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Planning for one’s financial future can be a daunting task, but with the help of a financial professional, it can become much easier.
However, the terms used to describe financial professionals can be confusing, and it is essential to understand the differences between them to ensure that you are getting the best guidance for your needs.
In this article, we will provide a detailed overview of the differences between a financial advisor, fiduciary, and financial planner.
Before you get started, here are a couple of free resources to help with your journey:
Financial Advisor
A financial advisor is a professional who provides guidance and advice to clients on how to manage their personal finances. Financial advisors can work independently or as part of a financial firm or institution, and their services can include:
Investment advice and management: Financial advisors can help clients develop investment strategies, manage their portfolios, and make investment decisions.
Retirement planning: Advisors can help clients plan for their retirement by creating a savings plan, estimating retirement expenses, and choosing retirement accounts.
Estate planning: Advisors can help clients develop a plan to distribute their assets after they pass away and minimize estate taxes.
Tax planning: Advisors can help clients develop a tax strategy to minimize their tax liability and take advantage of tax benefits.
Insurance planning: Advisors can help clients determine their insurance needs and choose the right insurance products to protect themselves and their assets.
Debt management: Advisors can help clients develop a plan to pay off debt and manage their finances more effectively.
Financial advisors may charge fees for their services, which can be based on a percentage of assets under management, an hourly rate, or a flat fee. Some advisors may also receive commissions for selling certain financial products, such as insurance or mutual funds.
It is important to choose a financial advisor who is qualified, experienced, and trustworthy. Even better, you may want to find a financial advisor who actually specializes in advising people just like yourself.
For example, at my firm, Covenant Wealth Advisors, we specialize in advising clients age 50 plus who have over $1 million in investments (excluding real estate), and they are concerned about being able to retire without the stress of money. Many of our clients are high income individuals including doctors and busy professionals.
Other types of financial advisors may specialize in working with teachers, or employees in the tech industry.
Potential benefits of working with a financial advisor:
Personalized guidance: A financial advisor can provide personalized advice and guidance based on your specific financial situation and goals.
Range of services: They can offer a wide range of services, including investment management, retirement planning, tax planning, and estate planning.
Peace of mind: By working with an advisor, you can feel more confident and secure in your financial decisions, knowing that you have a trusted professional on your side.
Avoid second guessing yourself: An experienced advisor can help design a personalized plan that tells you exactly what you need to do to accomplish your goals.
Save time: An advisor can help you save time by handling the research and analysis required to make informed financial decisions.
Avoid emotional decisions: Financial advisors can be an objective voice around your money, which typically is an emotional topic for many people. Many of the mistakes individuals make when it comes to money has to do with poor emotional decisions. An advisor can be your objective voice of reason.
Reduce taxes: Some financial advisors who specialize in tax planning will analyze your tax return to figure out ways to reduce your income taxes and better manage taxes in retirement.
Improve returns: While not guaranteed, research from Vanguard and other reputable institutions show that hiring a financial advisor may improve your returns by over 3% per year beyond what you can achieve on your own.
Potential drawbacks of working with a financial advisor:
May not be a fiduciary: Not all financial advisors are held to a fiduciary standard of care, which means that they may not always act in the best interests of their clients.
Potential conflicts of interest: They may have conflicts of interest, such as receiving commissions on the products they sell.
Cost: Financial advisors may charge fees for their services, which can be a percentage of assets under management, an hourly rate, or a flat fee. These fees can add up over time and may impact your overall returns.
Limited control: By working with an advisor, you may give up some control over your finances, as the advisor will be making recommendations and managing your portfolio.
Unfulfilled expectations: If you have unrealistic expectations or a mismatch of communication with your advisor, it may lead to unfulfilled expectations or disappointment in the relationship.
Lack of fit: The advisor may not be a good fit for your specific financial needs or goals, which may result in frustration or dissatisfaction.
It is important to carefully consider the pros and cons of working with a financial advisor before making a decision. It is also important to choose an advisor who is a good fit for your specific financial situation and goals, and who is transparent about their fees, services, and potential conflicts of interest.
Fiduciary
A fiduciary financial advisor is a financial professional who is legally and ethically obligated to act in the best interests of their clients. This means that they must prioritize their clients' interests over their own when providing advice and making recommendations.
A fiduciary advisor is held to a higher standard of care than a non-fiduciary advisor. They must provide full and fair disclosure of all material facts, avoid conflicts of interest, and manage any conflicts that arise in the best interests of their clients. They must also provide competent and diligent service to their clients and uphold the highest standards of professional conduct.
Some financial professionals are not held to a fiduciary standard, which means that they are only required to provide advice that is suitable for their clients, but not necessarily in their best interests. These non-fiduciary advisors may receive commissions or other incentives for selling certain financial products, which can create conflicts of interest.
Choosing a fiduciary advisor can help ensure that you receive advice that is in your best interests and that your advisor is transparent about any conflicts of interest that may arise. It is important to confirm whether your advisor is a fiduciary and to understand the services they provide and how they are compensated before working with them.
Potential benefits of working with a fiduciary:
They must act in the best interests of their clients, which gives clients peace of mind that their interests are being prioritized.
They are held to a higher standard of care, which means that clients can expect a high level of expertise and professionalism.
They must disclose any conflicts of interest, which increases transparency.
Potential drawbacks of working with a fiduciary:
While working with a fiduciary financial advisor can provide many benefits, there are also some potential drawbacks to consider. These include:
Limited investment options: Fiduciary advisors may be limited in the investment options they can recommend, as they are required to prioritize your best interests over their own. This can potentially limit the range of investment opportunities available to you by avoiding high commission products.
Limited control: By working with a fiduciary advisor, you may give up some control over your finances, as the advisor will be making recommendations and managing your portfolio.
Unfulfilled expectations: If you have unrealistic expectations or a mismatch of communication with your fiduciary advisor, it may lead to unfulfilled expectations or disappointment in the relationship.
Limited guarantees: While fiduciary advisors are legally obligated to act in your best interests, there is no guarantee of investment performance or success.
Financial Planner
A financial planner is a professional who helps individuals and families create a comprehensive financial plan that encompasses all aspects of their financial life. This may include retirement planning, investment management, tax planning, estate planning, risk management, and other financial goals.
Financial planners typically work closely with their clients to understand their financial situation, goals, and risk tolerance. They then use this information to develop a customized financial plan that addresses their specific needs and objectives. The plan may include recommendations for specific investments, insurance policies, tax strategies, and other financial products and services.
Financial planners may hold various professional credentials, such as the Certified Financial Planner™ (CFP®) designation, which requires extensive training, education, and experience in financial planning. They may work for financial planning firms, banks, insurance companies, or be self-employed.
Potential Benefits of working with a financial planner:
Working with a financial planner can provide many potential benefits, including:
Comprehensive financial planning: Financial planners can provide a comprehensive analysis of your financial situation, including your income, expenses, investments, insurance coverage, and retirement savings. They can then use this information to develop a personalized financial plan that aligns with your specific goals and objectives.
Expertise and experience: Financial planners have extensive knowledge and experience in financial planning, investment management, tax planning, and other areas of personal finance. They can use this expertise to help you make informed decisions and avoid costly mistakes.
Objectivity and accountability: Financial planners are typically objective and unbiased in their recommendations, as they do not have a vested interest in any specific financial products or services. They are also accountable for the advice they provide and are held to a fiduciary standard when providing investment advice.
Goal-setting and monitoring: Financial planners can help you set realistic financial goals and monitor your progress over time. This can help you stay on track and make adjustments as needed to achieve your goals.
Risk management: Financial planners can help you manage financial risks, such as market volatility, inflation, and unexpected expenses. They can provide guidance on how to protect your assets and minimize your exposure to potential risks.
Tax efficiency: Financial planners can help you optimize your tax situation by providing guidance on tax-efficient investment strategies, retirement planning, and other tax planning opportunities.
Peace of mind: By working with a financial planner, you can have peace of mind knowing that your finances are being managed in a responsible and professional manner.
The potential downsides of working with a financial planner are not substantially different than working with a fiduciary or financial advisor.
Differences between Fiduciary, Financial Advisor, and Financial Planner
While fiduciaries, financial advisors, and financial planners may offer similar services, there are key differences between them.
Fiduciaries are held to the highest standard of care and must always act in their clients’ best interests.
Financial advisors can offer a wide range of services and may have access to a broader range of investment options, but they may not always act in their clients’ best interests.
Financial planners can help clients create a comprehensive financial plan and often have achieved advanced education such as earning their CERTIFIED FINANCIAL PLANNER designation.
So, what's the difference between a financial advisor, fiduciary, and financial planner?
A financial advisor may or may not be a fiduciary and may or may not be a financial planner.
A fiduciary is always a financial advisor and may or may not be a financial planner.
A financial planner is always a financial advisor, but may or may not be a fiduciary.
In our experience, you may be best served by hiring a financial advisor who is also a fiduciary and financial planner.
How Can I Tell if My Financial Advisor is a Fiduciary?
Here are some ways to determine if your financial advisor is a fiduciary:
Ask them directly: The easiest way to find out if your advisor is a fiduciary is to ask them directly. They should be able to tell you if they are a fiduciary and explain what that means.
Check their certifications: Some certifications, such as the Certified Financial Planner (CFP) designation, require that advisors adhere to a fiduciary standard. Check your advisor's certifications to see if they require a fiduciary duty.
Look for conflicts of interest: A fiduciary advisor must disclose any conflicts of interest that could affect their recommendations. If your advisor is selling products or services that they receive commissions or other incentives for, it could be a conflict of interest.
Review their code of ethics: Many financial advisors have a code of ethics that they follow, which should include a fiduciary duty to their clients. Ask to see a copy of their code of ethics and review it carefully.
Check their registration: Registered Investment Advisors (RIAs) are held to a fiduciary standard, so if your advisor is an RIA, they are required to act in your best interest. You can check their registration with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) via BrokerCheck to confirm their status. If broker check reveals that the advisor is an IA, or investment advisor, then he or she does serve as a fiduciary.
Ask them to sign the fiduciary oath: The fiduciary oath is a promise made by financial professionals who are acting as fiduciaries to their clients. The oath is a commitment to act in the best interests of their clients and to uphold certain ethical standards.
The fiduciary oath typically includes the following elements:
The advisor will always act in the best interests of their clients.
The advisor will provide full and fair disclosure of all material facts.
The advisor will avoid conflicts of interest and, if they cannot be avoided, they will be disclosed and managed in the best interests of the client.
The advisor will maintain the confidentiality of client information.
The advisor will provide competent and diligent service to their clients.
The advisor will uphold the highest standards of professional conduct.
By taking the fiduciary oath, financial professionals are making a commitment to their clients to act in their best interests and to maintain high ethical standards. The fiduciary oath is an important step towards building trust between clients and their financial advisors, and it is becoming increasingly important as more people seek out fiduciary advisors who are committed to acting in their best interests.
In summary, it is important to ensure that your financial advisor is a fiduciary, as this ensures that they are acting in your best interests. By asking questions and doing some research, you can determine if your advisor is a fiduciary and make informed decisions about your finances.
How to Choose the Right Financial Professional
When choosing a financial professional, it is important to consider several factors. You should ask about their qualifications, experience, and services offered. You should also ask about their fees and any potential conflicts of interest. It is also a good idea to seek referrals from friends, family, or colleagues who have had positive experiences with financial professionals.
It is important to note that not all financial professionals are created equal, and not all of them may be a good fit for your needs. Therefore, it is important to do your research and choose a professional who is knowledgeable, trustworthy, and has your best interests at heart.
Conclusion
In conclusion, understanding the differences between fiduciaries, financial advisors, and financial planners is crucial when choosing a financial professional.
Fiduciaries are legally obligated to act in their clients’ best interests, while financial advisors and financial planners may not always have this same level of obligation.
Financial advisors can offer a wide range of services, while financial planners can help clients create a comprehensive financial plan.
Ultimately, it is important to choose a financial professional who has the expertise, experience, and qualifications to meet your specific financial needs and goals. By doing so, you can have peace of mind that you are receiving the best possible guidance and advice for your financial future.
Would you like to work with a financial advisor who also serves as a fiduciary and a CERTIFIED FINANCIAL PLANNER professional? Contact us for a free consultation.
Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.
Registration of an investment advisor does not imply a certain level of skill or training.