What is the difference between a financial planner and a financial advisor?

What is a Financial Advisor?

Generally, a financial advisor will look at specific aspects of your finances and advise in relation to that, for example; if you go to an advisor looking to make an investment, they will then advise you on the most appropriate investment fund or if you wish to put in place a pension, they will advise what the most appropriate pension structure is.

In Ireland, a lot of pensions and investments are taken out via the banks and the big life with the advice being given by one of their employees.

What is a Financial Planner?

A financial planner is a professional who helps individuals create a long-term financial plan to meet their financial goals over their lifetime. Rather than looking at one aspect of the person’s finance, they will holistically evaluate all the clients’ finances and put in measures to ensure that everything is working in unison to achieve the overall objectives from now right up until mortality. This goes beyond just setting up an investment or pension as it will incorporate budgeting, tax planning, estate planning. There will be short, medium and long term goals set out.

Key differences between a financial planner and a financial advisor:

Engagement

A financial planner will ask questions about your goals and what you want from life. They will ask questions about your spouse, children, or anything else that is important to you. They want to know what each stage of your life looks like.

A financial advisor focuses more on your current money, pensions, and investments you hold.

Planning versus Selling

A financial planner will set a road map of a person’s lifetime with key goals and milestones along the way. They will then look work backwards to see what products are needed to achieve these goals. They will use specialist software to carry out cash flow modelling before making recommendations or putting specific financial products in place. Often, the products needed will be entirely different than the person had initially thought they needed.

A traditional financial advisor will sell a potential client a specific product without really understanding the client’s overall life goals. They tend to focus on a specific problems or want of the client.

Length of Relationships

A financial planner looks to build long-term trusting relationships. They help you throughout your financial journey as your circumstances change. They will then make changes to the financial plan accordingly. People’s goals and objectives will change over time, so a financial plan needs to be updated at least once a year.

A financial advisor is more focused on transactional short-term business. They are more concerned with the immediate task at hand and finding the right product to fulfil that need rather than looking at the bigger picture.

Ongoing Support

The financial planner looks to build relationships through ongoing support to their clients as their circumstances change. They take on a coaching role as well as provide the client with guidance on every aspect of their financial situation.

A financial advisor will only provide support in relation to the financial product which they sold the client.

Fees versus Commission

Generally, a financial planner will adopt a transparent fee-based model. This will allow the planner to give impartial advice when putting a financial plan in place.

A financial advisor generally takes a commission when a product is sold to a client. Often, there are targets in place for advisors of banks or the larger life offices which can lead to mis selling of products. The charging structure of commission-based products are generally opaque with many investors not really knowing the actual amount they are paying on an annual basis to cover the initial commission costs.

A simple example of Financial Advice versus Financial Planning

A 28 year-old married woman with a young child joins a new company and she becomes a member of the occupational pension scheme. The employer and the employee both make a contribution each month.

The financial advisor of the scheme gives a talk on the benefits of making additional pension contributions (AVC’s) such as the tax relief and tax-free growth on offer within pension structures. The advisor recommends the employee to make AVC’s to avail of these benefits. The advisor is on a commission-based salary in this instance.

AVC’s are fantastic but are they the right fit for this employee?

AVC’s will be locked away until at least age 50. The advisor has not considered her age or personal circumstances.

Whereas a financial planner will map out the woman’s life from now until mortality. They will look at incomes, expenses, debts etc to identify if there are other more short-term priorities.

In this process the financial planner identifies that the woman is currently renting.  Building up a house deposit would be a much greater priority than making AVC’s. An investment account taking a 5 year investment time horizon should be implemented rather than an AVC account.

The planner also notes that the husband is not currently working, and the woman is the only earner of the household. Putting in income protection for the woman is crucial in this instance rather than investing in AVC’s.

By looking at the bigger picture the financial planner can give much more appropriate advice.

What is right for you?

If you have a specific need, such as wanting to set up a child savings account, for example, you are better off working with a financial advisor.

If you want to look at the bigger picture and start putting a realistic long term plan in place, you should work with a financial planner.

At Opes Financial Planning we believe that you cannot give financial advice without first having a financial plan in place. Contact us if you would like to set up a consultation with one of our team.