What is a financial planner?
Financial planners help clients develop strategies to achieve their financial goals
Whether you inherited a large lump sum, landed your dream job with a significant pay bump or are getting married or divorced, you shouldn’t embark on the financial planning journey on your own. Yet you can’t trust just anyone with your money.
Exceptional financial planners have extensive education, training, certifications and previous experience, and apply that knowledge in your favor. Here’s everything you need to know before hiring a financial planner.
Key insights
- A financial planner helps you achieve your financial goals by providing guidance on spending, saving and investing.
- Financial planners can provide big-picture financial guidance or specialize in areas like retirement planning or asset allocation.
- Look for financial planners with reputable certifications like CFP, CPA or CFA.
- The cost of a financial planner varies. If you’re new to wealth management, a robo-advisor may suffice.
Financial planner definition
A financial planner is someone who supports an individual, family or organization in reaching their financial goals. They do this by defining both long-term and short-term goals, then provide guidance on spending habits, paying off debt and saving or investing for the future.
The more complex your finances are, the more likely you are to need a financial planner.
Some financial planners offer a broad, holistic approach to wealth management. Others specialize in specific areas like tax planning, asset allocation, risk management, retirement planning or estate planning. Some planners also work with a specific demographic of the population, like high-income earners or retirees.
What is a CFP?
Certified public accountant (CPA) and chartered financial analyst (CFA) are other common and reputable certifications.
What are robo-advisors?
While robo-advisors are held to fiduciary standards and are a good first step for investment management, they are not ideal for comprehensive financial planning. There are also hybrid options that allow you to work with a CFP and robo-advisor, which can be more cost-effective.
What does a financial planner do?
A financial planner helps you to meet your short- and long-term financial goals. To help define these goals and create a plan, they take into account your career, family implications, education and physical health.
They start with a financial analysis, including your income, expenses, assets and debt, to get a better understanding of your current financial situation. Then, they identify areas of opportunity and help you build a budget to reach goals such as:
- Buying a home: Whether it’s your first home, forever home or a vacation home, a financial planner can create a plan to get you the keys.
- Saving for retirement: You don’t want to realize too late that you can’t have the kind of retirement you want. A financial planner can help you put the right funds in the right account so you retire on time.
- Reducing or eliminating debt: Whether you have student loan or credit card debt, a financial advisor can help you get out of debt and start saving.
- Saving for a baby: Between getting the right insurance and creating an emergency fund, financial advisors can ensure you’re ready when the baby arrives.
- Diversifying your investment: Financial advisors can help you determine how you should invest given your risk tolerance.
- Paying for college: Education is expensive. A financial advisor can help you plan how to cover some or all of the costs.
- Tax planning: A financial planner can help you find ways to avoid paying unnecessary taxes on your investments and income. They can also help you understand the tax implications of certain decisions.
- Estate planning: Financial planners can help you get your financial affairs in order so your assets are only minimally taxed after your death, leaving more to your loved ones.
Some financial planners also sell investments, insurance or other financial products.
» MORE: How to manage your money
How to find a financial planner
There are a few ways to find the right financial planner for you, depending on where you’re at in your finance journey and whether you prefer in-person or online service.
For example, if you are able to file your taxes on your own and are just beginning your investment journey, you may want to start with a robo-advisor or online advisor. These will be more affordable as you get started with your financial goals.
Since anyone can call themselves a financial planner, it’s a good idea to double-check qualifications and credentials.
If you want a local financial planner, you’ll need to look up financial planners in your area. A Google search should return some options. Or, if you’re open to an online financial planner, check out a financial planner database. You may want to filter by the type of service you need most to limit the results. You can also search for certified planners on the CFP website.
You can also reach out to your network. Ask the folks whose finances inspire you if they have a financial planner they recommend.
Once you’ve found a handful of potential financial planners, double-check their history on BrokerCheck to avoid costly mistakes.
Questions to ask a financial planner
If you are ready to meet with a planner, here is a list of questions to get you started:
- What are your credentials and qualifications?
- Can you provide references?
- What type of clients do you typically work with?
- What is your fee structure?
- What are my all-in costs?
- How will our relationship work?
- What is your investment philosophy?
- What investment benchmarks do you use?
- Who is your custodian?
- What tax hit do I face if I invest with you?
- What is your area of expertise?
- Will you act as my fiduciary?
- What services can I expect?
- How will we settle disputes?
How much does a financial planner cost?
A financial planner's costs depend on the planner’s experience, credentials and location. It will also often depend on the complexity of your finances. That said, there are lots of options for anyone across the financial spectrum to work with a planner.
“One common misconception is that financial planners are only available to the wealthy,” said Jacob Gardner, CFP and co-founder of Defining Wealth.
“The truth is there are many, many financial planners out there willing to work with younger, less wealthy clients on an hourly, annual or subscription-type flat fee. Younger and less wealthy folks’ ability to get advice early on in their financial journey is a crucial win for the modern investor. It allows them to set a firm financial foundation for the rest of their lives that they can build upon as they accumulate assets and eventually retire.”
There are normally two ways that financial planners receive compensation: fee-based and commission-based. Some planners will do a mix of both fee-based and commission-based payments.
Fee-based financial planners
Some financial planners who charge AUM charge 0.25% to 1% per year of the client’s assets that they manage. Robo-advisors can charge 0.25% of your assets annually without a minimum balance requirement.
Hourly planners charge $200 to $400 an hour. The more complex your finances are, the more you’ll likely have to pay.
The average cost for a stand-alone flat fee for a project done by a financial planner is around $2,500.
Commission-based financial planners
Note that if a financial planner earns a commission, this means they aren’t a fiduciary. A fiduciary is required by law to put their client’s needs above all else, including the planner’s own benefit. It’s always preferable to work with a fiduciary financial planner.
Financial planner vs. advisor
Financial planners and financial advisors are similar, but not the same. That’s because not every financial advisor is a financial planner.
While financial planner is a broad term that encompasses many finance professionals, financial advisor is an even broader term. It includes anyone who advises people on their finances, like a trust officer, private banker or tax consultant.
Financial advisors are often used for short-term or more targeted financial needs, such as managing investments, arranging insurance coverage or acting as a stockbroker. Financial planners often provide a more holistic service that’s focused on your overall goals and financial needs.
FAQ
What is a fiduciary?
A fiduciary is an individual or organization entrusted with managing assets or finances for someone else. They have a legal obligation to act in the best interest of the individual or entity. The decisions they make can include prioritizing their client’s best interest over their own, like not accepting payments from third parties.
Are all financial planners fiduciaries?
No, not all financial planners are fiduciaries. Fiduciaries are legally obligated to act in the best interest of their clients, whereas some financial planners offer a suitability standard. This means they can provide recommendations that are suitable for a client’s situation. It’s smart to clarify if a financial planner is a fiduciary before paying for their services.
What is an AUM fee?
An AUM fee (assets under management fee) is a monetary charge based on the total amount of assets the financial planner or advisor manages for a single client. They use this percentage as a way to align their compensation with their client’s best interest, as the more their client’s investments grow, the more they’re paid, benefiting both parties.
What should a financial plan include?
A financial plan should start by outlining the financial goals and objectives of the individual, including long-term and short-term goals. From there, you and your planner can include investment, retirement, tax and estate planning alongside a budgeting and cash flow analysis, debt management and insurance reviews. Financial plans should be periodically reviewed and adjusted to meet changing markets and new or shifting goals.
Bottom line
A great financial planner will help you determine your financial goals, create a plan and execute to make your goals a reality. Working with a financial planner who isn’t certified could put your finances at risk, so make sure to check their CFP status before working with them.
While not everyone needs a financial planner at every stage of life, the more complex your finances are, the more advisable it is to get a certified financial planner involved.
Article sources
- Charles Schwab, “ Schwab Intelligent Portfolios .” Accessed Sept. 14, 2023.
- Betterment, “ A better way to invest .” Accessed Sept. 14, 2023.
- NAPFA, “ Why NAPFA? ” Accessed Sept. 14, 2023.
- Certified Financial Planner Board of Standards, “ The Standard of Excellence .” Accessed Sept. 14, 2023.
- BrokerCheck, “ Why Use BrokerCheck? ” Accessed Sept. 14, 2023.
- AARP, “ Can You Afford a Financial Planner? ” Accessed Sept. 14, 2023.
