What does a financial advisor do?
The term “financial advisor” is fairly broad. There’s no regulation of the term, so any number of professionals can call themselves financial advisors. Like the titles financial planner, financial consultant, financial coach and wealth advisor, there are no uniform requirements to be considered a financial advisor.
For the most part, though, a financial advisor is someone who can guide you as you make decisions about your money.
“Financial advisors, by whatever title they go by, can help you set goals and create a plan to reach your objectives,” says Roger Wohlner, a financial advisor based in Arlington Heights, Illinois. “A financial advisor can also help you adjust your plan as things change, and might be able to help you with specific planning issues like taxes, retirement, college or business.”
Different professionals use the term whether they’re selling insurance, managing a portfolio of assets or creating a comprehensive financial plan.
What types of financial advisors are there?
When considering who to work with, Pam Krueger, the founder and CEO of Wealthramp, a platform that vets financial advisors and matches them with clients, suggests worrying less about the title used and instead paying attention to the services offered.
“You also need to understand how they get paid and whether they’re a fiduciary,” Krueger says. “A fiduciary is required to provide advice that is in your best interest. Other advisors, such as those who sell insurance or other products, might not be fiduciaries and instead make part of their money based on commissions.”
Krueger points out that there’s nothing wrong with working with a financial advisor who makes money on commissions.
“Just because they’re getting paid as a result of making a sale doesn’t mean that they can’t provide good advice,” Krueger continues. “However, it’s important for you to have information to understand the difference between getting actual advice and the possibility that you’re sitting through a sales pitch.”
Before working with someone, Krueger suggests confirming that they are a fiduciary financial advisor and getting it in writing that they will make recommendations based on your best financial interest, regardless of whether it helps them earn a little extra money.
What credentials should you look for in a financial advisor?
While credentials can be a good starting point when vetting a financial advisor, Wohlner agrees with Krueger that finding a fiduciary financial advisor should be the top priority.
“Whether someone is a fiduciary matters more than the letters behind their name,” Wohlner says. “Pay attention to experience and education as well. Find out if they have experience in some of the specific areas you need help with.”
Even though credentials aren’t the final arbiter of whether a financial advisor is a good choice, some certifications might indicate a high level of education and a commitment to ongoing professional development in the financial industry.
Krueger suggests prioritizing the following:
- Certified financial planner (CFP): These advisors have to complete financial planning courses that include basic information on investing and tax planning. A CFP must pass a comprehensive exam and take ongoing education credits to maintain their certification through the CFP Board.
- Chartered financial analyst (CFA): Issued by the CFA Institute, this designation requires advisors to fulfill specific work experience requirements, complete courses and pass three exams. The focus is on investment analysis, portfolio management and wealth management. CFA professionals must maintain membership with the CFA Institute.
- Certified public accountant (CPA): If you’re concerned about taxes and other related financial matters, working with an advisor who is also a CPA might make sense. CPA requirements (often including education and exam specifics) are typically set by the individual state.
Other designations that require education and experience, and that might be useful in terms of ensuring that a financial advisor has received training and practice, include:
- Accredited financial counselor (AFC): Requires experience hours and an education course, as well as passing an exam. To remain credentialed, an advisor must meet ongoing education requirements set forth by the Association for Financial Counseling and Planning Education. It’s also a Financial Industry Regulatory Authority (Finra)-accredited designation.
- Chartered financial consultant (ChFC): To become this type of financial consultant financial planning courses are required, including some that are specialized, as well as ongoing education and adherence to the ethics standards set forth by the American College of Financial Services.
- Registered investment adviser (RIA): Registered investment advisers are those who meet specific requirements set by the state or the Securities and Exchange Commission (SEC). When a certain level of assets under management is reached, an RIA must register with the SEC. You can generally check into violations and judgments using Finra BrokerCheck.
While you can receive good advice without the credentials, they can provide you with peace of mind as you choose a financial advisor.
How do financial advisor fee structures work?
The cost of a financial advisor varies based on how they earn money and the fee structure involved.
First, it’s important to understand how a financial advisor is paid. There are three main models that a financial advisor might use:
- Commission: A financial advisor who doesn’t receive money directly from you is usually making money from commissions for selling financial products. This might be common among brokers and insurance agents.
- Fee-only: Fee-only financial advisors make their money exclusively from fees clients pay. You’re less likely to run into conflicts of interest with a fee-only advisor, Krueger says, because their bottom line isn’t influenced by whether you buy certain financial products or services.
- Fee-based: Krueger says it’s important to understand the distinction between fee-only and fee-based financial advisors. A fee-based advisor or planner uses a hybrid model. They might charge a fee for planning and guidance, or asset management, but they might also receive commissions.
While you don’t need to automatically assume someone earning commissions is providing poor advice, Wohlner points out, you do need to be aware of the potential conflicts and choose accordingly.
Financial advisor fee structures
If you select a financial advisor who charges a fee, consider the structure they choose. Typically, you want to work with someone whose fee structure matches your budget and style. Some common ways that financial advisors charge clients include:
- Assets under management (AUM): Your financial advisor charges you based on the assets they manage on your behalf, expressed as an annual percentage. This is common with wealth managers and advisors who handle investments. As your assets increase, your fees also increase. For example, if you have $200,000 assets under management at 1%, you pay $2,000 a year. Later, when your portfolio grows to $500,000, you pay $5,000 a year.
- Retainer: Rather than charging based on your portfolio size, a financial advisor might charge a set fee paid monthly, quarterly or annually. The advisor should tell you how many check-ins you have during the year and what services, such as financial planning or reviews, are included in the annual retainer.
- Subscription: Similar to a retainer, some financial advisors charge a subscription or membership fee. You pay monthly or quarterly and have access to a suite of services or online tools to help you manage your money. In many cases, your subscription level determines how many meetings you have and what guidance you receive. There might be an onboarding cost with a subscription model.
- Hourly: Instead of charging based on services, you’re charged based on an hourly rate. You can choose this option if you want to have more one-on-one advice and services, and pay only based on the time you use.
- Fixed: Some financial advisors have a set fee list based on the service you receive. They might have a pricing list for a comprehensive financial plan, check-in, college plan, financial review or other services.
How to find and vet a financial advisor
When looking for a financial advisor, consider starting with a vetted network. Krueger says that she vets all the financial advisors in the Wealthramp network and that they only recommend fiduciary financial advisors. Other networks that offer access to advisors include Advisor.com, a Buy Side financial partner, XY Planning Network and NAPFA.
Some networks offer a questionnaire that can help narrow down your choices. Others can help you find a financial advisor located near you if that’s important to you, or you can work with someone remotely.
Once you have some options from a trusted network or platform, schedule discovery sessions with two to four financial advisors. Wohlner points out that many advisors will have a brief initial session with you to see if you’re a good fit.
When you have your initial meeting with each, assess their values, approach and whether their fee structure matches your budget and needs. Compare the answers you receive and decide who you’re most comfortable working with.
Key questions to ask a prospective financial advisor
When you have a discovery session with a financial advisor, ask questions that can help you understand how they work and whether they would be compatible with your financial approach and needs. Some of the questions Wohlner and Krueger suggest asking include:
- Are you a fiduciary? Start by finding out whether they are a fiduciary, and ask whether they act as a fiduciary all the time.
- How are you compensated? Be informed about whether an advisor receives commissions for sales on top of fees or other income.
- What is your fee structure? Find out how the advisor charges for advice and what services the fee encompasses, as well as how many one-on-one sessions you receive based on the fee.
- Do you have any credentials? Ask about their credentials and whether they remain up-to-date to maintain them.
- What is your background and education? Credentials might not be as important as their education and experience. Find out if they have a relevant background that might be of benefit to you, even if they don’t have letters following their name.
- How much experience do you have? Find out how long they’ve been helping people with their finances and whether they have experience with the help you need. For example, if you’re struggling with debt and saving for retirement, find out if your advisor has experience with debt reduction planning on top of retirement planning.
Pay attention to how the advisor interacts with you and how comfortable you are with them. Verify that they listen to you and understand your needs as you determine who you should work with.
Should I choose a fiduciary or a broker-dealer?
Broker-dealers are financial professionals or firms that buy and sell securities for their own accounts and on behalf of their clients. You might see them simply referred to as brokers.
Broker-dealers aren’t held to a fiduciary standard, but they are required to make recommendations that are in your best interest. Broker-dealers earn commission when they buy or sell investments on your behalf, introducing a conflict of interest into the advisor-client relationship.
That doesn’t necessarily mean you shouldn’t work with a broker-dealer. In fact, some advisors are registered as both a broker-dealer and an RIA. In these cases, it’s important to be aware of which role the advisor is filling when you work with them. If they’re acting as an RIA, they’re held to a fiduciary standard, but if they’re acting as a broker, they only have to recommend products that are suitable for your situation.
Many of the larger investment firms, such as Charles Schwab or Fidelity, offer both brokerage and advisory services.
What if my advisor isn’t meeting my needs?
If your current advisor isn’t the right fit, you might want to consider changing financial advisors. First, though, it could be worth having a meeting with them to see if you’re able to improve your relationship and clear up issues that could be caused by miscommunication.
If you come away from that meeting ready to find someone new, make a note of the ways you weren’t satisfied with the relationship and use that information to help you find the best financial advisor for your needs. Once you’ve chosen a new advisor, they should be able to help facilitate the transfer of your assets to their firm if needed.
How do fiduciary standards protect you?
Fiduciary advisors are required to put your best interest ahead of their own. This means that they can’t recommend products or financial plans that aren’t suitable for you because it would earn them a larger payout.
However, remember that some advisors can switch between a role that requires them to act as a fiduciary, like an RIA, and one where they aren’t held to that same standard, like a broker-dealer. Ultimately, it’s up to you to find an advisor you trust to help you make the best decisions with your money.
