If you need help managing your money or you’re not sure whether you’re on track for a major life goal, a financial advisor can be an important ally.
A financial advisor is a professional who helps you create and implement a financial plan, manage your finances, and monitor your progress as you work toward your fiscal goals.
But the term “financial advisor” is a fairly broad one. Financial advisors often hold various licenses and certifications, but there’s no specific credential that someone needs to hold in order to call themself a financial advisor — though many common services financial advisors provide, like buying and selling securities, do require a license. That makes it extra important to vet an advisor and make sure they’re qualified to help you manage your money.
If you’re debating whether to hire a financial advisor and aren’t sure where to start, you’re in the right place. In this article, you’ll learn about the different types of financial advisors, what financial advisors do, how much a financial advisor costs, and how to choose the best advisor for you, including knowing which questions to ask.
There are many different titles a financial advisor can go by, each of which has different requirements. Many of the types of financial advisors listed below work as personal financial advisors, meaning they primarily provide advice to individuals. However, some of the professionals listed below may focus on advising corporations or organizations instead.
When you decide what type of advisor you want to work with, it’s important to understand the difference between a fiduciary vs. non-fiduciary advisor. Many (but not all) financial advisors are held to a fiduciary standard, which means they’re required to act in their client’s best interest. A fiduciary must disclose any potential conflict of interest to the client up-front.
Other types of advisors are only held to what’s known as a suitability standard. That means they’re required to make recommendations they believe are appropriate for their client’s needs.
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An investment “adviser” is paid to provide advice about securities like stocks and bonds. Anyone who provides investment advice (as most financial “advisors” do) must register with either the U.S. Securities and Exchange Commission (SEC) or state securities regulators, depending on the value of assets under management. They’re also required to hold a securities license.
Many investment advisers work for major financial firms. However, an independent investment adviser or independent financial advisor is someone who’s usually self-employed but has met all licensing standards required by the SEC or state regulators. Some people prefer an independent financial advisor when they’re seeking personalized and objective advice since the advisor isn’t connected to any firm or family of funds.
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Brokers and broker-dealers
A broker, broker-dealer, or stock broker is someone who buys and sells securities on their clients’ behalf. Broker-dealers must register with the SEC and are often paid a commission. Their recommendations must meet the suitability standard, but they don’t have a fiduciary duty to their clients. Like investment advisers, broker-dealers must have a securities license.
Just as you don’t need any specific credentials to call yourself a financial advisor, anyone can call themselves a financial planner. However, a certified financial planner, or CFP, is someone who has met the requirements of the Certified Financial Board of Standards, Inc. Some CFPs offer comprehensive financial planning, while others focus on specific areas, like retirement or insurance planning.
A CFP must complete a CFP Board-approved education program, have the equivalent of at least three years of full-time financial planning experience, pass an exam, and follow the CFP Board’s code of ethics. Certified financial planners are held to a fiduciary standard.
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A financial analyst develops investment strategies for companies and clients. The role often involves monitoring economic trends, analyzing financial statements, and developing financial models. Though some financial analysts may serve as personal financial advisors, financial analysts are more commonly employed by large corporations.
A financial consultant performs many of the same roles as a financial planner. Some financial consultants hold the chartered financial consultant (ChFC) designation, which is issued by the American College of Financial Services. ChFCs must complete a series of financial planning coursework and exams and abide by the American College code of ethics.
A wealth manager is a type of financial advisor who specializes in high-net-worth clients, often with investable assets of $1 million to $5 million or more. Though there’s no single credential required to become a wealth manager or wealth advisor, many hold multiple designations like CFP, certified public accountant (CPA), or chartered financial analyst (CFA) credentials.
“Financial coach” is another broad and unregulated term that pretty much anyone can use. Financial coaches offer education, support, and accountability to clients seeking to make informed financial decisions. The National Financial Educators Council provides certifications for coaches to help clients meet financial aspirations.
A robo-advisor is a digital advisor that automates your investments using algorithms. Usually, a robo-advisor asks you a few questions about your goals and risk tolerance and then recommends an investment portfolio of exchange-traded funds (ETFs). Robo-advisors then periodically rebalance your portfolio to ensure your investments are still in sync with your goals.
Many major brokerages offer robo-advisor services, and they’re often significantly cheaper than the cost of hiring a human. Typical robo-advisor fees are 0.25% to 0.9% of assets under management (AUM), making them a good choice for beginning investors.
The types of services a financial advisor provides can vary widely. Some financial advisors provide comprehensive financial planning. Others focus on a specific niche, like investing, retirement planning, or insurance.
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You can also find financial advisors who work primarily with people in specific professions. For instance, you may find advisors who cater specifically to physicians, attorneys, small-business owners, or military members.
Financial advisors can provide a wide range of services, including:
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Assessing your cash flow and making a budget
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Making a plan to pay off debt
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Planning for the financial aspects of starting a business
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Developing an investment strategy based on your goals, risk tolerance, and time horizon
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Evaluating your life insurance and disability insurance needs
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Saving for a child’s college education
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Working on major financial goals, like a home purchase
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Retirement planning, including income and withdrawal strategies
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Tax planning strategies
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Estate planning
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The cost of a financial advisor varies based on their compensation structure. Financial advisors are typically paid using one of the following models:
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Percentage of assets under management (AUM): Many financial advisors charge a percentage of assets under management (AUM), often between 0.5% to 1.5%. So if you had $100,000 under management and your advisor charges a 1% AUM fee, a financial advisor would cost you $1,000 annually.
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Hourly or flat fees: Some financial advisors charge hourly fees, often in the range of $200 to $400 per hour. Others may charge a flat fee for a specific service, like creating a comprehensive plan. However, these arrangements are most common when an advisor provides a one-time or occasional service, rather than an ongoing engagement.
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Commissions: Some financial advisors earn commissions when they sell you products like mutual funds, annuities, or life insurance. Commissions vary based on the type of product. Commission-based fees sometimes attract criticism because they create potential conflicts of interest.
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Hybrid model: Financial advisors may use a hybrid compensation structure that includes both fees and commissions. For example, an advisor may charge you an AUM fee or hourly rate for holistic financial planning services, but they may also earn a commission if they sell you a product.
To choose a financial advisor, first determine what services you want. If you’re looking for ongoing guidance on managing your money, a certified financial planner who offers holistic financial planning may be a good fit.
But if you want advice on a specific topic, you might look for someone who has expertise in that area. For instance, if you’re seeking advice on life and disability insurance, an advisor who holds the chartered life underwriter (CLU) designation may be a good fit, whereas if you need tax planning services, you could look for an advisor with a CPA license.
Consider asking family members and friends if they have a financial advisor they recommend. Some other good resources for finding a financial advisor include:
Make sure you verify any licenses or credentials the professional claims they hold. Use the SEC’s Investment Adviser Public Disclosure search tool to look up any investment adviser’s Form ADV, where you’ll find information like the licenses they hold, years of experience, employment history, complaints, and disciplinary record. You can also check with the issuing organization, i.e., the CFP Board if someone says they’re a certified financial planner or the CFA Institute for CFAs, to verify they’re in good standing.
Consider meeting with a few different financial advisors to find someone you’ll feel comfortable working with. Some questions to ask them:
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What services do you provide?
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How are you compensated, and what are your fees?
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How often will we meet or communicate?
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Will we have a fiduciary relationship?
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What type of client do you typically work with?
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Do you have any disciplinary history?
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Do you consult with other professionals, like CPAs or estate attorneys?
Once you’ve found a financial advisor you want to hire, you’ll both need to sign a letter of engagement. This letter should outline the scope of services the advisor will provide, disclose any potential conflicts of interest, and spell out each party’s obligations.
It’s important to have open communication with your financial advisor. Be sure you’re honest about your finances, including your assets and debts, and that you notify them about any major life changes. If you find that you’re not comfortable talking openly with your advisor, it may be a sign that you should look for a different professional.
What does a financial advisor do, exactly?
A financial advisor may provide comprehensive financial planning and ongoing investment portfolio management. However, some financial advisors provide a la carte specialized services. The scope of services your advisor will provide should be clearly stated in the letter of engagement that both of you sign.
How does a financial advisor make money?
Many financial advisors earn money from fees for their services. Advisors may charge fees as a percentage of assets managed or on an hourly or per-service basis. Some advisors earn commissions on the products they sell, or they earn a combination of fees and commissions.
How much money should you have to hire a financial advisor?
A financial advisor may require a minimum of $50,000 to $100,000 in liquid assets to work with a client. However, many advisors have higher or lower requirements, so be sure to ask when you set up a meeting. Many robo-advisors have significantly lower minimums.
