Financial Planner - Overview, Roles and Duties, Legal Requirements (2024)

What Is A Financial Planner?

A financial planner is a professional who helps people manage and make the best use of their money to achieve their dreams and goals. This can include saving for college, investing in retirement, or getting the most out of an insurance policy. They also help clients with taxes, wills, trusts, and estate planning.

Financial planners, also called financial advisors, help people achieve their long-term goals. They are usually licensed by the state in which they live. Their job is to help their clients plan for and execute long-term objectives.

They usually specialize in tax, wealth management, or retirement planning. Financial advisors, a broad category that includes advisors, includes stockbrokers, money managers, and insurance agents.

Financial planners work with people who want to improve their finances or the finances of an institution, such as a bank, an insurance company, or a wealth management firm. For example, a financial planner can help you manage savings for retirement, invest in your child's college tuition, or plan for your estate after death.

Certified financial planners are financial planners who hold the CFP® designation. Accredited financial planners can be members of theNAPFA, the National Association of Personal Financial Advisors in the US, or theEFPA, its European counterpart.

Legal and Educational Requirements to Become a Financial Planner

Technical competence and client relationship management are essential for financial planners. In addition, they need to demonstratecritical thinking,problem-solving, andexcellent interpersonal skills. They should also be able to network and build a brand image.

CFPs are required to abide by strict standards. They must follow a code of professional ethics.

Financial planners must follow theISO 22222:2005standard, which defines the financial planning process and the professional’s ethical behavior, competence, and experience.

Academic Requirements and Background

The candidate for this role is usually required to have abachelor’sorhigher degreefrom an accredited university or college, whether in the US or internationally, especially when applying for a designation like the CFP.

If the candidate doesn’t have the required academic degree when they register for the CFP program, they must complete their studies within 5 years upon passing its examination.

The CFP program offers candidates different ways of obtaining the designation depending on their education and professional accreditations. We look at it in more detail below.

The CFP® Program

Candidates who have professional designations or credentials may be eligible to enroll in theAccelerated path program, which offers a fast track to obtaining the qualification.

Similar to checking the university or college qualifications, the CFP Board will verify and approve the professional accreditations and designations of the candidates. In addition, the following qualifying charters allow students to pursue the Accelerated path program:

• Certified Public Accountant (CPA)
• Chartered Financial Analyst (CFA®)
• Chartered Financial Consultant (CHFC) - The Chartered Financial Consultant is a U.S-based professional designation. The charterholders must have relevant 3-year professional experience, complete the studies program, pass the examination and take part in the annualProfessional Recertification Program.
• Chartered Life Underwriter (CLU) - Issued byThe American College, the Chartered Life Underwriter is a professional designation considered the gold standard of insurance planning. Aspiring CLUs must have a three-year professional experience within the five years preceding the obtainment of the designation, qualifying 24 semester credit hours, exam completion, and continuous education.
• Licensed Attorney
• Doctor of Business Administration
• Ph.D. in financial planning, finance, business administration, or economics
• CFP® certification from outside the U.S. - The Financial Planning Standards Board affiliate provides the certificate.

CFP® students who have enrolled in CFP Board Registered Programs and completed coursework requirements on or after 1st January 2012 and candidates who qualify for the Accelerated path program must take theCapstone courseor its alternative.

The Capstone course is an extensive financial planning development course to enhance the students’ skills, knowledge, and abilities. The purpose of the course is to test candidates on delivering professional financial planning services.

TheCapstone alternativedemandsthatqualifying students fulfill the CFP Board’s experience requirement. There are two ways of complying with the work experience rule. First, the candidate must have either6,000 hoursof professional financial planning or4,000 hoursof apprenticeship that meets the criteria.

The CFP® Exam

An essential part of the process, the CFP® exam, is the final step before obtaining the designation. Students can register for the examination before they have completed coursework requirements. As long as they submit proof of completed courses by theeducation verification deadline, they can sit for the exam.

The exam takes place three times a year. The students can choose one of the three exam sessions - in March, July, or November. It tests the knowledge of its candidates with 170 questions, which cover the following topics:

• Professional conduct and regulation
• General principles of financial planning
• Risk management and insurance planning
• Investment Planning
• Tax planning
• Retirement savings and income planning
• Estate planning
• Psychology of financial planning

The questions comprisestand-alone,short scenarios,andcase study questions.

The exam takes 6 hours: 3 hours for the first 85 questions and 3 hours for the second half.

Like other financial exams, the CFP test requires a registration fee of $925. The earlier registration fee is set at $825. A late registration, typically within a month before the date, costs $1,025. The registration fee gives the student access to the CFP Board practice exam. This is a sample set of 170 questions to help with preparation.

Good-To-Have Qualifications for a Financial Advisor

Aside from the qualifying professional credentials mentioned in the Accelerated path program, a certified financial planner could benefit from other professional designations outlined below:

• Financial Risk Manager (FRM®)- The accredited financial professional understands risk management concepts and executes risk management strategies.
• Chartered Alternative Investment Analyst (CAIA)- The holder of this charter is knowledgeable and competent in providing advice on alternative investments.
• Chartered Investment Manager (CIM)- Available in Canada only, the CIM designation is given to a financial professional who has experience in investment management, more specifically portfolio management, and passed the relevant examination.
• Chartered Investment Management Analyst® (CIMA®)- The CIMA®certification is the leading investment education accreditation for client-facing advisors.
• Chartered Investment Counselor (CIC)- The CIC is an investment advisor recognized and authorized by the Investment Advisor Association (IAA). Chartered investment counselors can be very often portfolio managers.
• Enrolled Agent (EA)- This is a tax specialist authorized by the federal government to represent taxpayers before the Internal Revenue Service (IRS).

How To Choose a Financial Planner or Financial Advisor?

Choosing a financial planner or advisor can be challenging. If you are new to the idea, it can often seem overwhelming. However, depending on your location, you can check theNAPFAandEFPAdatabases to find a certified financial planner near you.

First, before you start, you need to understand how financial planners and advisors make money. Their compensation, including different fees and commissions, is explained below.

Fee and Compensation Structure

Let us take a look at the fee and the compensation structure below:

1. Commissions

A financial advisor can receive a commission for the products they sell. As a result, they can be incentivized to sell financial products that offer higher commissions for them but are not appropriate for the client.

Commission-based financial advisors are likely to act more in their interest than in the interest of their clients. Hence, it is essential to ensure that the advisor you are looking for does not obtain any fees or commissions from anyone other than yourself to ensure no conflict of interest.

For instance, if an individual invests $5,000 in a mutual fund with an upfront fee of 4%, the advisor would get $200($5,000 x 0.04), and the money that will go into the fund will be $4,800. This upfront fee is a characteristic offront-load mutual funds. This is a one-off fee. Generally, it can range between 3% and 6%, and it decreases when a more significant amount of money is invested.

2. Asset-based fees

This fee is usually set around 1%, but it could also be lower or higher than planners get based on total assets under management (AUM). The more critical the account or the portfolio, the bigger the payoff for the advisor. Some financial advisors may set minimum account requirements.

The asset under management fee structure incentivizes advisors to focus on a larger pool of investors than favoring a specific financial product that generates a high commission.

Typically, big financial institutions boast AUM in the hundreds of millions or billions.For example, Bridgewater Associates, the leading hedge fund, manages $150bn as of 2021. While the top-ranking asset manager, BlackRock, has $9.496 trillion worth of assets.

3. Hourly, monthly or annual fees

These can be flat fees that your advisor can charge. Typically, the hourly rates are a few hundred dollars, while the annual cost could be a few thousands.

4. Commission and fee

This fee structure is a hybrid compensation model, which combines the charge for AUM and the fee for selling a product, such as life insurance.Once you understand how these financial professionals make money, you can discuss this topic with your chosen advisor.

Fiduciary vs. Non-Fiduciary

It is important to know the difference between fiduciary financial advisors and non-fiduciary professionals. One of the key distinctions between fiduciaries and non-fiduciaries is how they earn money.Fiduciaryfinancial advisors arefee-onlyprofessionals.

They don’t receive commissions for recommending a product to a client. Instead, a fiduciary will document the process and the decision-making.

As they receive fees from the clients, they put their clients’ interests first. Therefore, their advice does not have a conflict of interest between their own and their client’s interest.

On the other hand, non-fiduciary advisors establish less rigorous and detailed suitability criteria for their clients.Non-fiduciariesusually receivecommissionsfrom the products they recommend (or sell).

Another key distinction between these two groups of advisors is the ethical obligations. A fiduciary must follow therule of loyaltyandthe rule of caretowards their clients. These principles-based rules guide and influence the relationship between the advisor and the client. Disclosure of conflict of interest is mandatory for a fiduciary and not required for non-fiduciaries.

The client’s best interest is major in the fiduciary’s duties. The SEC’sRegulation Best Interest, also known as Reg BI, outlines the four principles - care, disclosure, conflict of interest, and compliance - that help an advisor act in a client’s best interest. Failure to comply with this regulation can trigger fines, cease-and-desist orders, and even financial fraud charges.

The Questions You Can Ask Your Advisor

Once you have identified your needs and goals and know more about the types of advisors and how they’re paid, you can prepare for the meeting with them.

Choosing an advisor is no small task. Imagine the risk that comes with choosing the wrong advisor. The difference between a good and a bad advisor might mean the difference between having a happy and early retirement to pursue your dreams as opposed to having to work until you drop.

It would be best if you asked them all the questions you may have to help choose the best advisor who acts in your interest. Below are a few questions that can help you choose the right financial planner.

• What is their educational background?
• What is their experience as far as your goals and needs are concerned?
• How much time per day would they dedicate to your financial planning?
• What types of services do they provide?
• What are their fees, and how do they charge for their services?
• As a client, are there other vital qualifications to you, and how do those qualifications factor into your decision-making process?
• Are they fiduciary?
• How are you going to work together?
• Are they independent?
• What is their investment philosophy?

In addition, it is crucial to establish an open and trust-based conversation with your financial advisor, who will likely ask you questions about your financial situation - work situation, home, outstanding debt, assets, spending habits.

If you experience any adverse event, it is important you should speak to them about it. The initial strategy may not be suitable anymore and may need to be reviewed based on changing circ*mstances.

The Roles and Duties of a Financial Planner

Financial planners usually have a wide range of responsibilities. However, their primary role revolves around helping clients achieve their long-term goals by properly utilizing and investing their earnings.

They start by setting out a strategy to achieve these goals. Some of the most important duties include:

• Advising and educating clients on saving and investing, taxes, wills, trusts, estate planning.
• Providing tools for budgeting and planning.
• Helping manage debt.
• Connecting with other professionals to maximize client benefits.
• Supporting clients during economic downturns or transitions.
• Organizing and attending client meetings.
• Helping build long-term wealth and create an appropriate plan.
• Assisting with asset allocation and portfolio construction.
• Managing risk.
• Wealth management.

The Personal Financial Planning Process

The first step in a financial planner’s process is establishing and specifyingthe advisor-client relationship. Knowing how you are going to work together, cooperate and build trust is vital.

After that, the advisor will take an in-depth look at your unique situation. This includes assessing what you want to do with your money and how much time you have to achieve the goal. Next, a financial advisor willlookat your financial situationusing factors ranging from your income and job conditions to liabilities and assets. They may also ask you to provide bank statements.

The next step is todetermineyourgoals and priorities. Knowing what those are will help you better prioritize the different financial decisions you need to make. The conversation that is part of the process can touch on lifestyle choices or even retirement preferences.

After this, it’s important toidentifyprecisely where your money comes from, yoursources of income, including other investment accounts that you may have, and what you have planned for your future. This helps the planner know which type of investments or retirement plans would be best for you.

Once these steps are complete, financial planners usuallydevelop and implement an investment policy statement (IPS)that is unique to you and will help you achieve your goals while meeting any specific budget constraints that may exist.

As part of the working relationship with your planner, you will have anannual review meeting. As the name suggests, an annual review meeting is a meeting to discuss what has been achieved, whether the strategy is still viable and what lies ahead. During the annual review meeting, you can discuss the following points:

• Review the plan and modify it if necessary.
• Assess and evaluate the investment strategy and its performance.
• Consider any positive (or negative) tax implications.
• Income protection.

The Future of the Financial Planning Industry

According to the U.S Bureau of Labor Statistics, financial advisors as a profession will grow by 5% in the next decade, which is below the average of all occupations.

This doesn’t imply that the role of the financial advisor has become obsolete. More importantly, the significance of in-person interaction is still very valuable even if robo-advisors have started to proliferate. This is important for the relationship between the advisor and their clients.

In addition, as demographics shift and change globally, people will still need advice on their finances and how to create and maintain wealth. This is particularly relevant when unexpected events, such as financial and health crises, occur. With an aging population, the demand for protecting assets and navigating complexities around the estate, taxes, and transfer of wealth becomes even more important.

Retirement accounts and insurance policies will continue to see more money flowing to them as they are designed to protect against risky events in life. This increase in demand will create a need for financial planners going forward.

Financial Advisors: Working Hours and Salary

Financial advisors work at least 40 hours per week. Their work-life balance fares better than other financial professionals, such as investment bankers.

The job of a financial advisor is generally well-paid. As reported by the Bureau of Labor Statistics, the median salary was $89,330 in 2020. Depending on their skills and their client base, some professionals can earn well above $150,000 a year.

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