I was recently explaining to a friend what young professionals should expect when they interview a financial advisor. I said that they should always walk away understanding how the advisor gets paid, and if the advisor is a financial planner or an investment advisor. My friend gave me a confused look and asked “Wait, there’s a difference between financial planners and investment advisors?”
This is a common misconception that we, as financial planners, have failed to correct. I will start by saying that the term “financial planning” is still being defined, and everyone doesn’t agree on the definition. This means the definitions in this article are my own. Financial planner is not a protected term. You can’t just say you‘re an accountant or lawyer without having the proper training and licensing, however you are welcome to call yourself a financial planner with little to no training or credentials (this varies by state). Good, bad, or otherwise, it makes it impossible to define the services with authority, but here are my personal definitions:
Financial planner: A financial planner provides advice to their clients related to one or more areas of personal finance. The most common topics for a financial planner to give advice on are: cash flow and debt management, retirement planning, insurance planning, estate planning, tax planning, real estate, education planning, and investment advice. Other topics that some financial planners advise on include: financial psychology, career transitions, and others. As you can see, financial planners are in the business of giving advice on practically every area of their client’s financial lives. Many financial planners have a specialty, such as being an expert on stock options for executives, or working with specific types of clients such as expecting parents, but they tend to assist with all of the listed topics.
Investment advisor: An investment advisor gives their client’s advice on how to invest their money. They help establish their client’s ability to handle up’s and down’s in the market, set goals for their investment funds, and make recommendations on how the client should be invested. Their primary focus is their client’s investments. Most investment advisors also manage their client’s portfolio.
So why all of the confusion? Because most financial planners are ALSO investment advisors, but not all investment advisors are also financial planners. I like to think of Investment Advisory as a service that financial planners can provide, but there are a lot of professionals that only provide investment advisory services.
The reason for the overlap is because the emerging profession of financial planning started with investment advisors that wanted to give advice on other areas of their client’s financial lives. There also hasn’t been a clear distinction between Advice and Management. There are a few financial planners that will give investment advice without actually managing their client’s portfolios, but they are in the minority right now.
The point is that there is a significant difference between financial planners and investment advisors. Neither is better than the other, it is just important to know what services your advisor provides. If you are looking for a financial advisor, be sure you are clear on what services you want so that you can be sure your advisor provides them.
So what do you think? Do you get confused by the different titles that professionals use? Has this post helped to simplify and explain the differences? Let me know in the comments section!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Follow him on Twitter @R_Alan_Moore. You can contact him at firstname.lastname@example.org, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”