What’s a Financial Planner?
Key Points:
• A financial planner is a type of financial advisor who provides holistic financial advice, and who often holds additional certifications.
• “Holistic financial advice” means that, like general practitioners, financial planners can advise on just about any financial topic — not just investment management.
• While all people do some level of financial planning, not all people need financial planners. Financial planners are most necessary for people with high net worths, complex portfolios, and an enormous number of financial choices.
• When looking for a financial planner, it’s usually best to work with a fee-only planner who adheres to the fiduciary standard, and who ideally possesses additional certifications (e.g.: CFP® certificants).
A financial planner is a type of financial advisor who provides holistic financial advice, and typically holds additional certifications. “Financial advisor” is the umbrella term for all professionals who provide financial advice, and “financial planner” refers to the subset whose work most resembles that of a general practitioner in medicine. That is, rather than specializing in one area or another, financial planners are knowledgeable about all financial topics, and can therefore provide guidance in all areas.
Financial planners come in many different forms, from purely digital robo-advisors to traditional human advisors. Robo-advisors tend to be much less expensive than human advisors and to cover a much narrower range of services, typically limited to investment management. As such, they are favored among people new to financial planning, with small net worths, who would not be able to take advantage of the range of services offered by human financial planners. Predictably, therefore, human financial planners are favored by people with highly complex financial circumstances, with high net worths, and who need a substantial amount of attention and advice in order to achieve their financial goals.
While each financial planner is unique in some respects, working with a financial planner typically boils down to a few major stages. After an informal, free consultation, the financial planner develops a thorough comprehension of the client’s financial circumstances, life goals, and risk tolerance. From there, they develop a plan for the client to approve. Upon approval, they implement it, and conduct regular meetings with the client to review the extent to which the client’s goals are being met. If necessary, the financial planner will recommend alterations to the plan, which often happens as a result of significant changes to the client’s lifestyle.
As such, financial planning is an ongoing process, and people expecting to hire a financial planner should also expect to speak to their financial planner regularly. Financial planners should be contacted at any major life milestone — marriage, home buying, the birth of a child, approaching retirement — in order to ensure that the plan is as up to date as possible. But ideally, financial planners and clients would speak more frequently than that. It is in clients’ best interests to be as aware as possible of what’s happening to their money, and to feel comfortable contacting their financial planner with any and all financial questions.
Because it is not illegal for a person to call him or herself a “financial planner” without holding specific certifications, it behooves individuals searching for sound financial advice to verify whether their target advisors have the requisite qualifications. A favored certification is the Certified Financial Planner™ professional (or CFP® certificant) designation, which is awarded to financial planners who have undergone highly rigorous testing and training, and who have held themselves to stringent ethical guidelines throughout their careers. (To read more about the grueling process by which individuals become CFP® certificants, click here.)
Do I Need a Financial Planner?
On some level, it benefits everyone to have a financial plan, but that does not mean everyone needs a financial planner. For people with limited assets, DIY financial planning may be just as effective, and much less expensive than hiring a financial planner. In addition, many financial planners have either stated or unstated net worth minimums — often around $200,000, for those that have them — which represents a fair benchmark of the point at which professional financial planning becomes useful.
Whether or not you need a financial planner depends on the complexity of your financial circumstances, your goals, and the options spread out before you. Simpler finances inherently limit the choices a person can make with their money; complex finances multiply them exponentially. Smart, successful people often think they can handle this complexity alone, but that’s rarely the case. Financial planners, whose entire lives concern synthesizing complicated financial information, are best-equipped to find the plan of best fit in a person’s data-rich financial matrix.
What Services Do Financial Planners Offer?
Particularly if you hire a CFP® certificant, the range of services offered is theoretically limitless — that is, if it falls under the heading of “financial inquiry,” your financial planner will almost certainly be able to address it. With that being said, individual financial planners do tend to excel in one area or another, and as a result, attract clients who need particular help in that area. Some financial planners focus on estate planning, others focus on tax planning, others (like Heron Wealth’s Chris Jennings) focus on equity compensation — the list extends as far as there are financial topics. As such, when deciding who to hire, it’s important to evaluate whether their experience includes working with clients like you.
A common misconception is that financial advisors and/or financial planners are nothing more than investment managers. While many financial planners’ expertise includes investment management, it goes far beyond assembling and managing an investment portfolio. This is a key way in which human financial planners differ from robo-advisors, which use algorithms to automatically build and update investment portfolios.
How Do I Find a Financial Planner?
There are a number of online resources that can help you find a financial planner, including NAPFA, the Garrett Planning Network, the XY Planning Network, and the Alliance of Comprehensive Planners. But before you begin the search process, it’s important to know what exactly you’re searching for. As we stated in the introduction, just because someone calls him or herself a “financial planner” doesn’t necessarily mean they possess qualifications, certifications, or experience that evidence their expertise. Before you settle on a financial planner, look out for the following terms:
Fee-Only
“Fee-only” in the context of financial planners refers to financial planners’ pay structure. There are three major types of pay structure: fee-only, fee-based, and commission-based. Commission-based advisors make money based on commissions from product sales and financial transactions. Fee-based advisors make money from commissions as well, but also make money based on set fees, be they hourly fees, project fees, or fees based on a percentage of assets of their under management (AUM).
Fee-only financial planners are the only ones who never make money on commissions. They only make money according to set fees that they clearly communicate with their clients. As you will see in the subsequent section, this reduces potential conflicts of interest between financial planner and client almost to zero. When it comes to receiving financial advice, you don’t want there to be any room for conflicts of interest. You want to be sure that the advice you’re receiving is the best possible advice for you. Fee-only advisors are the only ones who can truly claim this, 100% of the time.
Fiduciary
“Fiduciary” is a broad term that refers to any relationship in which one person is legally and ethically required to act in the best interests of another person. The fiduciary relationship exists in a range of contexts, including between an attorney and their client, a guardian and their ward, an executor and their legatee, board members and their shareholders, and, of course, between a financial planner and their client.
Fee-only advisors adhere to the fiduciary standard, which means they are acting 100% in their clients’ best interests, 100% of the time. Fee-only advisors adhere to the much less rigorous suitability standard, which means that their advice doesn’t have to be 100% in their clients’ best interests if it can reasonably be deemed “suitable.” This leaves room for conflict of interest. In fiduciary relationships, there is no room for conflict of interest. So, when seeking out a financial planner, don’t settle for less than the fiduciary standard.
CFP® Certificant (or similar qualification)
CFP® certificants are people who have completed education, experience, and ethics requirements over the course of many years. Most notably, they have taken and passed the extremely rigorous CFP® exam, a 170-question, six-hour test which covers the entire spectrum of financial planning, and often requires years of preparation to pass. As you can see, CFP® certificants have demonstrated deep knowledge and ethical rectitude.
Of course, not all CFP® certificants, fiduciaries, or fee-only financial planners are intrinsically the best choices when searching for a financial planner. Regardless of their apparent qualifications, in any and every introductory meeting, you should seek to understand whether you have personal and philosophical chemistry, whether your communication preferences match up, and whether the collaboration feels like a promising one.
Conclusion
When you reach a point where your financial circumstances grow more complex than your solo expertise can handle, it is likely time to hire a financial planner. Financial planners have extremely broad expertise, and can advise on just about any sensitive, consequential financial matter. It’s best to look for fee-only, fiduciary, and/or CFP® certificants, but you should also be sure that your personal relationship will be a positive one. You will be meeting with this person to discuss the most intimate aspects of your financial life — a good personal relationship is essential.