Distinguishing Between Financial Planners and Investment Advisors: What You Need to Know
Depending on your personal finances, you might need guidance from a financial professional. However, it can be confusing to understand the differences between financial planners and investment advisors. This article aims to clarify their roles and responsibilities, helping you choose the right professional for your needs.
What Are Investment Advisors?
Investment advisors specialize in providing advice about securities, such as stocks, bonds, and other investment instruments. Their primary role is to help you create and manage an investment portfolio. An investment advisor can also help you navigate various financial products and provide tailored investment strategies. These professionals must be registered if they are to offer this type of advice, usually with the U.S. Securities and Exchange Commission (SEC) or a state regulatory agency.
Fiduciary Duty and RIA Standards
In the U.S., Registered Investment Advisors (RIAs) are held to a high standard of conduct known as a fiduciary duty. This means that they must prioritize your interests above their own when making investment recommendations. This is crucial because RIAs have a legal obligation to act in your best interests, not just to make money for themselves or their firms. This includes disclosing any potential conflicts of interest and aligning their compensation with your best interest.
What Are Financial Planners?
Financial planners take a more comprehensive approach to your financial life, covering a wide range of financial matters such as savings, taxes, insurance, and retirement planning. Unlike investment advisors, financial planners do not limit their services to investment portfolios. Instead, they offer a holistic view to help you make informed decisions across different aspects of your financial situation.
RIAs and Financial Planners: The Connection
It's common for many financial planners to also be RIAs. These professionals have expanded their scope to offer services beyond investments, providing a full spectrum of financial advice. If you're seeking a combined RIA and financial planner, you can find someone who will take a holistic view of all your financial life, including your investments. However, it's important to note that not all financial planners need to be RIAs, and not all RIAs are financial planners.
The Legal Significance of the “Investment Advisor” Designation
The term “Investment Advisor” is the only one that has actual legal and regulatory significance. To be called an investment advisor, a professional must be licensed by a state or the Securities and Exchange Commission (SEC). This includes specific ethical and fiduciary responsibilities, such as charging fees that are aligned with the client's best interest, providing clear and documented advice, and disclosing any conflicts of interest.
Types of Investment Advisors
Investment advisors come in various forms. Some are also licensed as stock brokers, which allows them to buy and sell bonds, stocks, and options in addition to mutual funds. Many investment advisors have additional training and certifications, such as Certified Financial Planner (CFP), Certified Employee Benefits Specialist (CEBS), Certified Retirement Specialist (CRS), or Chartered Financial Analyst (CFA). These designations often indicate additional expertise in specific aspects of financial planning or investment management.
Role of CFPs
Certified Financial Planners (CFPs) place a particular focus on placing investments in the context of a client's overall financial life. This includes aspects like saving, budgeting, and planning for retirement. While most CFPs advise on investment strategies, some may have a more specialized focus on retirement planning, money management, tax and succession planning, or managing individual securities. While most CFPs are also investment advisors, it's not a requirement, and not all investment advisors hold CFP certifications.
Conclusion
While there is often overlap between financial planners and investment advisors, their roles and responsibilities differ significantly. Understanding the differences can help you make an informed decision about which professional is best suited to your financial needs. Whether you need investment advice or comprehensive financial planning, identifying the right professional can provide you with the guidance you need to achieve your financial goals.