Financial advisor vs. financial planner – what’s the difference?
Those seeking financial advice are often confused by the distinction between financial advisors and financial planners. Although the two terms are used interchangeably, there are some pretty important differences – we’re about to discuss them in this blog.
Hello, I’m Michael Hart, an advice-only financial planner serving Princeton, New Jersey and clients nationwide. My goal is to help individuals and families make informed financial decisions without product sales, commissions, or asset-based fees.
That means my recommendations are designed around your best interests—not around selling investments or insurance products.
And also…
Here are some blogs we’ve written on the subject of financial advice, which you may wish to read.
Buying a House Probably isn’t a Good Investment
Work with a fee-only financial advisor
Before we get into what the distinction is between a financial advisor and a financial planner, let’s talk about one important detail.
The only type of acceptable financial advisor is an Investment Advisor Representative (IAR) who charges a fee – not a commission, but a fee. They are called “fee-only advisors.”
To make it absolutely clear: You should ONLY work with a financial advisor who:
Works at an RIA firm
Is not registered with FINRA; is only registered with the SEC and not FINRA
Is not a registered insurance agent in any state and does not receive commissions for the sale of policies
Does not accept commissions for sales of investment products, even some of the time
If the advisor you are talking to does not meet the above stated criteria, do not work with them.
Okay so they do? Good; they fall into the “Acceptable” category. Now let’s drill down further to talk about how you can tell if they are worth considering or not. Now, there is nothing to say that any advisor from the sub-categories below will not ruin your life. Any advisor could ruin your life. It’s up to you to filter them out. However, advisors from these sub-categories are far less likely to ruin it.
Fee-only financial advisors are broken into four major subcategories.
AUM fee advisor
This advisor charges a percentage of your assets, usually 1%. They manage your portfolio and some, but not all, provide financial planning services under the 1% fee. Others charge an additional fee, usually a flat hard dollar amount, for financial planning.
Sometimes it can be tricky to do the math on how much AUM fees mean in hard dollars. If you have $1,000,000, they make $10,000 a year off you if they are charging you 1%. The fee is usually debited out from your accounts at the custodian once a quarter, so you don’t have to write a check.
Flat fee advisor
A flat fee advisor is defined as a financial advisor who charges one set, flat fee for services rendered over a certain period of time as stipulated by a contract, usually a year. The fee may be charged on a monthly, quarterly, or annual basis, but it is a hard-coded dollar amount flat fee that does not vary over a contractual time period.
A flat fee means you do not charge commissions or AUM fees. Whether you charge $6,000 a year or $20,000 a year, the amount of assets the clients has under your management does not matter. There is no ambiguity as to the fee the client pays the advisor.
The advantage of working with a flat fee advisor is that the fee is clear and straightforward. Also, because the advisor’s fee is not based on your assets, they will advise you regarding assets that are “held-away”, or not held in your portfolio at the custodian, such as real estate, alternative investments, or your 401k plan. This makes them a bit more objective in certain decisions. They are not incentivized to advise you in a way that increases the portfolio size, for example, telling you not to pay down debt or telling you to roll your old 401k assets over to them to be included in the 1% AUM fee umbrella.
Hourly planners
An hourly financial planner is someone who provides financial advisor for a set hourly rate. These services often include recommendations on investments, financial planning, retirement, Social Security, Medicare, tax planning, and other wealth-related topics.
You pay an hourly planner by sending a separate payment. The account is not automatically debited at the custodian. You have to write a check or send an electronic payment.
Hourly advice has its drawbacks but it is the most straightforward way to bill a client. The advisor should provide transparency as to how many hours they performed work for you, and what the tasks were for those hours.
Advice-only planners
Advice-only financial planning is fee-only comprehensive financial planning without the expectation or even the option to manage any client investments. Financial planning is offered as a stand-alone product; it is the only thing that an advice-only financial planner does.
Advice-only planners are ideal for someone whose portfolio is simple enough where they can manage their own money. The planner will usually provide a set of written recommendations and guide you through how to implement them in your own portfolio. If you lack the technical knowledge to be able to execute simple trades then this is not a solution for you; but if you are competent and capable enough of following their guidance, it could work.
Somebody who lacks the time or ability to manage their own portfolio, with specific guidance from the planner, should not hire an advice-only planner.
Somebody whose portfolio is complicated, for example with a highly concentrated position, huge tax liability, or very specific investment restrictions, should not use an advice-only planner.
You pay an advice-only planner by sending a separate payment. The account is not automatically debited at the custodian. You have to write a check or send an electronic payment.
Do I need a financial advisor or a financial planner?
Here’s the difference between financial advisors and financial planners, in a nutshell.
The term “financial advisor” pertains to a broad category of financial professionals who advises people about how to accumulate wealth, and who renders this service for a fee. Financial advisors typically manage investments and provide tax, retirement, and financial planning.
“Financial planner” is a sub-category within the broader category of “financial advisor.” Financial planners specialize in financial planning. They may or may not advise people on investments, but it is not at the core of their value proposition. Their services are centered on tax, financial, and/or retirement planning.
Let’s take a deeper look.
Financial advisors
Financial advisors manage your investments for a fee. Financial planning may be included, or it may not be. The advisor may not be equipped to provide true financial planning. Or if they provide it, they may not include it in their fee – you may be charged additionally for this.
Typical questions you need a financial advisor to answer:
How do I get rid of these stocks without incurring a huge capital gain?
What should I invest in to save my portfolio from taking a dive when the market goes down?
What is the best style of large cap stock to buy right now given the state of the economy – large cap value, or large cap growth?
How is the average expense ratio of the mutual funds that I own? Are they the best mutual funds within the style category of large cap growth or are there better mutual funds within that category that I should own?
Financial planners
Financial planners provides analysis and recommendations as to the overall plan for your financial life. This may include com
Typical questions you need a financial planner to answer:
Do I have enough money to retire?
When do I take Social Security?
How do I gift my assets to my kids?
How expensive of a house can I afford to buy?
If I have a $35,000 unrealized capital gain, how do I best recognize that gradually so to avoid IRS tax hell?
These folks put financial planning, not investments, at the core of the service they provide. Advice-only planners are financial planners as they do not touch investments.
Incentives matter
Financial advisor vs. financial planner – and never the twain shall meet?
Regardless of what someone calls themselves, look at how they are compensated. Incentives matter, because they drive the actions that a financial professional takes on your behalf.
I’ll simplify it by expressing the concept this way:
Compensation = Behavior
I can’t say it any more clearly than that. If someone claims to be a financial planner, ask them how they charge. If they are charging you a fee on AUM (1%), they are likely going to be more concerned with the portfolio than with your financial plan.
Which one is better – financial advisor or financial planner?
I would caution you against working with a financial advisor who focuses only on money management and do not address financial planning. Managing your wealth with a sheer focus on investments is a bit of a gamble. The market can go up or go down, and the advisor has very little control. They can manage the risks of the portfolio but if the market is down 30% in a year, there is little they can do to make it go back up.
Your wealth accumulates based upon decisions you make in your lives:
When and where to buy a house,
What type of college to send your children to,
Whether to pay down your student loans or save in your 401k,
When to take social security.
Etc.
These decisions are highly influenced by the advice that a financial planner can provide to you.
Financial planning is the basis for long term wealth accumulation – it’s not just about doing well in the market. It is the roadmap that dictates how you invest. Investing without a plan, a roadmap that outlines your life goals, and a logical basis for financial decisions likely to occur along the way is not going to yield optimal results.
I’ll sum it up this way:
Financial planning is for everyone, whether or not you have even one dollar saved. The question is not whether or not you need financial planning – everyone does – but the extent to which you need it. If you advisor doesn’t provide financial planning as part of their fee, or doesn’t provide it at all, don’t work with them. It should be the core of their service, not an add on.
While financial planning is an absolute necessity, you can forgo professional investment management in certain circumstances and work with an advice-only planner. This may allow you to avoid paying for a service that isn’t adding that much value and that you could carry out yourself. Consider your personal preferences and constraints (time, skill, attitudes, etc.) when making this decision.
Putting it all together
Thanks for reading this blog clarifying the key aspects that set a financial advisor apart from a financial planner – and vice versa!
If you're searching for a:
Fee-only advisor in Princeton, New Jersey
Flat-fee planner near Princeton, NJ
Retirement planner in Princeton NJ
Fiduciary financial advisor in Mercer County
Advice-only financial planner in Princeton, NJ
…I’d be happy to help.
Thanks for reading!
— Michael
P.S.
We are fee-only, flat fee advisors in Princeton, NJ who help mid-career professionals build wealth. If you’d like to meet with us to discuss retiring in New Jersey, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.
Disclosure
Advice Only, Public Benefit Corporation, dba Open Book Financial Planning, is an investment adviser registered with the Securities and Exchange Commission (CRD# 334039 / SEC File No. 801-135290). Our current disclosures, including Form ADV Part 2 and Form CRS, are available on our website at www.adviceonly.com
