If you’re thinking about investing or want to get out of debt, you may be considering a financial advisor. But what exactly do they do?
Financial advisors take on many roles in the financial industry, so understanding what they do, what to look for, and, most importantly, if you need one is crucial to your financial future.
What Is a Financial Advisor & What Do They Do?
The term financial advisor is very broad. It covers an umbrella of professionals, including stock brokers, investment managers, and wealth managers. The one thing they all have in common is that they provide financial guidance. Financial advisors can provide a wealth of services, including:
- Budgeting
- Saving for short or long-term goals
- Retirement planning
- Tax Preparation
- Handling inheritances
Think of the term financial advisor as a blanket term for any financial professional providing financial guidance to clients, similar to teachers. They use their financial expertise to teach or guide their clients to make the best financial decisions for their unique situations.
Fiduciary Financial Advisors
When looking for a financial advisor, it’s best to look for a fiduciary advisor because they must work in their client’s best interest. In other words, they must put your financial needs above their earnings. A non-fiduciary isn’t under the same obligation and may provide biased recommendations to earn the highest commissions.
The investments non-fiduciaries suggest must be suitable for you, meaning they can’t be off-the-wall recommendations. However, there aren’t any requirements that they are the ‘best of the best’ for your situation.
For example, if a financial advisor has two assets, they can recommend one that’s perfect for your financial situation but pays lower commissions and another that will work. However, the latter isn’t as good for your situation as the first, but the advisor will earn higher commissions. A fiduciary must recommend the former asset, but a non-fiduciary isn’t under the same obligation.
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Financial Advisor vs. Financial Planner
Financial planners are a category within the scope of financial advisors. As their title suggests, they help you plan your current and future finances.
Financial planners typically evaluate your current financial situation and ask about your financial goals, including short and long-term goals. Some ways they may help include creating a budget, a debt payoff plan, or determining where to save or invest funds to reach your long-term goals.
Some financial planners have specialties, such as tax planning, and some may hold special licenses, such as a certified financial planner (CFP), which may provide more reassurance that the financial advisor is educated and legit.
Financial Advisor vs. Wealth Manager
Wealth managers are another subset of financial advisors. Wealth managers typically work with individuals with a high net worth who already have a diversified and well-performing portfolio. They work with more complex issues, including tax planning, legal services, and legacy planning.
Most wealth managers have a minimum amount of assets an individual must have to work with them. It’s not unheard of for wealth managers to require $1 million or more to work with them.
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Financial Advisor Responsibilities
- Budgeting – A financial advisor can help you budget and achieve your goals for things like vacations, buying a house or car, or saving for emergencies. You’ll learn to make sense of your income and expenses and maximize your earnings.
- Investment advice – Knowing your goals, risk tolerance, and timelines, financial advisors can suggest specific investments or guide you to the best investment strategy to reach your goals.
- Tax planning – Investing and saving can help you reach goals, but tax liabilities can diminish your earnings. Tax planning services can minimize your liabilities and maximize your profits.
- Debt management – Paying debt down or off can be overwhelming. A financial advisor may help you strategize to pay the debt off faster and with the least interest possible.
- Savings Advice – Whether saving for emergencies, college, buying a house, or anything else, a financial advisor can help you create savings plans that work with your budget and timeline.
- Inheritance advice – Receiving a windfall can be overwhelming, but a financial advisor can help you plan how to handle it while minimizing your tax liability.
- Retirement planning – Financial advisors can provide helpful financial advice to ensure you’re ready for retirement, whether you’re just starting or already have money saved but aren’t sure if it’s enough.
- Long-term planning – Ensuring you have enough money to care for you and your spouse should you need long-term care is an important aspect of financial planning and something financial advisors can help you do.
- Estate planning – Helping you determine what will happen to your assets when you or a spouse die is important, especially if you want to avoid excessive tax liabilities or probate.
Human Financial Advisor vs. Robo-Advisor
Technology has changed how we receive financial advice, providing many opportunities for automated advice, sometimes at a significant discount.
Human financial advisors usually cost more because they can read between the lines of a situation better than a computer program can. However, not everyone needs a human advisor. Here’s how they compare.
Human advisors provide:
- Personalized advice beyond investments or budgeting; they can help with more significant decisions like estate planning or debt payoff
- Fees between 1% and 2% of the assets under management or a per-transaction fee
- Provides an extensive selection of investments and DIY portfolio opportunities for more custom investment opportunities
Robo-advisors provide:
- Investment advice as it pertains to the exact portfolio you’ve created with them; only a few robo-advisors, like Betterment, will link to all investment accounts providing a net worth overview
- Fees between 0% and 0.25% of assets under management, but some robo-advisors may have additional fees
- Most robo-advisors offer pre-built portfolios of specific ETFs based on the portfolio’s risk tolerance, matching investors with the already-built portfolios
Human Financial Advisor
Choosing a human financial advisor is a big decision because the fees are often higher, but the services are more robust. If you’re looking for more than investment advice or are an established investor and are ready to make more sophisticated investment decisions, a human advisor may be your best bet.
Before choosing a human advisor, understand the minimum account requirements, fees charged, and services offered, especially if you’re looking for something specialized, such as budgeting, debt payoff, or estate planning.
Financial Robo-Advisor
Robo-advisors are best for investors just starting their investment journey or with only a small amount of assets. If fees greatly impact your earnings because of the low amount of assets invested, a robo-advisor may provide the best solution.
You must be okay with pre-built portfolios and a hands-off investing approach. You can provide information about your risk tolerance and timeline and even change those answers. Still, the robo-advisor handles asset allocation, which may make some feel like they’ve lost control of their money.
If you want more control of your investments, check out a self-directed investing platform that lets you create portfolios and then simplifies account management with automation.
How to Choose the Best Financial Advisor for You
When you’re ready to invest, it’s critical to understand the best way to choose the right financial advisor for you!
Research and Compare
Researching and comparing is essential whether you’re choosing a human or a robo-advisor. You’re trusting this person or firm with your money and financial future.
Read reviews on third-party sites, check their Better Business Bureau rating, and compare their offerings. Don’t be afraid to interview human advisors to see if you ‘click.’ You may find that you don’t agree with every advisor’s methods or beliefs, and it’s important to invest your money with a firm that goes well with what you want or believe.
Find a Fiduciary
It’s best to work with a financial fiduciary. Trusting your money with someone prioritizing their commission over your financial education and well-being won’t have your best interests at heart.
This doesn’t mean all fiduciaries are the same, and any will do. Still, research and interview human advisors to ensure you’re on the same page.
Look for Credentials
Depending on the level of financial advice you need, it may be best to look for advisors with proper credentials. At the very least, ensure they have a bachelor’s degree in a finance-related field. In addition, you may consider any of the following credentials:
- Series 6 license – Allows advisors to sell mutual funds and annuities
- Series 7 license – Allows advisors to sell most financial products, including stocks, bonds, and other commodities
- CFP – Certified financial planners are licensed and proven capable of providing financial advice
Cost
Of course, you should consider an investment firm’s costs. Some robo-advisors may charge $0 commissions for trading stocks or ETFs but may charge a flat monthly fee or other miscellaneous fees.
Some robo-advisors charge a percentage of your assets under management, as do human advisors, although some, especially non-fiduciaries, charge a commission per transaction.
Compare the costs to determine how they will affect your financial goals. Choose the type of advisor that charges fees you’re comfortable with while providing the needed services.
Financial Advisor Considerations
When choosing a financial advisor, there are several considerations you must make. You may work with this professional for a few years or decades, and you are trusting them with your most prized possession — your assets.
To choose a financial advisor, consider the following:
- Goals – Create a list of short and long-term goals and find an advisor to help you achieve them. For example, if your goals include estate planning, you should look for a financial advisor that works with an estate planning attorney to seamlessly meet your goals.
- Comfort level – You must be comfortable talking to your financial advisor about all financial topics, including your debt. Your entire financial picture is necessary to help you make the best investment and financial decisions. Your advisor should have similar beliefs as you and be willing to listen.
- Services – Determine the type of services you need when choosing a financial advisor. For example, if you need help with debt payoff, you need a financial planner specializing in these services. However, if you want to build wealth, you should focus on an investment advisor who can help you reach your goals.
- Relationship – Some advisors offer a team approach, which may keep your costs down, but it also means you won’t always work with the same advisor. If you prefer working with an exclusive advisor, you may pay more, but you should find what you need.
- In-person vs. virtual – If you choose a robo-advisor, you’ll get virtual guidance from a computer, with a few exceptions of firms that offer access to a team of human advisors (not necessarily certified). Human advisors may also offer in-person or virtual consultations, so decide how you’re most comfortable conversing with your advisor.
- Cost – Understanding the cost is critical when choosing a financial advisor. If choosing a human advisor, you’ll pay more, but you may find advisors with a flat fee versus per-investment commissions, which may keep your costs lower.
When to Hire a Financial Advisor
You don’t need a certain amount of money or a financial distinction to hire a financial advisor. Since there are many different types of advisors, everyone could use one at each point in their financial journey.
Early in your journey, consider a robo-advisor or low-cost financial advisor that can help you get started and create the financial path to reach your goals. As you build more assets and need to make more complicated investment decisions, consider human advisors or more complex robo-advisors that offer a hybrid of automated portfolio management and human advice.
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUEFAQs
How Much Does It Cost to Hire a Financial Advisor?
All financial advisors have different costs. Robo-advisors are the least expensive, charging 0% to 0.25% of assets under management but providing automated service that may not include financial advice. They also require a hands-off approach to investing, meaning you don’t hand-pick your investments.
Human financial advisors cost more, usually 1% to 2% of your assets annually, but can provide more intricate services than robo-advisors.
What Should I Ask a Financial Advisor?
Some essential questions to ask a financial advisor include:
- What are your minimum balance requirements?
- What types of investments do you work with?
- Do you work with people in my situation?
- How do you get paid?
- How will we communicate?
What Return on Investment Is Typical When Working With a Financial Advisor?
No financial advisor can guarantee a certain return; if they do, they are likely a scam. Don’t fall for advisors that sound too good to be true. Keep this fact in mind. The average 10-year return on the stock market is 10%, but that’s for long-term investments. If you have shorter or longer-term goals, your returns may differ depending on the chosen assets.
How Do I Know If I Really Need a Financial Advisor?
Think of a financial advisor as a partner. They are there to guide you to your goals. Yes, they get paid, but you get paid for your job too. Look for an advisor who charges fees you’re comfortable with, and that understands the goals you’re trying to achieve, whether you’re just starting or are an experienced investor.
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