Who to Hire: A Financial Planner or a Financial Adviser?


Armed with Internet access and a DIY attitude, many Americans tackle all kinds of projects on their own to avoid paying a professional. When it comes to managing an investment portfolio, creating a detailed estate plan, or handling the sale of several stock holdings, most of us are better off hiring a financial professional. (See also: 4 Times You Should Splurge and Hire a Pro)

Financial literacy varies across generations. For example, only 24 percent of Millennials and 38% of Gen-Xers in the U.S. are able to answer four out of five financial quiz questions correctly. While the titles financial adviser and financial planner are often used interchangeably, they're not the same! Let's review the difference between a financial adviser and a financial planner, how you can decide which professional you need.

What Is a Financial Adviser?

In simple terms, a financial adviser helps you manage your money. Since most of the time this means managing your investments, a financial adviser has to complete the Investment Adviser Law Examination (better known as the Series 65 exam) to legally practice the profession.

A financial adviser is a broad title within the financial services industry. To specialize in a field, a professional often completes additional certifications. According to the National Association of Personal Financial Advisers (NAPFA), there are more than 100 professional designations within the industry. Here are three examples of financial advisers:

What Is a Financial Planner?

A financial planner is a certified professional uniquely qualified to help individuals pull all their finances together, solve financial problems, and make a plan to achieve their financial goals. This particular type of financial adviser is proficient in the areas of financial planning, taxes, insurance, estate planning, and retirement planning.

The most popular credential among financial planners is the Certified Financial Planner (CFP), which is a rigorous seven-hour long exam only available a couple times throughout the year. Only individuals who have completed college or university-level coursework in major personal financial planning areas qualify to take the CFP exam. In order to retain CFP status, a professional must also complete continuing education requirements each year.

Depending on the work history and preferred area of expertise of the financial planner, he may hold additional designations, such as Chartered Financial Analyst (CFA) and Chartered Financial Consultant (CHFC).

How to Decide What Professional You Need

The main reason why these two titles can be confusing is that every financial planner is also a type of financial adviser, but not every financial adviser is a financial planner. Here are two useful rules to decide which professional to hire.

1. Define the Scope of Your Project

Just like you wouldn't hire an engineer to fix your clogged toilet, you shouldn't hire a full-fledged financial planner to just to buy a couple of bonds. The general rule of thumb is that you should seek the professional who holds the appropriate expertise and qualifications of the services that you require.

Consider two scenarios:

  • A financial adviser focusing on investment management may not be the best match for a client looking for comprehensive estate planning services. A CFP would be more appropriate in this case so that she can structure your finances to meet your financial planning goals.
  • If you're just trying to decide between several 529 college saving plans, then a CFP may not be necessary and a financial adviser would do.

2. Decide Whether or Not You Require Fiduciary Duty

Another key criterion to decide between a financial adviser and a financial planner is fiduciary duty. While all financial planners with a CFP designation are legally bound to put their client's interests before their own, not all financial advisers are.

Commission-based financial advisers may receive an incentive or kickback for pushing certain products, such as life insurance packages or mutual funds. Check with your prospective financial professional as to whether or not he receives ongoing income from any recommendations or how his fees may affect the success of attaining your financial goals.

Fortunately, starting April 10, 2017 all financial advisers handling retirement accounts will be required to serve as fiduciaries. Until then, make sure to check for fiduciary duty.

Tips When Choosing a Financial Adviser or Financial Planner

Before you sign a contract, do your homework and determine whether or not your potential financial adviser or financial planner is the most suitable for you.

1. Ask for Credentials and Affiliations

While some salespersons and representatives from insurance and investment companies may appear to provide financial advice and financial planning services, they may have compensation agreements that encourage them to suggest certain investments. Make sure to inquire about the credentials of any financial professional.

2. Verify Credentials and Affiliations

Virtually all governing bodies providing certifications provide a searchable database to look up members. For example, through the CFP Board's member database I can see that there are only five CFPs servicing my ZIP code. So, anybody else claiming to be a "financial planner" is lying. Besides confirming credentials, look for any disciplinary action posted on the database. If the professional didn't disclose them in advance, that's a red flag.

3. Review Client Eligibility Requirements

Some financial professionals require you to own a minimum of investable assets. For example, one of the CFPs in my ZIP code requires at least $500,000 in investable assets and another, $2.5 million!

4. Consider Pay Structure

Before entering a contractual relationship with a financial adviser or planner, request a detailed disclosure of all applicable fees. The objective is to spot potential conflicts of interest. Pay close attention to minimum fees for rendered services, commissions from investment products or securities trading, and referral fees from other professionals, such as accountants, insurance agents, and mortgage brokers. (See also: 4 Sneaky Investment Fees to Watch For)

5. Ask About Continuity Planning

In other words, "Who would handle my finances if you were to be hit by a bus tomorrow?" After investing so much time in finding the right professional, you don't want to find out that she's retiring next year. Also, inquire if you'll be working with the same financial adviser at all times. If you'll be working with another associate than the one you're interviewing right away or within a few months, request to meet that associate before signing a contract.

6. Inquire If You're the "Typical Client"

You'll get the most out of your financial adviser or financial planner when he's more used to clients at your asset level and financial objective. Working with a "superstar" financial adviser may sound amazing, but may cause a lot of anxiety if you keep being pushed for financial transactions outside your risk tolerance.

The Bottom Line

When deciding on whether to hire a financial planner or financial adviser, ask as many questions as you need to find out if the prospective financial professional is right for you. Finding out as much as possible in advance will allow you to minimize any surprises.

Have you hired or sought to hire a financial planner or adviser?

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