Financial Planner vs. Investment Manager — Which Is Right for You?
When you decide to work with a financial professional for guidance, the first step is a confusing one: trying to figure out the difference between all the different kinds of job titles that exist in the financial services industry. Financial planners and counselors? Investment advisors and wealth managers?
It’s almost enough to make you give up — and that’s before you even try to schedule an appointment with someone.
What do various financial professionals even do? Which ones would be ideal for your situation? And, most importantly, how much will it cost you to work with them? Many simply choose the same advisor their parents use, or a representative at their bank branch. The downside to defaulting to the most obvious option is that it may not be what you actually need.
Know What You're Paying For
Before you pay someone a few hundred (or a few thousand) dollars to give you advice, you need to do your research and understand how people who work in the financial services industry attain their qualifications, make product recommendations, and charge their clients.
Just because someone works for a well-known company or has a snazzy website doesn’t mean they’re the best choice for you.
In the following chapters, we break down the differences between broker-dealers, fee-only financial planners (registered investment advisors), and counselors.
Full-Service Broker-Dealers
Full-service brokerages, first and foremost, offer you the ability to open an account for investing. While discount brokerages provide brokerage accounts only (for lower fees), full-service brokerages offer investment and retirement planning, tax guidance, and more.
Common choices include (but aren’t limited to) Wells Fargo, Merrill Lynch, Morgan Stanley, Edward Jones, Fidelity, Charles Schwab, and UBS.
Full-service brokerages are often those traditional financial institutions dating back to when buying or selling stocks involved talking to an actual human stockbroker who would execute trades for you.
Who Works for a Full-Service Broker-Dealer?
You’ll work with a broker or financial advisor who is licensed to sell investment products to customers.
These advisors have likely received some form of license from the Financial Industry Regulatory Authority (FINRA).
Today, it’s easier for the do-it-yourself investor to manage their own accounts online, but customers of full-service brokerages are willing to pay extra for guidance.
How Do They Make Recommendations?
Brokers are held to the suitability standard by FINRA, which means that when they make a recommendation, that recommendation must be suitable for the client’s needs and personal situation — but it may not be the best fit for the client’s needs. Brokers don’t have to place the client’s interests above their own, nor do they follow strict rules about disclosing conflicts of interest.
Ultimately, brokers are more beholden to their employers than their clients.
Here’s an example of how the suitability standard works: Suppose a broker suggests their client include an S&P 500 index fund in their investment portfolio, and the bank the broker works for happens to sell such a fund. They can encourage their client to buy shares of their bank’s fund over an index fund offered by another financial institution with a lower expense ratio.
How Do They Charge for Their Services?
“You have to look back on the history of how our industry got started,” said Scott Frank, CFA, CFP, and founder of Stone Steps Financial in Encinitas, Calif. “Everyone was a broker and sold stuff to people. In the ‘90s, when mutual funds got bigger, brokers would get commissions from that. Then investment managers charged 1 percent to manage money.”
These days, it's more varied. Here’s a breakdown of how broker-dealers charge their clients, depending on the kinds of services they offer:
Commission: The broker or financial advisor receives payment when they sell you a product or service offered by the company they work for. This obviously motivates them to steer you toward those products over similar ones offered by other companies.
Percent of Assets Under Management: Investment managers charge a flat percentage of the money you have invested with them. As your assets grow, the money they earn from you grows. Many investment managers choose to only work with clients with a very high net worth, because they won’t earn much by managing smaller portfolios.
Fee-Based: In this hybrid approach, you’re charged a flat fee for financial planning services, plus a percent of assets under management.
Why Choose a Full-Service Broker-Dealer?
In a word: convenience.
You may already have checking or savings accounts at a bank that also offers brokerage services. Broker-dealers are large companies with locations nationwide, making them the simplest choice for many. And for investors who want some more hand-holding with their brokerage accounts, full-service brokers offer more guidance and customer service than discount brokerages.
However, keep in mind that their focus is on selling you the products that their company offers. This may lead to a pushy approach, which isn’t for everyone.
Registered Investment Advisors
Registered investment advisors, or RIAs, work with clients who are looking for investment and financial advice, and they are overseen by the Securities and Exchange Commission or a state securities agency. They range from one-person businesses to large companies.
Unlike broker-dealers’ suitability standard, RIAs are beholden to the fiduciary standard, meaning their recommendations must be made with the client’s best interests in mind, whether or not the professional stands to make any sort of profit.
Who Works for RIAs?
RIAs serve a variety of functions, from investment advisors who help create and manage clients’ portfolios, to financial planners who offer comprehensive guidance on investment, tax, estate, and retirement planning, among other things.
Depending on the reason you decided to work with an RIA, you may work with someone who passed the Series 65 or Series 7 and 66 exams, a chartered financial analyst (for portfolio management), or a certified financial planner.
Because RIAs include such a wide range of financial services, it’s essential to know exactly what you’re hiring them to do.
“Most firms say they do comprehensive financial planning,” said Frank. “If your meetings with your advisors are all about your investments, they really aren’t being a comprehensive financial planner.”
How Do They Make Recommendations?
Let’s go back to that example of the S&P 500 index fund. A broker held to the suitability standard can recommend a more expensive fund to you, so long as it suits your objectives.
A fiduciary, on the other hand, may recommend an S&P 500 index fund to you, but they’ll recommend one with the lowest possible expense ratio. They are obligated to make recommendations that serve you best, regardless of what they stand to make from the transaction (and they may make nothing!).
As more clients looked for help beyond the traditional broker-dealer model, more RIAs offering comprehensive financial planning services began to launch. While some RIAs focus exclusively on investments, others employ financial planners to talk to clients about everything from budgeting for a home purchase, to saving for their child’s education, to deciding whether to lease or buy a car.
“People pay us a retainer and then it’s our job to help them with everything,” said Frank. “I do life planning first.”
How Do They Charge for Their Services?
RIAs charge clients in various ways. Some are also broker-dealers who make commission, others charge a percentage of assets under management, and increasingly, they’ll charge an hourly or fixed fee.
Fee-only financial planning firms are growing in number, because they offer transparent pricing and don’t limit themselves to high net worth clients. Some firms charge one flat rate for a limited engagement, or offer ongoing services for an initial fee followed by a monthly retainer.
Some fee-only RIAs will, as an optional add-on service, charge clients a percentage of assets under management if they’re hired for both financial planning and investment management services. Others roll the cost of investment management into their fee or retainer.
Why Choose an RIA?
The fiduciary standard that RIAs must follow is a compelling reason to choose them over a full-service broker. You stand to put your money into very similar investments, and keep more of your earnings because you’re paying lower fees and no commissions.
For anyone who wants financial planning over investment management, especially if you don’t have a seven-figure net worth, a fee-only RIA can provide the service you need at a reasonable cost.
Many people in their 20s and 30s are opting for fee-only financial planners over their parents’ more traditional investment advisors, because they’re at an age where they’re making major life decisions, but they don’t have the net worth of someone who’s older.
“Someone our age doesn’t need the Happy Meal version of what their parents get,” said Frank, who generally works with clients in this age group.
One thing to keep in mind is that the expense of ongoing financial planning may not be ideal for anyone with significant debt. There are other financial professionals to work with first if you need help creating a debt repayment plan.
Financial Counselors and Coaches
Financial counseling and coaching are growing fields to help people who have been underserved by the financial advising industry. Their role is one of education and guidance — helping clients explore their relationship with money and how that affects their ability to reach their goals. They can teach you the fundamentals of personal finance and help you create debt repayment plans, budgets, and more.
They don’t sell you products, earn commission, or give you investment advice, but they often recommend tools such as budgeting apps.
Financial counselors and coaches generally charge a flat fee for their services, while others charge based on client income. They may be a good option if you don’t have the net worth to invest with a professional, or you have a lot of debt, or you’d like to improve your money mindset or behaviors, or you simply want to learn more about personal finance so you can apply best practices to your own life.
Financial coaches don’t have to obtain any licenses, which can make it hard to find a reputable coach.
Many financial planners work in tandem with coaches, so a CFP you trust might refer you one.
How to Find a Financial Professional
Before you begin your search, it helps to ask yourself a few questions:
- What is your current financial situation?
- What, in particular, are you looking for help with?
- What are some of your goals?
- If you’re looking for investing help, what is your investing style, time horizon, and risk tolerance?
- Do you want a professional to take action on your behalf, or would you prefer to act on your own (buying or selling stocks, opening accounts, etc.) with the help of a professional?
- Do you want to work with someone on an ongoing basis, or for a limited engagement?
Broker-Dealers: Since many financial or investment advisors for broker-dealers work for major companies, it’s easy to find offices for these companies where you live. You can learn more about someone you’re considering working with using FINRA’s BrokerCheck tool.
Fee-Only Financial Planners: You can search for fee-only financial planners through NAPFA, the Garrett Planning Network, or the XY Planning Network.
Counselors: You can find an Accredited Financial Counselor through the Association for Financial Counseling and Planning Education.