Difference Between Financial Planner and Advisor

Posted on by Ryan

Let me start off by saying that I truly like most financial planners. After all, they are like cousins to my own field of investment banking. I also believe they can be extremely helpful, even indispensable when planning your financial future. So, please use them. However, like most tools, they are only useful when used correctly and backed up by a certain amount of knowledge. After reading this article you’ll have a better understanding about the difference between financial planner and advisor.

A Personal Story

A few years back, a relative of mine inherited a sum of money from her late great aunt. Being an investment banker, everyone in my family assumes that I know all things financial. It’s funny, but I can invest a large amount of my own money and sleep well at night knowing that I have done my homework and calculated the risks and the rewards. But when it comes to investing family money, I get all tied up in knots and really fearful of making a mistake. My bravado and self-confidence go right out the window.

So, in the case of my relative’s request for help with her inheritance, naturally I sought help. I set up appointments with several well-established financial planners in hopes of helping my relative choose one to help her invest her newly found nest egg. It was a very enlightening experience and not what I expected.

Having gone through this process like most people trying to figure out and develop their personal investment strategy and financial plan, I would like to share my insights with you.

What’s The Difference Between Financial Planner and Advisor?

First, let’s get some definitions straight. In the world of investment, there are investment advisors and there are financial planners. Most financial planners are also investment advisors, but not all investment advisors are financial planners. Both investment advisors and financial planners sell investments. However, financial planners also evaluate financial resources and situations to develop investment strategies or financial plans for their clients–all with the intent of achieving their client’s financial and life goals.

I cannot stress enough the importance of having well-defined financial and life goals. How can anyone arrive at their final destination without knowing where they are going? The guidance of a good financial planner can help you define these goals and get you on the path to success.

Salesmen in Disguise

Difference Between Financial Planner and Advisor Commission

Some investment advisors are captive–meaning that they work for a firm that only sells a certain type of investment and therefore are limited in what they may offer you. These “salesmen” may also be known as financial representatives, financial specialists, annuity specialists, life insurance specialists and a whole host of other names used to disguise the fact that they are usually paid lucrative commissions or bonuses to sell specific product or service to their clients.

Commissions and bonuses are not bad things in and of themselves. After all, we should not expect anyone to work for free. However, it is very important when choosing investments to understand the motivation of anyone offering you advice.

As you search for an investment advisor or a financial planner, you are going to hear the phrase “fiduciary responsibility”–meaning that the planner or the advisor has an ethical and, in some cases, legal responsibility to represent the best interests of their client. But hang on a minute…can an educated professional with a list of impressive acronyms following their name really be impartial and do what is right for their client when they know that selling one financial product to their client earns a higher commission than another financial product?

Call me “cynical”, but come on…it’s human nature. Even in the best case scenario of both products being relatively close in quality and price, they’re going to pick the one that pays the highest commission! And I don’t blame them. I would do it. Gandhi would do it.

Okay, maybe not Gandhi…or Mother Teresa. The point is that there is an inherent conflict of interest in the world of investment and you should be aware of it whenever you invest. It is interesting to note that there are by far more commission-based advisors than fee-based advisors.

Fiduciary Responsibility…Not

So what’s the difference between financial planner and advisor, well, let’s get back to my story. With my relative in tow, I visited with several financial planners. During each interview I would ask the financial planner their opinion of “Vanguard Funds”. There was purpose in my question. Vanguard funds are index funds that can be purchased directly from Vanguard through their website. This means that the financial planner would not get a commission. Every single one of the financial planners that I met with suggested reasons why the Vanguard funds might not be suitable for my relative.

Coincidence? I also asked if they would consider being paid a fee by my relative and forgoing any commissions they might receive by selling my relative a financial product. To my surprise, several of them actually got a bit irate, stating that they had a fiduciary responsibility to represent their clients fairly and that they were perfectly capable of distinguishing which financial products were best for their clients while not giving weight to their potential commission on that product. They were insulted that I would question their integrity. We left their office.

Difference Between Financial Planner and Advisor – Which Is Cheaper?

Okay, another knowledge tidbit for the uninitiated. There are two types of investment advisors, including financial planners–commission-based advisors and fee-based advisors. Both should be registered with FINRA, a self- governing organization for financial advisors whose membership in most cases is required by the Securities and Exchange Commission to work in certain parts of the investment industry.

Difference Between Financial Planner and Advisor Saving Money

Commission-based advisors receive commissions on the financial products that they sell. Fee-based advisors are paid a fee directly from the clients that they serve. From the outset, a commission-based advisor is going to be cheaper than the fee-based advisor. After all, the commission-based advisor doesn’t usually charge you any fees on the investments they sell you, because their fee is built into the cost of the investment. On the other hand, the fee-based advisor is charging you their fees over and above the cost of the investment. So, naturally, the fee-based advisor looks more expensive… at least in the short run.

In my experience, the better the investment, the lower the commission and visa-versa. Certain types of life insurance pay very high commissions over long periods of time. High-risk, venture capital or business startup type investments also tend to pay very high fees to the advisors that sell them. I have seen commissions as high as 10% of capital raised paid out to advisors that brought in the investors. Vanguard, the funds I mentioned earlier (and recommended by Warren Buffett), pay little to no commission to the advisors that sell them. Quality investments don’t need to pay high fees to attract investment. The product speaks for itself.

Human Nature & Investment Advice

So, now ask yourself…what would human nature dictate to a commissioned investment advisor when they could earn 1% on one investment and 10% on another investment? Which would they recommend? Would the quality of the investment even come into play? I am sure there are many investment advisors that take the long view and value their reputation for finding good investments for their clients. But I am equally sure there are investment advisors that would sell the product that makes them the most money regardless of the product’s quality. The real question is…how do you tell the difference between the good advisor and the greedy advisor?

The Difference Between Good and Greedy Advisors

The only way is to take money out of the equation. If you pay your advisor a direct fee in lieu of them receiving commissions, you eliminate the conflict of interest and you can count on their advice being fair and unbiased. It is not easy to find a good investment advisor or financial planner willing to work based on a fee, but it is well worth the effort. You can start by looking on the NAPFA website. NAPFA (National Association of Personal Financial Advisors) is an organization of fee-only financial planners. The fee charged by a fee-only financial planner will be meniscal compared to a bad investment. Investing is one of those areas in life where you really don’t want to be penny wise and pound foolish. Now you should be able to the difference between financial planner and advisor. You next step is to determine, which if any is right for you.

Are Fund Advisors Worth It? – Index Investing

Posted on by Ryan

You might be asking yourself if fund advisors are worth it. On the floor, index investing looks like an ideal match for do-it-your self buyers. The simplistic purchase maintain re-balance mantra of index fund proponents mixed with the abundance of assist from investing authors and on-line boards leads scores of knowledgeable buyers to tackle the duty of private portfolio administration annually. Many DIY buyers by no means look again; they treasure their newfound fiscal autonomy and the problem of overcoming future monetary hurdles. Others, nevertheless, uncover that they lack the time, curiosity, information or self-discipline to efficiently negotiate the damaging DIY terrain, they usually finally search assist from fund advisors. The function of this text is to obviously current the rationale for every strategy in order that index buyers can determine which tactic most accurately fits their wants and skills.

Why Investors Do it Themselves

According to a 2019 research by the Investment Company Institute, the first purpose that DIY buyers handle their very own portfolios is that they need to be in management. There is a way of empowerment that comes with making your personal funding selections, and DIY buyers, particularly males, like holding the reigns. The research additionally discovered that almost all of DIY buyers consider that they’ve the required info and mental capacity to make nicely-knowledgeable, prudent monetary selections with out the assistance of knowledgeable. In the minds of those assured buyers, advisory charges are an pointless expense. Finally, many people discover private finance to be a rewarding pastime. According to the research, nearly all of DIY buyers take pleasure in conducting their very own monetary analysis, crunching numbers and intently);

Others select the DIY path not as a result of they love the thought of managing their very own investments, however as a result of they dislike the thought of hiring fund advisors. You might fall into this class in case you place a excessive worth in your monetary privateness, consider that the majority monetary advisors are incompetent or untrustworthy, or just need to get monetary savings by not paying advisory charges. The reality that fund advisors aren’t created equal supplies little solace to these whose opinions have been formed by the quite a few investor scandals of the previous yr or by a poor previous expertise with an advisor.

Finally, there’s a group of buyers who acknowledge that they might profit from skilled assist however lack an funding account giant sufficient to seize the eye of an advisor. First-time buyers typically fall into this class and have a tendency to hunt recommendation from public sources, family members or associates.

Why Would an Investor Hire Fund Advisors?

A good financial advisor can add worth to your portfolio in numerous methods. First, he acts as a gatekeeper, stopping you from making widespread return-decreasing errors. Numerous research have proven that particular person buyers routinely surrender as a lot as S% in annual returns on account of frequent buying and selling, trying to time the market and chasing previous efficiency. Even probably the most seasoned index investor wants the occasional reminder to keep away from distractions and stick together with his funding plan.

Good fund advisors offer entry to analysis, methods and funding decisions which have the potential to spice up returns. By understanding complicated points like tax administration, property planning and retirement forecasting, an advisor will help you higher perceive the probability of reaching your retirement objectives and recommend steps you could take to tilt the equation in your favor. Additionally, he could possibly increase your funding decisions by offering entry to unique fund households or share courses.

Finally, a great advisor performs laborious duties like portfolio monitoring and portfolio re-balancing so as to dedicate your time to different pursuits. An advisor who screens your portfolio incessantly can guarantee consistency together with your danger profile whereas probably squeezing extra returns from re-balancing exercise.

Closing Thoughts on Fund Advisors

Many buyers need a quantitative reply to the query of whether or not to rent an advisor; they need to know definitively whether or not an advisor would offer them with greater funding returns

after charges. In order to reply this query, you need to first ask your self whether or not you will have been capable of develop and persistently implement a low-value, disciplined funding plan by yourself. Many buyers do not have sufficient curiosity, information or potential to develop a wise plan; much more lack the required self-discipline to comply with one. If you end up veering off the trail to chase a scorching new sector or time the market, there is a good probability that an advisor would deliver some return-boosting self-discipline and objectivity to your funding selections);

If you do possess the psychological and bodily fortitude to develop a sound plan and persistently keep the course, you must in all probability look to qualitative elements to make your choice. For occasion, would you moderately spend the time that you simply dedicate to funding administration on different issues, like visiting household or pursuing different pursuits? For many buyers, the reply to this query modifications later in life as monetary conditions turn into extra complicated, the results of poor selections grow to be extra extreme, and time with household turns into a much bigger precedence.

Conclusion on Fund Advisors

The backside line is that managing your personal index portfolio could also be easy, nevertheless it’s not straightforward. If you determine to supervise your personal investments, defend your self towards the tendency to stray out of your funding plan by drafting an Investment Policy Statement. If you determine to rent knowledgeable, select a payment-solely advisor who agrees together with your passive investing philosophy, embraces his fiduciary duty to behave in your greatest pursuits, and is prepared and in a position so as to add worth within the methods described above. Whichever path you select, you’ll be able to maximize your probabilities of investing success by precisely assessing your danger angle and capability, designing a diversified, low-value portfolio, and sticking together with your plan.

Standard Deviation as a Measure of Risk for Stocks Explained

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One of the preferred ways in which buyers will decide the dangers related to a given funding is to review its normal deviation. While mildly difficult to reach at, the usual deviation supplies numerous useful details about a safety’s worth and, particularly, the way it will “sometimes” behave. This is why know about the standard deviation as a measure of risk for stocks is important.

In its purest type, the usual deviation tells buyers how a lot they will anticipate a safety’s worth to fluctuate from its imply returns. That signifies that if a safety usually earns 10% per year, a excessive commonplace deviation will recommend that day-to-day fluctuations shall be excessive whereas a a low normal deviation will point out that fluctuations can be decrease. In different phrases, securities a with normal deviation can be thought-about extra risky than securities with a low determine);

The significance of understanding this numbers comes right down to portfolio development. Consider a extra-balanced investor who needs to take pleasure in regular progress, understands there may be worth fluctuations however actually doesn’t need to see giant swings in a portfolio’s worth. Putting collectively a household of securities may contain selecting some shares which have greater volatility and offsetting these shares with securities which have decrease volatility. Standard deviation helps with this course of. Related article: How to Fight Inflation.

Why is it Important to Know the Standard Deviation as a Measure of Risk?

The good factor about understanding this statistical measure is that it’s particular to the safety. In different phrases, though a safety may be a part of an general index, some might and can behave indifferently to regardless of the broader market is doing. And that degree of volatility may be unbiased of the market’s volatility as properly. Standard deviation as a measure of risk tells us precisely what to anticipate from such securities, no matter what its relationship to the broader market could be.

The shortfall with this measure is that it’s based mostly on historic knowledge and might be pretty simply manipulated. Since it can measure returns over a interval days, weeks, months and typically years, the precise commonplace may be inaccurately masked behind longer-time period market circumstances (e.g. utilizing the final 10 years) or can present inaccurately excessive deviation (e.g. utilizing the final S months of risky interval);

Therefore, warning must be exercised when counting on this measurement and relying on present market and financial circumstances, the investor or analyst should determine how “watered down” the measurement ought to be (e.g. during times of heightened volatility, it might make higher sense to undertake an extended-time period interval, corresponding to a year or a number of years). Regardless, buyers ought to be nicely conscious of the parameters that go into the usual deviation.