Table of Contents
What does a financial advisor do?
Types of financial advisors
Benefits of a financial advisor
Frequently asked questions about financial advisors
How to choose a financial advisor
Jun 21, 2022
5 min read
Financial advisors are professionals who are upheld to fiduciary responsibility who make personalized decisions to help you reach your investing goals.
Financial advisors are professionals who make personalized decisions to help you reach your investing goals. They are upheld to fiduciary responsibility, so they’re required by law to act in your best interests. Some financial advisors specialize in a specific area, like investments, while others provide A-to-Z financial planning, like money management.
The role of a financial advisor varies. In general, they devise a plan for making financial decisions. Financial advisory services include:
Some financial advisors only provide guidance in one area, such as investments, while others can help you navigate life transitions, like starting a family.
To get started, you typically hop on an introductory call so that you can get to know your advisor and vice-versa. Then you fill out a questionnaire designed to provide a clear picture of your finances, from income to financial obligations, such as child support and student debt. Through a series of meetings, advisors devise a course of action. You typically meet your advisor once a year to discuss your progress.
Investment advisors offer investment advice or detailed analysis around securities. They may also manage investment portfolios and carry a Certified Financial advisor (CFA) designation. Financial planners, money managers, and investment consultants are different types of investment advisors.
Robo-advisors are online platforms powered by artificial intelligence and algorithms that provide financial guidance based on your profile, such as your risk tolerance and financial goals.
Brokers perform trades for clients. There are two main types: discount brokers, which feature low fees, but don’t offer investment research; and full-service brokers, which provide investment advice and recommendations based on research. If you buy or sell securities through a broker, they usually charge fees and/or commission. Full-service brokers typically charge between 1% to 2% of a client's managed assets, while a discount broker has lower fees and commissions. Depending on the platform, trades can cost anywhere from $5 to $20. Some offer no fees and commissions for trades, with no account minimum.
Certified financial planners, or CFPs, met education and training requirements, and passed a rigorous exam. They advise on retirement planning, tax strategies, insurance, income and estate planning. Although some types of financial advisors focus on investments or building wealth, CFPs focus on the lifestyle someone aspires to have and how to attain it.
Asset managers oversee your investment portfolio. They usually work with institutions and those with a high net worth. An asset management company may charge a minimum annual fee of, say, $5,000, so you'll probably need a portfolio worth at least $500,000. An asset manager, such as a mutual fund manager, typically earns 1% of total assets under management.
Wealth advisors may help with estate planning, managing risk, and capital gains taxes, as well as retirement planning and investing. They tend to work with individuals with $1 million or more in liquid assets; high-net-worth individuals with $5 million to $30 million in liquid assets; or ultra-high-net-worth individuals with more than $30 million in liquid assets.
A friend or family member may have financial know-how, but their advice may be limited—and biased. A financial advisor’s job is to provide unbiased advice that helps you reach your money goals.
Financial advisors can point you to tax-saving strategies that align with your goals.
A financial advisor can help you avoid common money pitfalls or make course corrections if your investments are underperforming or losing money.
A professional can help you understand the role insurance plays in protecting your assets. An advisor may also point you to services and products that could be a good fit.
If you're working with a certified financial planner, you can expect them to help you drum up a financial plan. Because they have fiduciary responsibility, they are required by law to give recommendations that serve your best interests. They will also draft financial plans or make recommendations based on your current situation, not where you hope to be. What doesn't a financial advisor do? Tackle habit formation and accountability, such as learning to budget.
Finding the right financial advisor means hiring someone who can best serve your needs without breaking your budget. Experts recommend vetting your options and getting to know the financial advisor before picking one.
Financial advisors are commission- and fee-based. That means financial advisors earn commissions when clients buy financial services or products. Fee-based financial advisors charge a flat fee, which may be a monthly fee or a percentage of assets under management.
Robo-advisors typically charge a flat annual fee of 0.2% to 0.5% of your account balance, whereas human financial advisors charge annual flat fees of 1% to 2%. If the financial advisor has a commission-based structure, they may charge more.
A financial planner helps you maintain and achieve a certain lifestyle. Other financial advisors devise a specific financial plan tailored to a certain area, such as investing or taxes.
A strong working relationship with a financial advisor requires trust and transparency. You’ll also want to find the right advisor for your needs, as some focus on families, high-net-worth women, or small business owners.
Beyond that, experts suggest vetting credentials. If you’re considering hiring a CFP or a CFA, you can check the professional association (i.e., the CFP Board and CFA Institute) to make sure they’re in good standing.
Investment and insurance professionals must be licensed with the Financial Industry Regulatory Authority (FINRA), U.S. Securities and Exchange Commision (SEC), your state insurance regulator, or state securities. Tools such as FINRABrokerCheck, SEC Action Lookup or your state securities regulator can also help you do your due diligence.
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