In a nutshell, a financial advisor helps people manage their money. Typically, there is an investing component to their services, but not always. Some financial advisors, often accountants or lawyers who specialize in trusts and estates, are wealth managers. One of their primary functions is protecting client wealth from the IRS. Other financial advisors are called money managers or investment advisors. They often have business school or finance backgrounds, and could have worked for an investment bank, hedge fund or brokerage. And then there are financial advisors who bill themselves as financial planners. Generally, their emphasis is on educating clients and providing risk management, cash flow analysis, retirement planning, education planning, investing and more. To find a financial advisor in your area, try using SmartAsset’s free matching tool.
What Is a Financial Advisor?
Unlike lawyers who have to go to law school and pass the bar or doctors who have to go to medical school and pass their boards, financial advisors have no special requirements. Indeed, someone who has no training can call themselves a financial advisor.
Generally, though, a financial advisor will have some kind of training. If it’s not through an academic program, it’s from apprenticing at a financial advisory firm. People at a firm who are still learning the ropes are often called associates or they’re part of the administrative staff.
As noted earlier, though, many advisors come from other fields. Accountants and estate planning lawyers can become such trusted advisors that clients ask them for investing help. Or maybe someone who manages assets for an investment company decides they’d rather help people and work on the retail side of the business.
Many financial advisors, whether they already have professional degrees or not, go through certification programs for more training. An overall financial advisor certification is the certified financial planner (CFP), while an advanced version is the chartered financial consultant (ChFC). Another broad credential some advisors hold is the chartered financial analyst (CFA) designation.
Certifications for Financial Advisors
Generally, there are two basic categories of credentials: advisory credentials and securities licenses. The former includes the CFP, ChFC and CFA designations, which require literacy in basic principles of financial planning, investing, risk management, retirement planning and more. The bulk of advisory credentials, though, represent specialized knowledge about such topics as divorce finances or alternative investments. Their names often say it all:
|14 Common Certifications for Financial Advisors|
|Accredited Investment Fiduciary (AIF)||AIFs help financial advisors avoid mismanagement claims by having proper documentation and avoiding conflicts of interest.|
|Certified Divorce Financial Analyst (CDFA)||A CDFA helps clients plan their divorces, including tax structuring and management and dividing assets.|
|Certified Public Account (CPA)||CPAs help clients reduce taxes and organizing investments.|
|Chartered Alternative Investment Analyst (CAIA)||CAIAs help clients work with alternative investments.|
|Chartered Financial Consultant (ChFC)||A ChFC handles financial planning for divorce and small business planning.|
|Chartered Investment Counselor (CIC)||CICs work with clients who have large portfolios and need experienced, high-level experts to manage investments.|
|Chartered Life Underwriter (CLU)||CLUs are experts in life insurance, risk management and estate planning.|
|Chartered Retirement Plan Counselor (CRPC)||CRPCs advise on retirement planning, including Social Security, retirement investments, tax planning, retirement accounts and estate planning.|
|Certified Investment Management Analyst (CIMA)||CIMAs generally focus on investment consulting and work with both individuals and corporations.|
|Certified Management Accountant (CMA)||A CMA is an expert at management accounting and typically help corporate clients make strategic financial business decisions.|
|Chartered Mutual Fund Counselor (CMFC)||CMFCs are experts in mutual funds and other packaged investment products.|
|Enrolled Agent (EA)||EAs are tax professionals authorized by the federal government to represent taxpayers before the Internal Revenue Service (IRS).|
|Financial Risk Manager (FRM)||FRMs work with individual clients seeking risk management and investment advice.|
|Personal Finance Specialist (PFS)||A PFS holds a CPA and also offers financial planning services.|
Securities licenses, on the other hand, are more about the sales side of investing. Financial advisors who are also brokers or insurance agents tend to have securities licenses. If they directly buy or sell stocks, bonds, insurance products or give financial advice, they’ll need specific licenses related to those products. The Financial Industry Regulatory Authority, or FINRA, oversees security sales requirements.
The most popular securities sales licenses include Series 6 and Series 7 designations. A Series 6 license allows a financial advisor to sell investment products such as mutual funds, variable annuities, unit investment trusts (UITs) and some insurance products. The Series 7 license, or General Securities license (GS), allows an advisor to sell most types of securities, like common and preferred stocks, bonds, options, packaged investment products and more. Series 7 holders can’t sell futures, real estate or life insurance.
What Services Do Financial Advisors Offer?
Generally, a financial advisor offers investment management, financial planning or wealth management. Investment management includes designing your investment strategy, implementing it, monitoring your portfolio and rebalancing it when necessary. This can be on a discretionary basis, which means the advisor has the authority to make trades without your approval. Or it can be done on a non-discretionary basis by which you’ll have to sign off on individual trades and decisions.
Financial planning, on the other hand, often involves the creation of a financial plan or blueprint for your finances. It will detail a series of steps to take to achieve your financial goals, including an investment plan that you can implement on your own – or if you want the advisor’s help, you can either hire them to do it once or sign up for ongoing management.
Or if you have specific needs, you can hire the advisor for financial planning on a project basis. Most advisors offer:
- Risk management and insurance planning
- Education saving planning
- Tax planning
- Legacy or charitable planning
- Retirement planning
- Portfolio management
- Cash flow analysis
- Debt management
- Emergency funds management
- Estate planning
- Small business planning
Finally, wealth management is often investment management and financial planning combined. It may also come with family office services.
How Do Financial Advisors Work?
Financial advisors can work for an independent firm or as part of a larger network, such as Edward Jones or Raymond James. They could also be employees at a bank, brokerage or investment company. Or some are individual practitioners.
If their employer is registered as an investment advisor with the U.S. Securities and Exchange Commission, the firm is legally bound to act as a fiduciary. This means they must put their clients’ interests before their own, among other things.
Other financial advisors are members of FINRA. This tends to mean that they are brokers who also give investment advice. Instead of a fiduciary standard, they legally must follow a suitability standard. This means that there is a reasonable basis for their investment recommendation.
Finally, advisors who work for small firms may be registered with their state authority. Advisors must register with the SEC only if they have more than $100 million in assets under management.
How Much Does a Financial Advisor Cost?
Always make sure to ask about financial advisors’ fee schedules. To find this information on your own, visit the firm’s Form ADV that it files with the SEC.
Generally speaking, there are two types of pay structures: fee-only and fee-based. A fee-only advisor’s sole form of compensation is through client-paid fees. On the other hand, fee-based advisors can earn commissions from vendors for selling securities or insurance products in addition to client-paid fees.
When trying to understand how much a financial advisor costs, it’s important to know there are a variety of compensation methods they may use. Here’s an overview of what you might run into:
- Financial advisors can get paid a percentage of your overall assets under management (AUM) for managing your money. The percentage ranges from .50% to 2.0%. Generally, 1% is the standard. Many advisors will lower the percentage at higher levels of assets, so you’re paying, say, 1% for the first $1 million, 0.75% for the next $4 million and 0.50% for next $5 million.
- Financial advisors can get paid hourly. If you simply have a few financial questions for an advisor, you’ll likely pay an hourly fee for answers. Rates generally range from $150 to $500 per hour, often with a cap to how much you’ll pay in total.
- Financial advisors can get paid with a fixed fee-for-service model. If you want a basic financial plan, you might pay a flat fee to get one.
- Some financial advisors make money through commissions. When an advisor sells you a financial product, he or she receives a specific percentage of the sale amount.
- Some financial consultants who work for large brokerage firms, such as Charles Schwab or Fidelity, receive a salary by their employer. Typically, these advisors handle more superficial financial concerns.
Do you need help finding a financial advisor in your area? Try SmartAsset’s free advisor matching tool today.
Do I Need a Financial Advisor?
Whether you need a financial advisor or not depends upon how much you have in assets. You should also consider your comfort level with money management topics. If you have an inheritance or have recently come into a large sum of money, then a financial advisor could help answer your financial questions and organize your money.
On the other end of the spectrum, if you’re just starting out and desire basic money guidance, you might benefit from a conversation or two with a financial advisor. Before deciding whether to visit a financial planner or not, clarify your financial questions. Note that many advisors won’t manage your assets unless you meet their minimum requirement. This number can be as low as $25,000, or reach into the millions for the most exclusive advisors.
When choosing a financial advisor, find out if the individual follows the fiduciary or suitability standard. As noted earlier, the SEC holds all advisors registered with the agency to a fiduciary standard. If you find an advisor through SmartAsset’s free matching tool, you can rest assured that they are a fiduciary.
Alternatives to a Financial Advisor
If you’re seeking financial advice but can’t afford a financial advisor, you might consider employing a digital investment advisor called a robo-advisor. The broad field of robos spans platforms with access to financial advisors and investment management. Personal Capital and Betterment are two such examples.
If you’re comfortable with an all-digital platform, Wealthfront is another robo-advisor option. Additionally, Fidelity, Wells Fargo, Schwab, Vanguard, TD Ameritrade and other large brokerage companies also offer varying combinations of digital and human financial advisors.
You can find a financial advisor to help with any aspect of your financial life. Financial advisors may run their own firm or they might be part of a larger office or bank. Regardless, an advisor can help you with everything from building a financial plan to investing your money. Before you sign on to work with an advisor, it’s your responsibility to understand their fees, background, services and experience level.
Tips for Choosing a Financial Advisor to Work With
- Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Make sure you ask the right questions of anyone you consider hiring as a financial advisor. Check that their qualifications and skills match the services you want out of your advisor.
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