SEC Q&A: What Is the Difference Between an Investment Adviser and a Financial Planner?

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The Securities and Exchange Commission (SEC) has on their website a page entitled, “Investment Advisers: What You Need to Know Before Choosing One” which begins:

The Securities and Exchange Commission (SEC) receives many questions about investment advisers—what they are and how to go about choosing one. This document answers some of the typical questions we receive from investors about investment advisers.

Here is one of the questions and answer from that site:

Q: What is the difference between an investment adviser and a financial planner?

A: Most financial planners are investment advisers, but not all investment advisers are financial planners. Some financial planners assess every aspect of your financial life—including saving, investments, insurance, taxes, retirement, and estate planning—and help you develop a detailed strategy or financial plan for meeting all your financial goals.

Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren’t securities.

Before you hire any financial professional, you should know exactly what services you need, what services the professional can deliver, any limitations on what they can recommend, what services you’re paying for, how much those services cost, and how the adviser or planner gets paid.

Advisors who are only able to recommend that you invest in a narrow range of products are call Salesmen. But since no one wants to be sold suboptimal investments with high fees and expenses no salesmen puts that title on their business card. They usually put “Financial Representative” or “Financial Planner” as their title. Sometimes they will put the product they are selling in their title such as “Life Insurance Specialist” or “Annuity Specialist.” If they sell to particularly large clients, I’ve seen the title “Private Wealth Advisor.”

The difficulty with salesmen is that they are, in the end, just salesmen.

For every so-called financial advisor, you should verify if they are really a fee-only financial advisor or if they are a commission-based advisor (often using the term fee-based to cloak their commissions). Here is how you can search the advisor information required to be filed with the SEC to tell if your advisor is really fee-only.

Some advisors have an obligation to act in your interests and some do not. You deserve a fiduciary standard of care even if most clients are confused about the distinction.

As the quote above makes clear: even the SEC thinks it is critical that you “understand how your adviser or planner gets paid.”

Advisors who limit their help to investment choices are often called Investment Advisors or Asset Managers. Their task is to put the money you have in long term savings to work in an appropriate investment strategy.

Advisors who help you with lifestyle spending, cash flow, saving, investment management, retirement planning, college planning, etc. are often called Financial Planners. Their task is to make sure that your finances are structured so that you will be able to meet your spending goals at the appropriate time in the future.

Perhaps you have sufficient wealth, but you need help managing that wealth. Advisors who help you with estate planning, risk management, tax planning, Roth Conversions, Capital Gains Planning etc. are often called Wealth Managers. Their task is to watch over your wealth and do whatever you would do if you had their time and expertise. They act as a steward on your behalf.

We call ourselves Comprehensive Wealth Managers and have titled the firm Marotta Wealth Management to indicate that we have a long list of potential services that we offer and are willing to help you with. Comprehensive wealth management is very extensive, and while many firms feign that they offer financial planning services, their core service is selling you financial products. This is where an interview with the advisor you are considering can be extremely helpful. You will get a sense of what they are going to do, how frequently they do these for clients, and what process they use to accomplish it.

There is another layer of advising which we think is an important starting place for all of comprehensive wealth management, and that is “life planning.” Life planning, as it relates to finance, is starting by asking the question, “What is the wealth for?” and then designing your investments, financial plan, and wealth management strategies to best accomplish your life goals.

For more on Life Planning, I’ve done a ten part video series (of about 8 minutes each) on “Comprehensive Wealth Management: Life Planning“, as well as a three articles on the subject of “Life Planning“.

We take the what-is-the-money-for approach to wealth management by writing an Investment Policy Statement for every new client. The aim of a fiduciary advisor is to do whatever the client would do if they had the advisor’s time and expertise. In order to even approach accomplishing that task, an advisor has to get to know his or her clients. Every good advisor has at least an informal method of getting to know their clients. The best advisors formalize that process using an Investment Policy Statement.

We purposefully did not call our selves “Life Planners” or “Marotta Life Planning.” Such a title may have nothing to do with finances. Typically this title is used for a “Life Coach” who helps you set life goals and take the actions necessary to accomplish those life goals. This includes finding balance between your work and your personal life, keeping significant goals in retirement, learning to have healthy habits in exercise and what you eat, spending time with the people you care about most, and having the experiences you have been postponing until later. These concerns are critical to financial planning as financial planing begins with just such spiritual values.

Interested in learning more about how we answer these questions?

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.