Financial Planner Vs Stock Broker Who’s Who?

April 20th, 2011 | Posted by Global Investors

I came up with the idea of writing about the difference between a financial planner and a stock broker when I realized during a conversation with one of my clients that the difference is not that obvious. So for those who are dealing with a financial planner or a stock broker, you might not even know what they can do for you and which one you need. I’ll try to make it clear with this article.

Certification

As I have previously mentioned, a Financial Planner needs a CFP certification (which stands for Chartered Financial Planner) in order to call himself a financial planner. To become a financial planner, you need to pass a specific exam. In some places, such as Quebec, you also need a certificate in financial planning before applying to write the exam. This obviously ensures that the financial planner has a minimum knowledge before he starts his job .

In order to become a stock broker, the only certification required is a “trading license”. Depending on if you are in the States, Quebec or somewhere else in Canada, the name of the license can differ but the result is about the same; you buy a big book where it explains what the stock market is, the difference between bonds, equities and other types of investments, etc. Once you have read it, you pass the exam and you get your “license”.
Overall, we can say that the certification to become a financial planner is much harder than to become a stock broker.

What a Financial Planner can do

A financial planner is like a general practitioner doctor. He will cover the 7 fields of financial planning with his clients:

- Insurance / Protection (life, disability, critical illness)

- Legal aspects (marriage rule, divorce, etc.)

- Personal finance (budgeting, financing, etc.)

- Tax optimization

- Investing

- Retirement planning

- Estate planning

In real life, very few financial planners will cover all the fields. Most financial institutions hire financial planners to do investing, retirement planning and sometimes financing. However, when you find a good one, he should go over all the aspects of your personal finance. He should refer you to a specialist for insurance (an insurance agent), estate planning and legal aspects (lawyer, notary) as well as using a tax expert or an accountant when required.

As for investing, most financial planners cannot trade stocks. In most cases, they can build investment portfolios with mutual funds and work with you on your asset allocation. However, they can’t give you stock recommendations or trade for you. Forget the ETF products as well, they are not authorized to trade them (unless they have their broker’s license….)

What a Stock Broker can do

Obviously, the main thing that a stock broker does is… trades stocks . However, most stock brokers are leaving the stock trading portfolio model for investment solutions that are easier to manage for their clients such as:

- Investment baskets (created and traded by their firm)

- ETFs

- Private investing / discretionary investments (with known portfolio managers)

- Even mutual funds!

Why are they leaving the stock trading model? Because, in most cases, a stock broker is always as good as his last trade. Clients are getting very impatient these days and they expect miracles from their brokers. Therefore, they expect them to buy only stocks that will go up….which is obviously impossible. Then, when stock brokers switch to “managed” investing solutions, they create a buffer that gives them more time to “satisfy” their clients. The biggest advantage of a broker is that he has access to all investment solutions on the market. It can be the hottest mutual funds, the latest bond issue or a custom made ETF portfolio; the stock broker can do them all (as opposed to the financial planner).

Who is the best?

The real question should be what are you looking for? A financial planner is very helpful to manage your overall finances as he is the only one with the knowledge to guide you in all the personal finance fields. However, if you are looking to get stock advice or trade ETFs, the financial planner won’t be of a great help. But to be honest, I think that people are definitely overreacting towards the management fees of mutual funds (for funds that are less than 2%). Paying between 1% and 1.75% is not too much to have your portfolio managed by professionals. ETFs are surely interesting but if you don’t know how to trade them, it’s like giving a Ferrari to a 16 year old kid who has never driven…

If you have a strong grasp on your personal finances already, maybe you only need a broker. But then again, make sure you are dealing with a professional. I know amazing stock brokers and some very questionable ones too… as is the case for most professions

In some very rare cases, you will meet a financial planner with a broker’s license. Then, you have basically hit the jackpot .

Some people will tell you that they would rather be on their own…. I’d say it’s a poor answer unless you have a strong financial background and a high interest in managing your portfolio and finances. I believe your finances should be managed by a professional much like you require the help of a dentist to manage your dental care or a doctor for your overall health. It doesn’t mean that you have to close your eyes and blindly follow your financial advisor, but asking him questions and following his lead will surely increase your net worth .

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