What is Financial Planning?

The term financial planner is used quite broadly to describe professionals who offer planning services related to wealth management, retirement, college tuition, estates, insurance and investment products of all kinds. The professionals, who perform financial planning services, are state-licensed investment advisers, certified public accountants (CPAs) and life insurance and annuities sales agents.

Some professionals dedicate themselves entirely to financial planning by earning specific professional designations independent of these licenses. The CFP (Certified Financial Planner) designation offered by the Certified Financial Planner Board of Standards is the best-recognized designation of this kind.

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In all cases, the primary objective of financial planners is to help businesses, individuals, and families identify financial goals and develop plans to help them succeed in reaching these goals.
financial planner on the job

Financial Planners vs. Financial Advisors

Financial professionals often make the decision to describe themselves as either “financial planners” or “financial advisors” based on the way laws are written in the states in which they conduct business. Many states restrict the use of the term “financial advisor” so that it can only be used to describe Investment Advisers registered with either state Securities Divisions or the Federal Securities and Exchange Commission.

Being registered as an Investment Adviser at either the state or federal level legally allows these professionals to hold discretionary authority over client assets and offer specific investment advice. A few states have laws that are even stricter and require those who hold themselves out as “financial planners” to become registered as Investment Advisers as well.

However, this is not very common, and in most cases, individuals marketing themselves as financial planners are not registered as Investment Advisers. Whether or not laws exist specific to the use of these terms, most Investment Advisers who have the legal authority to manage client assets and offer investment advice, will forgo the term financial planner and use the term financial advisor when marketing their services.

Financial planners always work directly with clients to gather data, determine financial goals, develop a plan and then monitor the plan to make adjustments along the way as needed. The difference between planners and advisors most often has to do with the legal authority to execute these plans. Financial advisors are generally the professionals who put plans into action by offering specific investment advice and using the discretionary authority clients give them to buy or sell securities like stocks and bonds, or any other investment vehicle, with the money entrusted to them.

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Becoming an Investment Adviser is an excellent career choice for those most interested in focusing their expertise on financial markets and products. Financial planners are best known for their ability to work closely with individuals and families, and for taking a personal and fully-rounded approach to helping clients achieve their financial goals.

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Financial planners who are not licensed to sell investment products or offer investment advice may be paid a fee for preparing plans, but would then recommend an Investment Adviser to implement these plans. Although operating exclusively as either a planner or an advisor is a viable business model, often a single person fills the role of both planner and advisor, developing the plan and putting it into effect.

Registered Investment Advisers (RIA) and Investment Adviser Representatives (IAR) vs. Financial Advisors and Financial Planners

The term Registered Investment Adviser (RIA) typically refers to Investment Adviser (IA) firms registered at either the state level with state Securities Divisions or at the federal level with the Securities and Exchange Commission. In some states, sole proprietors or principals of IA firms are described individually as Registered Investment Advisers (RIAs). However, RIA is not typically used as a formal designation or professional credential for individuals, but more often refers to a firm that employs investment adviser representatives (IARs).

Investment adviser representatives select specific stocks or bonds for clients based upon the client’s risk tolerance and financial goals and then make recommendations accordingly for them to buy or sell. Some IARs will also deal with alternative investments like real estate and commodities. IARs often are given discretionary authority over client accounts and can execute purchases and sales on the behalf of clients. IARs have a fiduciary responsibility to their clients, meaning they are bound by law to make recommendations and transactions that are always in their clients’ best interest.

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As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment adviser firms that manage more than $100 million in total client assets must register with the Securities and Exchange Commission, while those with total assets under management of between $25 million and $100 million would fall under a new category for mid-sized advisors and be required to register with the Securities Division of each state in which it conducts business.

Under the Act, firms that provide advising services that deal exclusively with venture capital funds, private funds, as well as certain foreign advisors, are exempt from SEC registration as long as total funds under management do not exceed $150 million.

What do Stockbrokers do?

Stockbrokers are securities sales agents who typically work with national or regional brokerage firms and are licensed to operate in specified states through each state’s Securities Commission. They operate under the auspices of the Securities and Exchange Commission indirectly through membership with self-regulatory organizations (SROs) like the Financial Industry Regulatory Authority (FINRA).

Stockbrokers are legally allowed to make general recommendations to clients on which securities to buy or sell based on their industry expertise so long as the final decision to buy or sell is made by investors themselves. They are bound to the suitability standard, which requires them to make recommendations that are appropriate based on their clients’ age, risk tolerance and financial standing. In addition to having the ability to execute buy and sell orders for individual stocks and bonds, they also deal in a variety of financial products that include mutual funds, annuities, investment trusts and commodities.

Life Insurance and Annuity Producers

Insurance sales professionals often become trusted financial planners. Life insurance is a necessary part of any complete financial plan as it provides financial security to beneficiaries in the event that the family provider dies early. The other products insurance producers offer, like annuities or long-term care insurance, also can help clients establish retirement income and avoid costly medical expenses. In addition to insurance products, they may also help clients select mutual funds or other investments to complete their clients’ portfolios. The compensation varies for these financial professionals. Some may draw a salary, but most will be compensated through commissions and fees paid by clients.

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Insurance sales professionals are licensed by the state Office of the Insurance Commissioner specific to the state in which they operate. Most state regulatory bodies require pre-licensing courses and state-specific life insurance line of authority exams to be completed prior to licensure.

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Certified Public Accountants

Certified Public Accountants (CPAs) provide accounting and advisory services to businesses and individuals. CPAs are particularly well-positioned to act as financial planners because of their knowledge of finance in general, as well as their familiarity with their client’s personal finances.

CPAs are licensed by the State Boards of Accountancy specific to the state in which they choose to practice. Although there is some variation in licensing requirements between states, they all conform to the general requirements of the Uniform Accountancy Act (UAA), which requires these professionals to have a bachelor’s degree at minimum and at least 150 semester hours of academic credit. Additionally, they are required to log a full year of supervised experience and pass the Uniform CPA Exam before being licensed.