks, bonds, and options. It is a 6-hour test and is normally taken with…
The Series 63 (in most states) tests one’s understanding of state laws as they apply to the sale of financial products. It is just over an hour long. Together, you need a 73% or better to pass the Series 7 and 63.
The Series 65 exam is required in order to become a Registered Investment Advisor (RIA) or an Investment Advisor Representative (IAR) for the RIA (The two go hand in hand). These designations are required in order to receive compensation for providing specific financial advice.
The series 65 is a 3-hour exam and you’ll need a 72% or better to pass.
The Series 66 is a combination of the Series 63 and Series 65.
This is all pretty confusing, but to summarize the completion of Series 6, 7, and/or 63 permits individuals to sell the products for which each one tests.
The Series 65 and 66 are needed in order to charge a fee for providing advice.
It may be a small distinction, but it is important because the completion of specific exams directly impacts an advisor’s ability to actually advise clients as opposed to being a salesman who calls himself an advisor.
Hopefully, you understand the distinction.
Fiduciaries
As we’ve already mentioned, fiduciaries are required to act in the best interests of their clients which makes them the most attractive advising option in my opinion.
One way to identify a fiduciary is to just ask them. If they say they are you can simply verify by looking them up in FINRA’s BrokerCheck database.
You can also find registered fiduciaries by visiting NAPFA (National Association of Personal Financial Advisors).
When to Run
If at any point in your search for a financial advisor you meet one that suggests they can make you more in returns due to their unique and special knowledge of finance, you should probably run for it and never look back.
History shows that only 10.62% of actively managed mutual funds outperform an S&P500 index.
This basically means you’re more likely to earn a higher return by simply investing in an index fund than by finding a super smart stock picker.
The math doesn’t lie, but some advisors do.
Find advisors who are more interested in selling their understanding of tax and retirement planning than their ability to play the slots…I mean, pick the hot stocks.
Better yet, find a planner.
Advising vs Planning
Another distinction that should be made when evaluating your options for hiring a financial advisor is whether they engage in financial advising or financial planning.
The difference may seem subtle on the surface, but these are two different practices.
When we think of financial advising this typically involves shaping one’s investment portfolio in a way that best matches their goals for growth and tolerance for risk.
However, this is only a portion of a fully developed financial plan.
A financial plan goes into a greater level of depth and considers not only investing, but also estate planning, insurance, retirement, and taxation.
Metaphorically, comparing a CFP to a simple financial advisor would be akin to comparing a Homebuilder to a carpenter.
No matter how skilled, it’s not the carpenter’s job to make sure you end up with a home you like because the scope of his work doesn’t extend beyond framing the structure.
Is the carpenter important? Sure. But it’s only one part of the whole picture.
Using a financial planner ensures that all the pertinent aspects of your financial life are taken into consideration as you arrange your finances.
Certifications
It’s also worth noting that there are several organizations that provide certifications to financial advisors that meet certain criteria for knowledge, experience, ethics, and fiduciary responsibility.
We’ve summarized a few of our favorites below.
This is by no means an exhaustive list, but it does cover the most common financial planner designations. Any of these designations would appeal to me if I was evaluating a person to serve as my personal financial planner.
Certified Financial Planner (CFP):
I would say that a CFP is the best overall certification, but you shouldn’t rule a financial planner out just because they lack this designation.
The others that follow are good too, but I would say the CFP is probably the “best all-around” personal financial advising certification.
However, the CFP designation is not given lightly, so it is reassuring to see as you evaluate advisors.
The CFP designation is issued by the CFP Board of Standards and requires candidates to complete classroom study (usually 1.5 to 2 years) before sitting for a very challenging exam that tests knowledge in financial plan creation, estate planning, insurance, investing, retirement, and taxes.
Additionally, CFPs must complete 6000 hours of full-time professional experience (or 4000 if they work as an apprentice to another CFP) and meet ethical standards to finally receive the certification.
CFPs have a fiduciary responsibility to act in the best interests of their clients.
Chartered Financial Analyst (CFA):
Offered by the CFA institute, the CFA is one tough certification to come by.
CFA candidates must complete three very challenging exams, three years of qualified work experience, and agree to perform their work according to certain standards of ethics and professionalism.
The CFA certifies one’s knowledge and ability in economics, accounting, finance, portfolio management, and securities analysis.
It is a much broader scope than the CFP and I’ve heard that the exam is more difficult.
Much of the subject matter for which CFAs must demonstrate their capabilities is not directly related to or even required for personal financial management, but if anything they’re probably slightly over-qualified to perform financial planning for individuals and families.
You definitely shouldn’t turn up your nose at a CFA because they’re not a CFP; just like you wouldn’t avoid picking Lebron James for your 3-on-3 rec league team simply because he normally plays on a team of five.
CFAs are very capable and also have a fiduciary responsibility to their clients.
Chartered Financial Consultant (ChFC):
Though less popular than the CFP, the ChFC is very similar in scope.
Awarded by the American College of Financial Services, the ChFC requires candidates to complete nine college-level courses with an exam at the end of each course.
The courses cover very similar topics to those required for CFP certification: financial planning, insurance, taxes, investing, estate planning, etc.
Enrollees in the program are required to have industry experience before they can begin the program.
This is a distinct difference from the CFP which allows candidates to complete the professional work requirement in a time frame before (up to 10 years) or after (up to 5 years) they complete the exam.
If the CFP has a brother that sure looks a lot like him, the ChFC is it.
ChFCs also have a fiduciary responsibility.
Certified Public Accountant (CPA) with a Professional Financial Services (PFS) Designation:
CPAs are accountants. This designation is very prestigious, but not exactly geared toward financial planning.
Historically, there have been many a CPA who, after providing years of quality accounting services to clients, saw opportunities to also provide financial advice and planning.
You have to admit, the two have a sort of “hand in glove” kind of relationship.
The PFS is awarded by the American Institute of CPAs and simply confirms that designation holders have received additional training in order to support a client’s financial planning needs in addition to any accounting services already being performed.
The fiduciary responsibility is a bit unclear for CPAs and CPAs with PFS, but most agree that it is an enforceable requirement.
Conclusion
The financial services industry is exceptionally broad and the range between qualified individuals and snake oil salesmen can be difficult to delineate.
Primarily, you should focus on whether or not a potential advisor acts as a fiduciary and is thus required to put your interests ahead of his or her own.
Next, look for certifications and experience that can help confirm an advisor’s capabilities before making a decision.
