What Is a Financial Advisor?

When do people seek out a financial advisor?

Financial advice can be useful in a variety of situations, but it’s also true that some questions can be answered by searching online. If you fall into one of the following categories, you may be ready to consult a financial advisor.

• You have assets in a retirement account but aren't sure how to make the most of them: Most of us haven't investigated the many ways to save money and invest it for an excellent return with an acceptable level of risk. Financial advisors can guide you through your options. For instance, they can help you understand your employer-sponsored 401(k) and what different funds offer.
• You have big goals for your money, like buying a home or paying for a child's college costs: If you anticipate needing tens of thousands of dollars for a down payment to buy a house, for instance, a financial advisor helps you plan out a reasonable timeframe and strategy to save that money.
• Your income and assets are growing, but so are your tax bills: A tax professional who offers financial planning services, including tax planning, can help you see what tax credits and deductions you qualify for and can weigh in on how things like donating to charity or starting a business impact your taxes.
• You want your estate to be easy, with as much of your wealth distributed to beneficiaries as possible: Estate planning may seem complicated up front but making a clear financial plan benefits your dependents and other beneficiaries. An estate planning-focused financial advisor can help you avoid long court processes and costly tax bills by deciding ahead of time how your assets will pass to beneficiaries after your death.

Different certifications for financial advisors

Legally, there are no certification requirements for financial advisors. However, when you want a specific kind of financial assistance, turn to people who have one or more of these credentials:

• Series 65 exam: This exam qualifies an advisor to provide advice on investments. They've studied a variety of ways to invest, what kinds of fees are typical, what each kind of fee means and any risks of certain investment products.
• Certified Financial Planner (CFP): CFPs spend years studying, take a multi-hour exam and work with other, more experienced CFPs in pursuit of this designation. It's the gold standard, even though there are a variety of other less rigorous planning and advising courses and credentials. If someone doesn't have their CFP, they can still be excellent, but if a CFP is available, they are most likely to have the knowledge you're looking for.
• Chartered Financial Analyst (CFA): If the CFP is the gold standard for holistic planning and advice, the CFA is an excellent indicator that your advisor offers full-service investment management. This credential shows the advisor has a thorough knowledge of investment vehicles, meaning that they can select investments for you with confidence in your goals in terms of risk management, diversification and your targeted rates of return.
• Certified Public Accountant (CPA): While a CPA isn't a credential for financial planning per se, the rigorous knowledge of tax law and tax filing means a CPA could also be good at providing financial planning and advising services. If your situation has tax complexity, such as owning a business with multiple employees or managing a variety of real estate, working with a CPA who offers tax optimization strategies could save you a lot on taxes simply by informing you of the options available.

Keep in mind the term registered investment advisor, or RIA. While this designation usually refers to a company's ability to provide investment management services, it also registers them with the Securities and Exchange Commission (SEC), and you can find online whether they've ever had any issues with the SEC.

What does the first meeting with a financial advisor look like?

Before meeting with a financial advisor, make sure you know the fees involved. Is there a one-time fee? Is this a free initial consultation with no obligation to move forward?

A financial advisor looking to form a long-term relationship with you and your family will try to get a strong picture of your financial situation during this initial meeting. They may ask about accounts, debt, assets and goals. It's easier to create a solid financial plan with a complete picture of where you are right now.

This meeting is also when you learn more about the advisor’s services, and you can ask any questions about your current financial situation. Many advisors will put together a report with detailed information on everything from how your investments are currently performing and may perform in the future to whether you’re saving enough to enjoy your retirement.

How does your financial advisor continue providing value over time?

Your financial advisor will deliver a financial report or plan after the first meeting. Do you still need a financial advisor after you’ve discussed your goals and how to achieve them? Here are some ways your financial advisor continues to provide value over time.

• If your financial advisor is providing investment management, they will periodically look at your returns and use their knowledge of the market to adjust your assets, such as by selling some financial investments and buying others. This approach allows them to aim for the highest rate of return possible given your risk tolerance.
• Major life events, such as getting married or divorced, having children or experiencing a death in the family, come with financial hurdles and new choices to make. A financial advisor can talk you through these junctures and help you choose the right financial path.
• If you experience a financial windfall, such as an inheritance, the sale of some high-value stock in a company or a major promotion at work, you’ll want to make the most of that money. Meeting with your financial advisor can help you evaluate options given your current financial picture.
• If you come into new debt, need to take on new caregiving responsibilities or lose your job, your advisor can still assist you. They help you decide how to sell off investments wisely in order to create temporary cash flow, and many will even design a new monthly budget to get you through the tough period until your finances improve.

How do financial advisors get paid?

Most financial advisors have either a fee-only structure (which can be a flat rate/retainer or a percentage), subscription- or commission-based structure. Here are some ways this could work:

• Some financial advisors charge an hourly billing rate for the work they do for you. So, if your account requires twenty-four hours to manage and maintain throughout the year, you're billed for that much time.
• Other financial advisors take a fee based on the managed assets. For instance, it could be 1% of all assets under management. The idea is that they help you achieve more than 1% of growth above and beyond what you'd achieve yourself, so they take their fee out of the profits.
• Finally, some financial advisors make a commission when you buy certain insurance or financial products.

What is a fiduciary financial advisor?

If you’re new to the world of financial advising, it's best to work with someone who operates based on the fiduciary standard. The fiduciary duty is guidance on what kinds of advice and product recommendations your advisor can offer you. If they use this standard, the fiduciary commits to choosing products that are in the client’s best interest, not just products that are technically suitable for them. If there is a breach of fiduciary duty, for example if a financial advisor does not act responsibly on your behalf, there can be legal repercussions for their actions.

A fiduciary is obligated to avoid potential conflicts of interest and disclose their presence to you. This is one big reason why many fiduciaries don't tie their compensation to product referrals but rather to a set management fee for your assets or an hourly rate for the time they spend working with you.

When do I need a wealth manager rather than a financial advisor or planner?

Wealth management refers to a variety of services associated with high-net-worth individuals. For those just beginning to invest, perhaps only in a Roth IRA or an employer-sponsored 401(k), choosing target date retirement funds, exchange-traded funds or other low-fee mutual funds is fairly straightforward.

Tax decisions, allocating money where it will earn more and strategies like tax loss harvesting are a few more complex strategies. These strategies only yield a useful return for those with a high net worth, often considered at least $500,000 under management.

A wealth manager can offer helpful tax, estate and financial planning services for you if you have a lower net worth, depending on your goals and whether your particular wealth manager is only experienced working with higher-net-worth families. It is worthwhile to talk to a CFP or other financial planner before deciding.

When can I do without a financial advisor?

More resources are available than ever for people who want to manage their own money. It is entirely possible to learn about investing and choose investments with a solid return, a tolerable level of risk and appropriate diversification.

You may be able to manage without a financial advisor if:

• You're in the early years of your career when you can keep expenses under control and invest in widely established savings vehicles, like your company's 401(k) or a Roth IRA.
• You're currently not able to save very much. Since your priority now may be to increase your income, reduce expenses or change your long-term goals, a financial advisor isn't going to be as helpful as they'd be after you gain some space in your budget to save and invest.
• You're enjoying doing the legwork for your money yourself. You feel confident in the resources you have available to help you navigate new financial territory.

What are robo-advisors, and when can they work well for me?

Robo-advisors are software programs that allow you to submit your preferences to generate a mix of investments using artificial intelligence and algorithms. For example, you could choose aggressive investing for a high rate of return, even if there is a moderate risk of loss, or you could decide you don't mind a low rate of return and stick with reliable, low-risk investments.

Many robo-advisor apps include educational material about investing. This can be great for starting out, but many have minimum initial deposits of around $5,000. Be aware of the fees charged by the robo-advisor, some are higher than 0.75%, comparable to the fees charged by in-person advisors.
A financial planner who has investment management capabilities can give you personalized attention and advice.

Financial advisors: A conversation partner with great insight

Some financial advisors are not worth the cost, particularly if they convince you to invest in ways that don’t align with your values. However, there are excellent financial advisors who can help you realize a new financial strategy that saves you thousands of dollars and frees you up to achieve your goals.

The key to finding a good advisor is having a straightforward discussion with them. Make sure your conversation covers:

• The kind of deliverables/advice/planning you will receive
• How they structure their fees
• Their experience and credentials
• If they work with individuals in financial circumstances like yours

These points will help you find a financial advisor best suited to your goals and financial situation. Whether you want someone to take investment management off your plate or someone to help you structure your estate, a great financial advisor can be a critical ally in achieving your goals.