Financial planners provide a number of planning services that help you manage your financial life. Financial security is the number one goal for planners, but college, retirement, and estate plans are also included in the planning process.
Financial advisors are focused on the investment of your assets. They provide several services that include investment policy, asset allocation, manager selection, and performance reporting.
Financial planners and financial advisors appear to provide distinctly different services, but that is not the case. Some planners provide investment advice and services. Some advisors provide planning advice and services. So a financial professional’s title may not depict what the professional actually does.
Planning to Advising
Why do so many financial planners provide investment advice? The answer is they make a lot more money. The planning business is intensely competitive and a lot of planners provide planning services for free (more about that later). And, obtaining new clients is an expensive, time-consuming process. The more revenue they generate from clients the more income they produce for themselves.
Advising to Planning
So why do advisors also provide planning services? Everyone needs planning so it reduces sales resistance if they lead with planning versus investment advice. Equally important is their investment recommendations that can be imbedded in their financial plans so the plans do the selling for them.
There is also a major insurance element in most financial plans – for example, estate plans when insurance is used to pay inheritance taxes. In the past, 70% of all financial planners were insurance agents. That’s because there was a major stigma associated with the title insurance agent. There still is, but a lot of agents have gone covert by calling themselves financial planners.
Make no mistake there are a lot of insurance applications in a financial plan: Life, Annuity, Long-Term Care, Disability Income, Health, and other forms of insurance. Most planners are reluctant to refer their clients to insurance agents who may sell against them or sell low quality insurance products to their clients. Consequently, the financial planners sell insurance products themselves and keep the commissions.
Fee & Commission
When you add it all up, a simple financial plan can produce four types of income for the planner: Planning fees, investment fees, investment commissions, and insurance commissions. Even relatively small plans can produce thousands of dollars of compensation for financial planners and financial advisors.
The Free Lunch
Be very cautious when planners and advisors claim they will produce a financial plan for free. What they are really saying is there are no separate fees for their planning advice and services. Instead, they have wrapped the planning expense into an asset-based fee or they are being paid commissions by third parties. Then the third parties mark-up their fees to you to cover the commissions they paid financial planners and financial advisors. One way or another, these commission expenses are passed through to you.