You’ve likely heard the terms ‘financial consultant’ and ‘financial advisor’ used interchangeably. These broad job titles both apply to professionals who help their clients (individuals and organizations) understand their assets and manage their money.
Technically, there is no legal distinction between financial consultants and financial advisors. On the surface level, they achieve the same goals. However, there are some key differences.
What Is a Financial Advisor?
Financial advisors provide advice to individual clients on how to achieve their unique financial goals. This often looks like creating a personalized financial plan, accounting for the client’s current financial situation, risk tolerance, and financial goals. They typically help with retirement planning, investment portfolios, estate planning, and insurance planning.
They can also offer investment products like mutual funds and annuities. Financial advisors can receive a commission on the sale of these products, but they still must abide by fiduciary duty–meaning that they must provide professional advice that is within their clients’ best interests.
What Is a Financial Consultant?
Freelance financial consultants, on the other hand, provide advice on finance to a wider range of clients–non-profits, government agencies, and businesses, for example. They are hired to provide a wide range of financial planning services, including tax planning, risk management, and business planning.
Financial consultants can provide insights and services to individuals, but it’s more common for them to provide their expertise to a larger scope. They can help organizations and individuals develop budgets, create plans for reducing debt, and provide advice on risk management, and tax planning services.
What’s the Difference?
When you consider that everything a financial advisor provides can also be offered by a financial consultant, it feels like the line differentiating the two is very thin. That’s because it is. The difference is truly a ‘devil in the details’ situation. Let’s explore what really makes these two positions differ:
Licensing Requirements
While it isn’t required for financial consultants or advisors to have licensure or credentials, financial consultants more commonly have them. The most common designation for either position is the certified financial planner (CFP). Financial consultants can also pursue a chartered financial consultant (ChFC) designation.
Additionally, some of the activities required for both positions require specific licensures. Financial consultants generally pursue these so they can offer a wider range of services to their broad scope of clients. This includes a Series 7 license, which allows them to sell securities and facilitate securities transactions.
Services Offered
Financial advisors will generally gear their financial planning towards individuals, offering a more personalized experience for their clients. These services focus on:
- Retirement planning
- Investment portfolio management
- Estate planning
- Insurance planning
On the other hand, financial consultants will provide a more comprehensive range of services. This includes risk management, business planning, and tax planning. They can still provide the same services as a financial advisor.
Length of Engagement
Due to the demands of their typical clientele, the average span of engagement with a financial advisor versus a financial consultant varies. Consultants typically provide services to a client over a limited span of time, such as a contracted consultancy with a local government agency or assisting a business owner with a one-time sale of its enterprise.
Advisors generally work with clients over an extended period of time, especially in situations where they manage the stock portfolio for their clients or help clients with long-term goals, such as saving for college funds or retirement.
Bear in mind that these aren’t hard and fast rules, but general tendencies between the two roles.
Compensation Structure
The cost of hiring a financial advisor or financial consultant can be complicated, as hiring any role in finances can vary. There are a multitude of compensation structures that both roles utilize: commission-based, fee-based, or fee-only. While there are other types of compensation arrangements, they all generally fall into one of those three categories.
Commission-based compensation is the most common, where compensation is based on a percentage of the sale price of a financial product. They do not charge clients a flat fee and instead receive compensation based on the products they are able to sell you.
Fee-based compensation sets a fee schedule and may include commission-based products. The advisor or consultant may receive ‘referral’ or ‘soft-dollar’ fees from third parties in addition to the set fees they charge you. Fee-only advisors and consultants do not receive any commissions or third-party fees and instead charge an annual fixed percentage fee based on the assets under management (AUM) or a fixed-dollar retainer fee.
Financial advisors will most commonly charge a fee for their services in a fee-based compensation, and make additional income with the commission from the sale of financial products. Financial consultants will generally charge a flat fee in a fee-only structure, meaning they do not earn commissions on the sale of financial or investment products.
The Bottom Line
Financial advisors and consultants are very similar positions, and the differences really come down to the tendencies common for each. Financial consultants typically seek accreditations and licenses, operate on a fee-only structure, and work in shorter-term contracts, but this isn’t always the case.
Financial advisors generally charge a fee-based compensation rate eligible for commissions, work on long-term projects with clients, and don’t need licensing or credentials for the majority of their work.
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