Maybe you’re changing jobs and need help with employee benefit election. Maybe it’s tax planning that you need help with, or it could be simplifying your financial matters. Once you've decided it’s time to get some professional financial help, you may be asking yourself: “Which type of financial professional is best for me?”
Unfortunately, there is a bit of ambiguity in sorting through the titles - you have several options to choose from. These options generally include:
- Financial Advisor
- Investment Advisor
- Wealth Advisor (AKA Wealth Manager)
- Financial Planner
- Wealth Planner
With overlap in services and areas of expertise, it's no wonder why the general consumer gets so confused. Heck, I refer to myself as a financial planner and the name of my firm includes “Wealth Planning.”
According to the 2019 Financial Trust Survey Report by Personal Capital, “Nearly half of Americans (48%) incorrectly believe all financial advisors have a legal obligation to act in clients’ best interests.”1 With all these titles floating around, it’s helpful to know the differences between each category of financial experts before committing to a long-term engagement. Here, we’ve rounded up some of the key differences between each group so you can get the right kind of help with full confidence.
Term #1: Financial Advisor
The most used term, a financial advisor is someone who helps you with different aspects of your financial life. This might include planning for and transitioning to retirement, investment advice, life insurance, 401(k) plans, IRAs, budgeting and more. Every financial advisor is different in what specific areas they specialize in and what services they provide, so if you are looking for help in one particular area, it is always best to ask.
Financial advisors can be compensated in a variety of ways - they can be fee-based, fee-only, or charge a percentage based on your total AUM (assets under management). Financial advisors that sell insurance or specific products generally receive a commission as well.
These compensation structures are important for you to know. While transparency should be the mutual goal of both client and advisor, transparency in compensation will help you understand potential biases the advisor may have as they recommend products and solutions to you.
Term #2: Investment Advisor
An investment advisor focuses on just that - your investments. Their role in your financial journey will be to manage your portfolio. Areas of consideration typically include asset allocation, tax efficiency and tax harvesting, as well as specific fund selection to name a few. Their goal is to get the highest rate of return relative to the amount of risk you’re comfortable with over the long run. Before they begin designing your portfolio, investment advisors should evaluate your current financial picture, as well as determine your optimal risk tolerance, which may involve you filling out a questionnaire.
After discussing your needs and goals with your investment advisor, they generally present an investment strategy tailored according to the unique aspects of your life. Some investment advisors manage your money and do the investing for you, others simple "advise" on what you should do, leaving you to implement the strategies on your own.
The compensation structure for investment advisors replicates that of a financial advisor, though most investment advisors do not participate in selling life insurance or commission driven products (note: be mindful of “loaded” funds, a type of investment that includes a relatively large commission).
An investment advisor can add tremendous value, especially for those without a disciplined or repeatable investment process. Should you hire an investment advisor just to manage your investments? Are there better, less costly, alternatives? It's quite possible. It's also quite possible that your expectations of value-for-service may need a reboot. Read "Hire A Financial Advisory for Your Investments...Is It Worth It?"
Term #3: Wealth Advisor
With more money comes more responsibility and complexity. Also referred to as a wealth manager, these professionals’ duties are catered specifically to those who have a decently sized nest-egg, often labeled as high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals. They generally expand their focus to include estate planning, philanthropic gifting, trust management, as well as other complex functions.
Keep in mind, many firms may categorize their own business under more than one of these labels (they might say they are a "financial advisor" as well as a "wealth manager"). Of course, the best course of action is always to contact any financial professional you are interested in working with directly and learn more about their business model and what services they provide to their clients.
The compensation model for wealth managers is generally focused on assets under management, where your fee is based on a percentage of the assets/investments the wealth manager is responsible for. Wealth managers at larger institutions may also apply fees for lending solutions and may receive additional compensation from their company based on performance.
Term #4: Financial Planner
Investopedia.com defines a financial planner as “one type of financial advisor, who helps companies and individuals create a program to meet long-term financial goals.”2 Financial planners typically specialize in comprehensive planning, combining areas such as investment management, tax planning, retirement planning, estate planning, as well as cash flow and loan management.
While not every financial planner is a Certified Financial Planner (CFP®), most CFP® holders are financial planners. Other credentials that are common among financial planners include the Chartered Financial Consultant (ChFC) and the Chartered Financial Analyst (CFA®).
As financial planners fall under the financial advisor umbrella of specialties, the compensation model can reflect very closely to that of a financial advisor. Additional fee structures may include annual retainer fees, hourly billing, and flat-fee models.
Term #5: Wealth Planner
Where wealth management is catered specifically to those who have a decently sized nest-egg, wealth planning is focused on high-income individuals that are generally younger and in accumulation phase. The disciplines are often the same, such that a wealth planner works on more complex scenarios that include estate planning and gifting, but also places emphasis on cash flow, financial perspectives, and consumption behaviors.
Wealth planning is relatively new to the game. In years past the emphasis of Wall Street was to go where the money is. While this approach is still familiar to most financial/investment/wealth advisors, wealth planners go where the money isn’t (yet). The role of a wealth planner is to get the client to the stage of management, strategically planning each step along the way.
Fee’s paid for wealth planning will vary based on the planner and their services. Often the fee is paid via a client’s cash flow, using annual retainers or monthly invoicing. Assets under management may also be used, though the assets would need to be large enough to justify fair compensation on behalf of the wealth planner.
The financial industry, like that of the medical industry, is filled with different titles and designations. Prolonged illness deserves the attention of a qualified physician, but you would never choose a cardiologist to treat your behavioral problems just as you should never choose an insurance advisor to help you manage your cash flow and student debt loans.
What’s most important is making sure the advisor on the other side of the proverbial table has your best interest in mind, and that your goals are aligned.
Here are six questions to help get you started in your initial conversation:
- What are your areas of expertise, and have you worked with other clients like me?
- Are you a fiduciary?
- Do you receive compensation beyond the fees I pay directly?
- Do you have any limitations on the solutions you can provide?
- Do you have a defined investment process?
- Are you a Certified Financial Planner (CFP®), Chartered Financial Consultant (ChFC), or Chartered Financial Analyst (CFA®)?
Now that you understand the foundation by which your planner works from, pay close attention to the title of the advisor you’re interviewing. Ask them additional questions that align specifically to your needs, short-term objectives, and long-term goals. A financial advisor may be best fit for your banking and investment needs, while a financial planner may better align with a desire for a holistic plan with strategic execution. While the title of your advisor may be indicative, it is by no means definitive.
If you have any additional questions about advisors or anything else about planning your financial future, then please feel free to reach out.
Lucid Wealth Planning LLC (“LWP”) is a registered investment advisor offering advisory services in the State(s) of North Carolina and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this article on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by LWP in the rendering of personalized investment or financial advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content in this article is for information purposes only. Opinions expressed herein are solely those of "LWP", unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. The information contained in this article is not intended to provide any tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.