Financial Planner

Financial Advisor

Investment Advisor

Financial Advisor, Financial Planner, Investment Advisor… What do they all mean? Which is right for you?

Hint: you want a fiduciary

The financial industry is full of bright marketing and salespeople, and they have spent years concocting phrases to add gravitas to financial products and their peddlers. In the real world, terms like financial advisor, financial planner, and investment advisor get used interchangeably…. the marketing folks have done their job. In truth, only one of the above terms is legally defined, and only one is innately responsible for putting client needs above their own.

Financial Advisor:

Financial Advisor is a broad term for a participant in the financial industry that advises clients on financial products. A financial advisor might be a financial planner, he might be an investment advisor, but he also might be an insurance salesman. Beware of the insurance salesman calling himself a financial advisor, they wear the same suits, speak a similar language, but the hawk the most expensive and difficulty-to-unwind products on the market. (For the record, I can deduce one circumstance where you might want to buy a plain-vanilla annuity, but more on that in another article.) Insurances products sold as “investments” have a number of problems that limit their value to clients:
1. They are highly expensive.
a. When you buy an annuity or whole-life product, the salesman gets paid a commission up-front, and an ongoing commission as you continue to pay the policy. Obviously, a percentage of the funds you pay towards the contract go to pay the commission.
b. You pay the insurance company to manage your money.
2. They are difficult to unwind. Once you realize the contract is expensive and no longer want to continue, you are subject to significant fees or partial forfeiture of investment returns to cancel the policy.

Financial Planner:

A financial planner is a less broadly defined term than financial advisor but can encompass various professionals. You have probably heard of a Certified Financial Planner, or CFP. Financial planners help prognosticate and guide you through your financial phases and attempt to maximize your savings and asset allocation. Financial planners tend to charge by the hour for their services, they also tend to overcomplicate financial plans. Financial planners focus on asset allocation, i.e. what type of investments you should buy and the ratio you should buy them in. For example, a financial planner might tell you to own 60% stocks and 40% bonds, but they are less likely to tell you to buy specific securities. The type of financial planning you need, depends on your age, wealth, and psychology.

Financial planners have their limits. I think that most financial planners chase synthetic returns and manage client assets to those inappropriate returns. Additionally, excess emphasis on optimizing tax efficiency generates financial plans that are inflexible and erroneously assume that tax law will be similar in the distant future. (In my mind, the best way to deal with tax efficiency is to be tax agnostic – choose flexibility and liquidity over inflexibility and allocate equally to various types of tax advantaged and tax disadvantaged accounts to mitigate future tax law surprises.) Once you have built serious wealth, your financial planners will become lawyers and certified public accountants. The tax consequences on large sums shift orders of magnitude compared to most Americans, and you are going to need specialized tax professionals.

Investment Advisor: 

Investments Advisor is the only statutorily defined term of the three above. The term was codified by the Investment Advisers Act of 1940. Investment Advisors are required to register with the state or federal government and are also required to put client needs above our own. We are fiduciaries and are required to manage your money with prudence and with investments that are suitable for you. Investment advisors value and recommend specific securities to clients, and generally charge a percentage of assets under management. Investment advisors have a few drawbacks. Large established investment advisors generally provide less personal planning advice, as their focus is on securities analysis and portfolio management. Additionally, money management is difficulty, and many advisors struggle to generate returns comparable to the market after advisory fees. 

At Dougherty Financial Planning, we try to mitigate those issues by tailoring your investment portfolio to your specific needs and risk profile. To do this, we need to understand your financial background, employment, demographics, and psychology. We develop these metrics through questionaries and face-to-face meetings and whittle-down the universe of allocations and investments to your boutique needs. Dougherty Financial Planning does not charge or receive any commissions for the purchase or sale of securities. We do receive some soft dollar compensation from our custodian Charles Schwab in the form of access to research reports and trading platforms that we might otherwise have to pay for if using another custodian. Financial Advisor, Financial Planner, and Investment advisors all work in the nebulous industry of finance. Some financial advisors sell insurance with high fees and commission and are not required to act in your best interests. Financial planners focus on the path to a healthy retirement and asset allocation. Investment Advisors are fiduciaries that are required to act in your best interest and focus on managing your money. Each advisor type has its pros and cons, and you should choose the one that best suits your current need.