What Is a Financial Advisor?

Whether we like it or not, money can be complicated. And it can be an even harder nut to crack when you have more of it. Planning for retirement, managing investments, and handling taxes are just a few of the challenges you’ll face.

As your wealth grows, making informed decisions becomes critical. This is why it’s helpful to have a financial advisor in your corner. They offer valuable expertise and insights to help you navigate the complex world of personal finance. In this article, we’ll explain what an advisor does, how to select one, how much they cost, and more.

What Does a Financial Advisor Do?

Financial advisors provide guidance on how best to manage your money and accomplish your short- and long-term goals. They’re often well-educated individuals with a deep understanding of today’s financial landscape. They may either work independently or for a larger company.

Advisors generally offer services to assist with the following:

• Investment management
• Retirement planning
• Estate planning
• Education planning
• Tax planning
• Business planning
• Saving strategies
• Paying off debt
• Charitable or philanthropic donations

When you hire a financial advisor, you can expect to have discussions about your situation and needs. They’ll ask you some questions about your total assets, expenses, and how much debt you have. After this, you’ll work together to develop a plan that works best for you and your level of risk tolerance.

According to the Financial Industry Regulatory Authority (FINRA), the term, “financial advisor,” often refers to a broad spectrum of professionals who offer financial advice to clients rather than an official title. While anyone who offers advice can technically be called an advisor, the most reputable carry a fiduciary duty. In simplest terms, this is when an advisor follows an ethical standard to work only with your interests and benefit in mind.

Fiduciary Duty Breakdown

Per the U.S. Securities and Exchange Commission (SEC), fiduciary financial advisors must always offer guidance or recommendations without influence from outside sources and do so once they have a “reasonable” amount of knowledge about their client’s financial situation and goals. They must also keep fees as fair as possible and be sure to stay away from conflicts of interest.

Advisors who follow a fiduciary standard are usually registered investment advisors (RIAs) or investment advisor representatives (IARs). Certified financial planners (CFPs) must also act as fiduciaries. Depending on what you read, you may see RIAs and IARs sometimes written with an “e,” like “adviser.” This is how it appears in legal documents or official government materials.

What Is a Registered Investment Advisor?

A registered investment advisor is a finance professional who has registered with the SEC or a state securities agency. This can be either a single person or a larger firm that offers financial guidance or advice. RIAs are regulated by the Investment Advisers Act of 1940 and must uphold the fiduciary duty we mentioned above.

The regulation of RIAs varies by how many assets they have under management (AUM). FINRA says that an RIA must register with the SEC when they have over $110 million AUM. On the other hand, RIAs must register with their respective state agency if they have up to $100 million AUM.

Types of Financial Advisors

There are several types of financial advisors with which you can work. It’s not uncommon for some to specialize in a certain field or offer different services than others. The type of advisor you go with will depend on what you’re looking to achieve with your money.

Here are the different types:

Financial Planners

A financial planner can help you create an effective near and distant future blueprint for your finances. They can assist you with planning your estate, retirement, taxes, and your investments. Much like the general definition of an advisor, a planner will sit down with you and discuss your desires and help you create a viable roadmap.

Generally, high-quality planners receive certification from the Certified Financial Planners Board. CFPs have rigorous training in planning taxes, investments, and retirement, including 6,000 hours of related work experience or 4,000 hours of apprenticeship experience. Most importantly, they also must agree to be a fiduciary.

Investment Managers

An investment manager can help you manage your portfolio and give you advice on how to buy and sell stocks. They use the information you have provided them in your initial meeting to help you put together and maintain a portfolio tailored to your financial situation and goals.

Wealth Managers

Like the other two types of advisors, a wealth manager takes a holistic approach and can help you with various aspects of your finances. You can expect them to lend their expertise with investments, taxes, estates, philanthropy, and more. These types of professionals typically have experience dealing with clients with above-average net worth.

Robo-Advisors

A robo-advisor is an online tool that uses advanced algorithms to provide financial advice and manage portfolios for clients. Because robo-advisors don’t include any expertise or guidance from a human advisor, they’re less expensive. This makes them a good entry-level option, especially if you know you want to build a portfolio but may not have enough assets or money on hand to work with a traditional professional.

Using the same type of information as an in-person advisor (i.e., assets, risk tolerance, debts, expenses, investment goals, etc.), the robo-advisor generates suggestions. It will also allocate assets automatically.

As time goes on, the service will periodically rebalance your portfolio to mitigate risk and ensure it aligns with your goals.

When to Hire a Financial Advisor

If you feel that your wealth and/or financial situation has grown to the point that it’s too much to manage, it’s probably time to hire a professional. You may worry about expensive fees or feel unsure about trusting a stranger to help you plan your future. But, often, advisors can provide valuable peace of mind that you’re taking the right steps.

There are several common scenarios where it makes sense to hire an expert for financial guidance:

• You have a high net worth.
• You want to plan for your retirement.
• You want to plan for your children’s education.
• You own a business.
• You’re not comfortable with taxes or other finance components.
• You’ve gone through a big life change (e.g., marriage, divorce, having children).

How to Select a Financial Advisor

Finding the right advisor can seem like a tall order, especially when there are so many types at varying costs. We suggest starting with a list of what you’re looking for. Then, it’s important to review each advisor against the following checklist:

• Provides the products or services you want. Getting an advisor who aligns with the targets you’d like to set for your money is vital and can provide the know-how you need.
• Has the right experience, education, and credentials. Excellent financial experts have proper certification (e.g., an RIA, CPA, CFP, etc.) and education. Advisors who have registered with a reputable organization must uphold a high standard of trust and ethics and put their clients first.
• Displays transparency in your discussions. It’s crucial to work with someone you trust. Look for someone who is forthright and explains how to reach your goals as clearly as possible.
• Has a reasonable fee structure. Pros usually aren’t cheap. Therefore, you’ll want to find one with the right price and services.
• Has a comfortable mode of communication. Choosing whether you prefer in-person meetings, virtual communication, or no contact at all will decide a lot. For instance, if you don’t prefer to meet with a person, a robo-advisor might be more your speed.

Beyond just being a fiduciary, you should do your due diligence to check an advisor’s credibility. According to Austin Scott, a CFP with Pinnacle Ascent Wealth Management in Washington state, there are a few things you should look at. First, an advisor changing firms often could be a red flag, “There are many reasons why someone may change firms, but you may want to ask them about it. There can be many outside factors motivating one to do this, including monetary incentives, relocations, firm growth plans, clients’ interest and many others.”

Second, you should evaluate the “type of firm” an advisor works at, says Scott. Ask yourself questions like “What resources do they have? Do they have certain quotas or stipulations? Are they limited to certain types of investments, strategies, or products? Can they work with others on your financial team such as your estate attorney or tax planner?” If you have doubts about any of these elements, you may want to steer clear.

As you begin seeking one, we recommend using this free matching tool to find a vetted expert. This can quickly narrow your search and get you the expertise you need.

Cost to Hire a Financial Advisor 

Finance professionals spend significant time, effort, and money learning their trade. They offer professional expertise and advice. However, not all of them are created equal.

More experienced financial advisors, with well-earned reputations, will charge more than newer, less experienced ones. Additionally, not all of them use the same fee structures.

Below is a list of the different types of payment plans financial advisors offer:

Assets Under Management (AUM) Fees

Some advisors (often investment managers) charge a varying percentage based on client assets under management. The AUM payment structure usually operates on a tiered system where people who have less pay a larger fee, while those with a larger portfolio pay a lower percentage. In other words, as the value of a client’s assets grows, they pay less.

Most in-person advisors who use an AUM-based payment plan charge a fee equal to 1% of the assets they’re dealing with.

Flat Fees

Certain professionals charge flat fees for a specific service or range of services. As an example, an advisor may have a flat rate for financial planning services or help setting up your portfolio. However, once you pay that flat fee, it’s unlikely they’ll continue the ongoing management of investments or a broad plan.

Hourly Fees

In other cases, financial advisors may also charge you by the hour for the services they provide. Like a flat fee arrangement, an hourly fee model is typically for a single service or consulting to talk about a specific need, such as retirement or planning taxes.

Retainer Fees

Retainer fees are paid upfront, like a down payment, in exchange for future services. They’re used to set up your relationship, and a portion may be refundable if it turns out less work is required than initially anticipated.

Under this model, payments are typically on a monthly, quarterly, or annual basis and can include investment management or financial planning services.

Difference Between Fee-Only and Fee-Based Advisors

Advisors can differ depending on whether they’re fee-only or fee-based. Whether they’re one or the other can end up informing certain factors, such as their credibility, pricing, and more.

Fee-Only

Fee-only advisors earn a living exclusively from the services they provide. They don’t earn a commission from outside sources for products they recommend to customers. Fiduciaries fall under this category since they must put clients first without exception.

Fee-Based

Unlike fee-only, fee-based advisors have more freedom in how they get paid. They typically earn commissions from the products and investments they help their clients with. In some cases, this can present a conflict of interest, since advisors can recommend investments that could make them more money. This is different from a fiduciary, who must think of clients first.

If you’re interested in hiring a fee-based advisor, you can look up their Form ADV (which they must file with the SEC). This will provide information on the compensation they accept.

Frequently Asked Questions

Are financial advisors worth it?

Yes, in many cases, working with one is worth it. Getting financial advice from a professional can help you discern and reach your goals. They can tailor a plan that works for you. Advisors can also help you gain new insights and save when setting up investments and plans.

Do finance experts have to be certified or licensed?

Financial advisors don’t have to carry certifications or licenses, per se. This is because an advisor is technically anyone who provides financial guidance to another person. However, the best hires are those who’ve registered with official organizations such as the SEC, FINRA, and the CFP Board. These all follow a fiduciary duty.

What happens at a financial advisor meeting?

Initial meetings with an advisor will usually be a consultation. They’ll assess your financial needs and goals. Next, they’ll help you set up a plan. Later meetings will include checking in and monitoring how plans are going. Over time, an advisor should be an invaluable source of support as you try to realize your goals.