Tax planner, financial planner, and financial advisor — what’s the difference between the three? Sometimes a lot, sometimes not much. Each of the three serves in an advisory capacity with regard to at least some, and sometimes all, of your personal financial situation. So which one is best for you and your investment situation?
In truth, there’s a lot of overlap between the three disciplines. This is largely because virtually every area of personal finance is related to all the others.
For example, it would be impossible to establish a viable financial plan without considering the tax consequences, or having a financial advisor to provide specific guidance with regards to investments. What do the three different advisers do, and how to they differ from one another?
A tax planner is generally a professional with specific expertise in the area of income taxation. This can include an accountant, a certified public accountant (CPA), or a tax attorney. In addition to recognized professional credentials, each is involved extensively in both income tax preparation and research.
Their involvement in your financial situation will center very specifically on the income tax aspects of your personal finances.
However, since income taxes encompass such a wide range of financial matters, they will generally have extensive knowledge of most other areas of personal finance as well. This is why a tax planner can often be confused with either a financial planner or financial advisor.
More specifically, a tax planner is someone with detailed knowledge of your personal income tax situation. With this understanding, he or she can not only help you to minimize income taxes in the current year, but can also instruct you on how to reduce taxes in the future.
In fact, the most basic function of a tax planner is to minimize the impact income taxes will have on your overall financial situation.
Financial planners are more general in application, and are likely to work under different labels and in different professions. They often have specific professional designations, such as CFP — certified financial planner — or, RFP — registered financial planner. But they can also be in related fields, such as CPAs and attorneys.
Beyond these very specific professions, the concept of financial planner can get a bit vague. Many people who work in an area of the financial industry often refer to themselves as financial planners. For example, insurance agents may consider themselves financial planners, as the work they do often encompasses investments like annuities, in addition to basic life insurance.
It is probably best to avoid using a financial planner who is industry-specific. This person would naturally tend to favor financial options related to their particular business, rather than a general application in connection with your overall financial situation.
You should never consider someone to be a financial planner if they will be paid a commission or other type of fee to place you in specific products or investments. The financial planner should be a generalist who will recommend — but not necessarily benefit from — the widest possible number of options for you.
What a financial planner does is help you achieve long-term financial goals. They do this by analyzing your current financial profile, helping you to clarify and establish specific goals, and then creating a plan to enable you to reach these goals.
These objectives might also cause a financial planner to be closely involved with your income tax situation, as well as with your investment activities.
If a financial planner is primarily a generalist with regards to your financial situation, a financial advisor’s contribution is usually more specific. Most often, a financial advisor will specialize in investments. The financial advisor can operate either in a purely advisory role — making investment recommendations you can act on — or as a direct manager of your portfolio.
Financial advisors can also work in capacities apart from investments. For example, they may get involved in estate planning, retirement planning, mortgages, or insurance. Most typically, however, you’ll use the services of a financial advisor for a single specific purpose.
Financial advisors can come in all shapes and sizes. For some people, it might be a close friend or relative with above average knowledge of investments. It can even be respected financial advisor on TV or radio, or even an investment newsletter.
What disqualifies each of these individuals or situations as a financial advisor is a lack of accountability. None of these sources will face any consequences if the advice given turns out to be wrong. In addition, they typically don’t have information with regards to the full extent of your financial situation.
Financial advisors are typically compensated for their services either by earning commissions on the products they sell to you, or by charging a flat fee. In general, those who operate on a flat fee should be preferred. This is because they are not being paid to sell you something, but rather to give you sound advice to enable them to retain you as a client.
Do You Need All Three Types of Services?
There’s no question the services provided by all three professionals are very close to one another. Can you select just one professional who can act in the capacity of all three?
This would certainly save you money, but it’s not necessarily the right choice.
Which of the three you’ll need largely depends on the size and complexity of your financial situation. If your income tax situation is fairly complex, then you’ll certainly want to have a tax planner specifically for that purpose.
If you have a large net worth, you’ll want to have a financial planner who will help you chart the big picture course. And if you’re investment heavy, particularly in regard to equities and other risk type assets, you’ll want to have a financial advisor specifically to help you manage your investments.
Have you worked with any of the three professions, a tax planner, financial planner, or financial advisor? Would you recommend using all three, or to try to narrow it down to one or two?