What Is a Financial Planner?
A financial planner works with clients to help them manage their money and reach their long-term financial goals. They advise and assist clients on a variety of matters, from investing and saving for retirement to funding a college education or a new business while preserving wealth.
Financial planners must have a thorough knowledge of personal finance, taxes, budgeting, and investing. They may specialize in tax planning, asset allocation, risk management, retirement planning, or estate planning. Many financial planners draw their clients from a particular population, such as young professionals or retirees.
Key Takeaways
- Financial planners work with individuals, families, and corporations to help them effectively manage their current money needs and long-term financial goals.
- Some financial planners may hold the “CFP®” professional designation to establish their professional qualifications.
- Financial planning includes help with budgeting, investing, saving for retirement, tax planning, and insurance coverage.
- Some financial planners specialize but many offer overall services.
Understanding the Role of a Financial Planner
The Certified Financial Planner Board of Standards (CFP Board) describes financial planning as “a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circ*mstances.”
Some financial planners specialize in one area such as retirement savings but many offer a holistic approach that considers the client’s overall well-being. They may address the financial implications of family, career, education, and physical health.
Financial Planners Are Fiduciaries
Financial planners are considered to be fiduciaries. They're legally bound to act in a client’s best interests and they can’t accept payments from any third parties when recommending specific financial products to their clients.
The titles used by financial planners can vary. Registered investment advisors (RIAs) are fiduciaries under the Investment Advisers Act of 1940. They advise high-net-worth individuals on investments. They're regulated by the U.S. Securities and Exchange Commission (SEC) or state securities regulators.
An effective financial planner must have sufficient education, training, and experience to recommend specific financial products to their clients. A practitioner may earn and carry one or more professional designations as evidence of these qualifications such as the certified financial planner title.
The CFP® Designation
The most commonly held professional designation is certified financial planner (CFP®). It's issued by the CFP Board, the nonprofit certifying and standards-setting organization that administers the CFP exam.
"Certified financial planner" is a formal credential of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement. The designation is awarded to individuals who successfully complete the CFP® Board’s initial exams and then engage in ongoing annual education programs to maintain their skills and certification.
A CFP® may do much more than simply advise clients on available investments. They may assist their clients with budgeting, retirement planning, education savings, insurance coverage, or tax optimization strategies.
Fee-Based vs. Commission-Based Financial Planners
Financial advisors, including financial planners, generally fall into one of two categories. They're fee-based or commission-based.
Fee-based financial advisors charge a flat rate by the hour, by the project, or by assets under management (AUM). Their income comes primarily from fees paid by their clients but fee-based advisors may also earn income through commissions for selling certain financial products.
Fee-only advisors earn income only through fees paid by their clients.
Commission-Based Advisors
Commission-based financial advisors earn income by selling financial products and opening accounts on their clients’ behalves. The commissions are payments made by companies whose products and services are recommended by the advisor. Commission-based advisors can also earn money by opening accounts for clients.
Commission-based financial planners can have an incentive to direct clients to investment products from which they receive payment. Fee-only planners have no such temptation.
Choosing the Right Financial Planner
When you're ready to hire your first advisor or replace your current advisor, it's a good idea to interview at least three financial planners. Compare their answers so you can choose the one that's best for your needs. Be sure to get answers to these questions:
- What are your credentials?
- Can you provide references?
- What (and how) do you charge?
- What is your area of expertise?
- Will you act as my fiduciary?
- What services can I expect?
- How will we settle disputes?
You can visit the CFP Board website to check the status of a CFP®.
What Do Financial Planners Do?
A financial planner helps clients manage their current money needs and reach their long-term financial goals. Their focus may be broad or narrow. Some help clients with many aspects of their financial lives, including savings, investments, insurance, retirement savings, college savings, taxes, and estate planning. Others have a narrow focus, such as retirement or estate planning.
Some financial planners sell investments, insurance, and other financial products. Others help their clients create an investing plan and let their clients make the specific decisions.
How Much Does a Financial Planner Charge?
A 2023 AdvisoryHQ study found that hourly rates for financial advisors typically range from $120 to $300. The per-project cost ranges from $275 to $4,500 or more, depending on the complexity of the job. College planning “package deals” average from $275 to $1,500. Comprehensive financial planning costs $2,000 to $4,500.
Commission-based financial planners earn money when their clients buy financial products that the advisor recommends. Fee-only financial planners don’t receive commissions for products sold. They charge by the hour, by the project, or by assets under management (AUM).
What Is the Difference Between a Financial Planner and a Financial Advisor?
Every financial planner is a financial advisor, but not every financial advisor is a financial planner. A financial planner helps individuals, families, and businesses create programs to reach their long-term financial goals. They may offer broad financial advice or specialize in an area such as investments, taxes, retirement, or estate planning.
“Financial advisor” is a broad term that refers to nearly any professional who advises people on their finances, including certified financial planners. They may help manage their clients’ money, manage investments, buy and sell stocks and funds on the client’s behalf, and help with estate and tax planning.
The Bottom Line
Financial planners aren’t just for the wealthy. They can help those of more modest means to figure out a way to fund their children’s college educations, to plan for retirement, or to make sure that their IRS bills are as manageable as possible. They can help you invest wisely if you have some money left over after seeing to these issues. Ask for recommendations then do due diligence and research into an individual’s qualifications before you sign on with them.
