What is the difference between financial planning and financial advice?
Financial Advice offers an exciting and potentially lucrative career for anyone who is good with numbers and enjoys working with people. If you’re thinking of becoming a financial adviser, you may have also seen the term ‘financial planner’ used and wondered if there is a difference between the two terms.
The use of the title ‘Financial Planner’ is restricted in many countries but in the UK, any financial adviser can also use the term financial planner.
However there are actually several key differences between financial advice and financial planning, from the services they provide to the way their fees are structured. In this blog post, we’ll look at some of the differences between financial planning and financial advice.
What is the definition of financial advice?
Financial advice is a term which refers to recommendations provided about a specific financial investment. The recommendations will be based on each client’s own personal circumstances, financial goals and attitude to investment risk.
Financial advisers give advice on managing money, which could include buying or selling shares in a particular company, arranging insurance or investing in a personal pension. They tend to focus on a single specific issue rather than creating a long-term plan.
A fee will usually be charged for providing financial advice and these fees should be clearly explained before any recommendations are made. Financial advisors usually charge a percentage fee, which is usually around 2-3% of the value of the client’s investment.
Who can give financial advice?
Only firms and advisers who are authorised by the FCA (Financial Conduct Authority) can provide financial advice in the UK. All financial advisers must hold an FCA-approved financial advice qualification such as the Diploma for Financial Advisers (DipFA) and will be listed on the FCA’s Financial Services Register. This shows that they are approved and regulated by the FCA and their clients will be protected by the Financial Ombudsman and the Financial Services Compensation Scheme in the event of things going wrong.
Financial advisers may work within a company or for themselves on either an independent or restricted basis. Independent financial advisors will offer unbiased advice based upon a comprehensive analysis of the market and can not allow themselves to be influenced by any product providers. Restricted financial advisers may offer advice on one specific area such as pensions but look at the whole of the market, or provide advice on all providers of one type of product such as unit trusts.
What is financial planning?
Whereas financial advice provides recommendations to help their clients meet specific objectives, financial planning tends to be more concerned with long term goals.
Financial planning aims to give the client a clear picture of their financial future, helping to put them in control of their finances. The financial plan that the client receives will show them their current financial situation, what their end goal is, and a strategy to help them get there. This may or may not include recommendations for specific products such as investments or pensions.
What is the role of a financial planner?
A financial planner will help their clients to understand why they want to achieve these goals, what plans they need to make and how much money will be needed to reach their targets.
They ask questions about a client’s approach to finances and other personal matters which will allow them to build up a more detailed understanding of the client and provide them with a personalised financial plan.
As with financial advisers, financial planners are regulated by the FCA and need to hold an FCA-approved financial planning qualification. However they tend to charge a set fee for their services rather than working on a variable fee basis. Financial planner fees are usually between £1000 and £3000 on average and will generally include the cost of setting up any financial products.
Which to choose: financial planner or financial advisor?
People who already know that they simply want to set up a pension or ISA would be better off working with a financial adviser. But clients who want someone who can help them take control of their finances and plan for the long term may prefer to work with a financial planner.