What’s the difference between a financial planner, financial adviser, financial counselor or a wealth manager? While defining the terms can be easy, understanding the nuances of their different meanings can be a challenge.
According to a study by the National Association of Personal Financial Advisors, two in five adults gave themselves a letter grade of C or worse on their knowledge of personal finance. Drury University assistant professor of finance James Simmerman said this isn’t surprising.
“There are a number of financial advisers out there and they can all help in different ways; understanding what help you need is key,” he said. “The problem is there is not much regulation, so the designations can quickly become confusing.
“There isn’t a one-size-fits-all answer for choosing a financial adviser.”
There is little doubt, however, selecting a financial professional to help manage business and personal funds is essential. The NAPFA study found 56 percent of U.S. adults lack a budget plan and 39 percent have zero nonretirement savings. To boot, about 39 percent of Americans carry credit card debt month-to-month and more than 50 percent have no will.
So how does one go about selecting the right financial professional? Those in the financial field say it starts with asking a friend.
“Oftentimes, friends and family have a similar lifestyle and similar needs,” said Steven Young, a certified financial planner and owner of Steven Young Financial Planning. “The key is finding someone you trust, but also someone who fits your personality and your style.”
Young advises clients to arm themselves with knowledge and not to confuse financial planners with stockbrokers or other salespeople.
“Planning for retirement is different than buying 100 shares of Microsoft,” he said.
Research is key to understanding the nuances. The NAPFA recommends setting up interviews with multiple potential advisers – at least four or five – to ask key questions about their credentials, compensation models, disciplinary issues and other elements of financial planning.
Edward Jones Investments financial adviser Weston Kissee said finding the right combination of knowledge and personality is key.
“The personality of the client and the adviser need to line up, but also the investment philosophy,” he said. “This person is handling your money and that can be scary for people. The trust element is huge.”
Kissee recommends talking about the adviser’s qualifications, experience and preferred method of communication.
“Communication is key to trust,” he said. “If you haven’t talked to your financial adviser in a year, something is wrong.”
Possibly the largest difference between financial professionals is pay scale. Young works on a fee-only model, while Kissee works on a fee-based model. So what’s the difference?
Young said he charges for services by the hour or at a set percentage of overall assets.
“When I’m giving advice, I don’t have a dog in the fight. I’m not making commission on one plan versus the other,” he said. “Imagine going to see a doctor who was paid more to sell a certain drug; that’s not really advice, that’s sales.”
Kissee’s fee-based system is a mix of fee-only and commission-based pay. Fee-based advisers charge clients a fee for the advice delivered, but they also sometimes receive payments for products they sell or recommend.
Commission-based advisers receive payment based on different financial packages they offer. Different plans or packages provide varying commission levels for advisers.
“Fees depend on the clients’ needs and the services provided, but primarily I work with people who need help planning,” Kissee said, noting Edward Jones has experienced a shift toward financial planning within the last 10 years as services such as stock trading have moved online.
Experts also recommend working with a fiduciary when possible. According to Investopedia.com, federal and state law requires registered investment advisers to be held to a fiduciary standard. This legally requires an adviser to act solely in the best interest of the client at all times.
Other advisers are held to the suitability standard. Rather than legally having to place his or her interests below that of the client, the suitability standard only details that the adviser has to reasonably believe any recommendations made are suitable for clients. A key distinction in terms of loyalty is also important.
A broker’s duty is to the broker-dealer he or she works for, not necessarily the client served.
Professor Simmerman said despite certifications and standards, there are no guarantees any adviser will make the most of the money managed, but recommended everyone consider professional help.
“You don’t have to be rich to need a financial adviser. I think that’s a common misconception,” he said. “Paying someone to handle your money may sound counterproductive, but a trained professional can make better use of little funds than you can.
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