by Lauren Aimes
Financial advisors use a disturbing number of titles and qualifications these days, making it a challenge for an investor to determine what kind of advisor to hire. RIA vs IAR? Financial advisor vs financial planner? Investment advisor vs wealth manager? To make the right choice, it is imperative to understand the differences between the various types of financial professionals and their titles and certifications.
What is an Investment Advisor?
The term “investment advisor” refers to any individual or company offering investment advice or receiving compensation to analyze securities. Generally, an investment advisor will either charge their clients a flat or hourly fee for their services or bill them a percentage of the assets they manage. Investment advisors who bill clients this way can be contrasted with stockbrokers, also known as registered representatives, who are compensated via commissions on transactions.
The benefit of hiring an investment advisor who charges asset-based fees rather than commissions is that their compensation structure motivates them to grow your assets as a means of increasing the amount they earn on your account. Stockbrokers, on the other hand, are motivated by their compensation structure to earn commissions by making trades, whether or not your account performs well.
What is a CFP?
A CFP, or Certified Financial Planner, is an investment professional who has been accredited by the CFP Board. To achieve this accreditation, a planner must pass the CFP test and undergo continuing education on a yearly basis. The course involves detailed questions about financial planning, retirement, estate planning, taxes, insurance, managing client relationships and the implementation and review of recommendations.
It takes serious effort to acquire the CFP designation. To obtain certification, a candidate has to possess a bachelor’s degree or higher, finish financial planning coursework, successfully complete the CFP exam and have gained at least three years of experience as a financial professional or served an apprenticeship in the industry lasting at least two years. CFP holders must also demonstrate adherence to the standards of conduct set forth by the CFP Board, which does thorough background checks on all CFP applicants.
What is a Wealth Manager?
Wealth managers are generally financial advisors who focus on managing accounts for high net worth and ultra-high net worth clients. The practice usually involves a variety of disciplines, including financial planning, investment advice, estate planning, and accounting and tax services. A client will typically be assigned an individual wealth manager who coordinates with different experts either on staff at his or her firm or on a third-party basis.
Given that it encompasses a wide variety of financial planning services, wealth management is generally not strictly limited to investment advice. A broad-based approach is thought to be especially suited for wealthy clients whose financial situations are often complex, involving a multitude of investment and planning considerations.
What Other Names Should I Look For?
There are more than 200 different titles and certifications a financial advisor can have, so be wary of advisors who claim that obscure certifications somehow make them superior to other advisors. You can get more information on a specific advisor certification with this complimentary Paladin Registry tool. Some high-quality designations to look for in addition to the CFP designation include those given by the following organizations:
- CFA Institute
Whatever designations an advisor has, a key factor to consider is whether he or she is considered a fiduciary. Fiduciary advisors must put the best interest of their clients first, a higher standard than those who are required to offer advice that fits the ambiguous concept of “suitability,” as is the case with most stockbrokers.
How are These Roles Different?
Investment advisors focus on providing you with advice or management services designed to optimize your investment performance, while CFPs are generally more focused on the overall strategies used to plan for retirement, a child’s college education, passing on an estate and other major financial milestones in an individual’s life. It should be noted that a CFP or other financial planner can also be an investment manager, depending on his or her firm’s policies.
While financial planning as practiced by a CPA and investment management performed by an investment advisor focus on two different aspects of financial advice, a wealth manager generally is expected to either perform both of these roles or at least coordinate with other financial professionals to ensure that both areas are covered.
How Does an Investor Decide the Best Type of Financial Advisor for Them?
When choosing a financial professional to assist you, it is crucial to first have a clear understanding of what types of financial services you require. Do you need help drawing up a financial plan to help manage your cash flow, send a child to college or prepare for retirement? Or are you comfortable drawing up your own plan and are more interested in hiring an expert to manage your investments? Are you looking for strategic investment advice but prefer selecting the individual investments for your portfolio yourself?
Some general guidelines for choosing between the types of financial advisors discussed above are:
- If you only need investment advice, a CFP may be a good choice, as CFPs are trained to provide investment advice from a holistic standpoint. An investment advisor can also work here, however, be aware that many investment advisors focus on managing portfolios rather than charging a fee for advice, so make sure an advisor has experience offering advice for a fee rather than just managing money.
- If you only need financial planning services, a CFP or wealth manager is likely to be the best choice, depending on your individual circumstances.
- If you only need investment management services, an investment manager or wealth manger is likely to be the best choice, again depending on your individual financial circumstances. Note that some CPAs are also investment managers, however, if it is only a small part of their business and not their primary focus, you are likely to be better off hiring a financial professional who specializes in investment management.
- If you need financial planning and investment management services, for high net worth investors, a wealth manager may be a logical choice, as they typically focus on offering a comprehensive package of planning and portfolio management services. Another option is to hire a CFP and an investment manager to gain access to relevant expertise in both areas. As mentioned previously, some CFPs also offer investment management services. Also, some financial advisors who consider themselves investment advisors also offer planning services. If you go the all-in-one route with an advisor, be sure that the professional you choose has the capacity to adequately perform both roles or, if not, the ability to coordinate with the necessary personnel to provide you quality service in both areas.
Is There a Difference Between a Financial Advisor and a Financial Planner?
The term “financial advisor” has a broader meaning than the term “financial planner.” Generally, “financial advisor” can refer to a variety of advisor roles including a financial planner, investment advisor, stockbroker, tax advisor, insurance agent, etc. A financial planner, on the other hand, typically refers to a financial advisor who focuses on helping you design strategies to enable you to meet your financial objectives on an overall or holistic basis.
While a financial planner is considered a type of financial advisor, not all financial advisors are financial planners, as some may prefer to focus strictly on the area they specialize in, such as investing, taxes, insurance, etc.
What is an RIA? What is an IAR? And What is the Difference?
One of the most common questions we get: RIA vs IAR?
An RIA (Registered Investment Advisor) is a firm that is licensed either with the SEC or at the state level to offer investment advisory services. These can include both charging for investment advice on an hourly basis or charging fees based on the amount of assets under management (AUM).
An IAR (Investment Advisor Representative) is a professional who works for an RIA firm and has passed the necessary test (usually the Series 65) to offer investment advice.
Both of these roles are detailed in the Investment Advisers Act of 1940. A common mistake is to call an IAR an RIA, however, an RIA is always an advisory firm, not an individual. An individual owner of an RIA firm would be designated an IAR for that firm if he or she also offers investment advice. Both RIAs and IARs are considered to be fiduciaries. Fiduciaries must provide advice that they believe is in the client’s best interest, while a stockbroker must only provide advice that the broker considers “suitable” for a client.
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