What Is a Financial Advisor?

Managing your money isn’t a once-and-done deal. Instead, it’s a big, ongoing time commitment, especially if you’re trying to save for a down payment, retirement, or child’s college tuition in addition to day-to-day money management. It takes planning and commitment to stay on track toward your financial goals, and it’s common to feel overwhelmed by the process. Fortunately, a financial advisor may be able to take some money tasks off your plate.

If you’re wondering if hiring a financial advisor is the best strategy, here’s what an advisor does, the types available, the pros and cons of working with one, and more.

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What financial advisors do

Financial advisors help people manage their money and offer guidance on meeting monetary goals. It’s common for these professionals to offer retirement planning services for clients, but many also do a lot more than that. Here are some responsibilities a financial advisor might handle on your behalf.

• Identify and recommend investments based on your age and risk tolerance.
• Manage investments.
• Help with retirement planning.
• Assist with planning for large expenses, such as college tuition for your child or a home down payment.
• Guide you on estate planning.
• Make recommendations for managing your debt.

Types of financial advisors

The term “financial advisor” can refer to many different types of professionals, including those with the following credentials:

• Certified public accountant (CPA).
• Personal financial specialist (PFS).
• Chartered financial analyst (CFA).
• Investment advisory representative (IAR).
• Chartered financial consultant (ChFC).
• Accredited estate planner (AEP).
• Certified investment management analyst (CIMA).
• Chartered advisor in philanthropy (CAP).

Different compensation structures also exist for financial advisors. Some fee-based advisors work on commission only or charge a combination of commission and fees. This means that their recommendations may be suitable for your situation, but the products and investments they recommend also factor into their own earnings.

By contrast, some work on a fee-only model, meaning that potential commissions don’t factor into the equation, making their advice likely to be more objective. Fee-only financial advisors are typically fiduciaries, who provide recommendations that must align with your best interests.

How much do financial advisors cost?

As mentioned, there are different compensation models for financial advisors. Costs also vary depending on several factors, including the level of service required, the advisor’s credentials, and your net worth.

Fee-only financial advisors might charge an hourly rate, flat rate, be paid on retainer, or receive an annual percentage of assets under management (AUM.) AUM percentage rates differ but often fall into the 0.5% to 2% range. So if you have $500,000 in AUM and your fee-only financial advisor charges a 1% annual rate, they’d receive $5,000 in a given year from your portfolio.

If you don’t think that you can afford a financial advisor, don’t despair. There are ways to get free financial advice, even if it is not as comprehensive and detailed as what an advisor would provide.

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Pros and cons

Benefits

May help you reach financial goals

One of the most difficult parts about managing your money independently is remaining committed to your goals. The right financial advisor should help you stay on track, whether you’re saving for a particular life event, planning for an asset transfer, or seeking guidance on paying off debt.

Could free up significant time

Identifying suitable investments, managing those investments, and tracking progress toward financial goals is a large time commitment. Financial advisors who offer one or more of these services could take that work off your plate, freeing up time for other things you enjoy.

Can help you plan for unexpected costs

It’s often easier to save for a planned expense, as you know what to expect; unplanned expenses are trickier to manage. A financial advisor can offer helpful guidance on handling unexpected costs, building an emergency fund, and more.

Drawbacks

Credentials and services vary

“Financial advisor” is a broad term referring to professionals with different credentials and services. For this reason it’s essential to consider your needs and goals to find the right professional. Researching different credentials can also help broaden your understanding of financial advisors’ specialties.

Cost structures vary

Similarly, cost structures for financial advisors also vary. They may operate on a commission-only, fee-and-commission, or fee-only model. Opting for a fee-only fiduciary advisor is generally the best approach, as these professionals make objective recommendations and are required to act in your best interests. Payment models can also differ, with some financial advisors charging an annual AUM fee, hourly rate, flat fee—or receiving payment on retainer.

Not all are fiduciaries

Unfortunately, not all financial advisors are fiduciaries. Some are only obligated to make suitable recommendations rather than the best possible recommendations for your needs. For instance, one might recommend a suitable (but perhaps not optimal) product or investment on which they earn a commission. Ask prospective financial advisors if they are fiduciaries before you decide to work with one.

Tips for choosing a financial advisor

Here are a few things to consider as you compare financial advisors.

• Services. Think about the services you need to help improve your financial situation. Do they provide the ones you need?
• Credentials. Financial advisors often have specialized training and education. Consider their areas of specialty as you compare options.
• Fee structure. Ask about their compensation structure and if they receive commissions when you opt for a product or an investment they recommend. Also ask how they’re paid—i.e., hourly rate, percentage of AUM, etc.
• Communication. Determine how often they communicate, how you can reach them, and when you’ll have formal planning sessions to ensure that they communicate in a way that meets your needs.

Alternatives to a Financial Advisor

Financial advisor vs. financial planner

A financial advisor can refer to one of a broad range of professionals offering financial guidance. Some may be fiduciary advisors; others may not be. Financial planners fall under the umbrella of financial advisors but offer broader planning services that look at your financial life overall, rather than specialize in a field like investment management or estate planning.

Unlike financial advisors with specialties that require specific credentials, financial planners aren’t required to have a specified credential to work in the field. Still, many have earned the certified financial planner (CFP) designation. CFPs both have specialized training and must act as fiduciaries to their clients. However, if they only have a CFP credential, they can’t manage investments for you.

Do-it-yourself research, planning, and management

If you’re relatively financially savvy and have adequate time, you could seek out free financial guidance from a reputable source, create a do-it-yourself financial plan, create your own investment strategy, and manage all of this on your own. This approach could work if you understand the market, different financial products and services, and don’t want to pay the fees a financial advisor charges.

Robo-advisor

If you’re specifically seeking investment help, many brokerages also offer robo-advisor services, which rely on automation to help make investment recommendations and rebalance your portfolio. These services typically cost significantly less than human financial advisors, though you won’t get the benefit of personalized guidance.

Time Stamp: Financial advisors often make money management easier, but they aren’t free

Financial advisors can provide valuable guidance that could improve your money situation. While their services have value, they come at a cost, so it’s essential to ask how they’re compensated. Choosing a fee-only financial advisor may be the best approach, as these professionals are obligated to provide unbiased, objective advice and recommendations.

Frequently asked questions (FAQs)

Why should you get a financial advisor?

Working with the right financial advisor can have several benefits. They could help grow your wealth, get you on track for retirement, plan for unexpected costs, ensure your family’s financial protection should you pass away early, and more. Given how different these areas of expertise are, you will likely need more than one financial advisor.

What should you ask a financial advisor?

As you compare potential advisors, you’ll want to ask several questions, including the following:

• Are you a fiduciary?
• Can you tell me about your fee structure and how you’re compensated?
• Which services do you provide?
• What are your credentials?
• How often would we meet, either in person or virtually, to review my goals and plans?

What Is a CFP?

A CFP is a financial planner who has earned a professional credential, one that requires considerable financial education and training. CFPs are also fiduciaries, meaning their recommendations align with their clients’ best interests. Their specialty is creating a broad financial life plan that encompasses your financial goals such as paying off student loans, building wealth, planning for retirement, and saving for your kids’ college education.