What do financial advisors do?
A financial advisor can help you manage your money better
Responsibly managing your finances ultimately comes down to you. After all, it’s up to you to take charge of your budget, pay off your debt, invest wisely and set yourself up for retirement. But creating a financial plan can feel overwhelming, especially if you’ve never invested or created a budget. That’s where hiring a financial advisor could be helpful.
Financial advisors offer various services, including investment, budgeting, debt payoff and tax planning. Here’s how to know which financial situations warrant hiring one, how to choose one and which types of advisors to avoid.
Key insights
- Financial advisors offer a range of financial services, including investment advice, budgeting and debt payoff.
- The term “financial advisor” encompasses many different types of licensed and unlicensed financial professionals.
- Financial advisors typically charge a fee of 0.50% to 2% of your total assets managed.
- You might not need a financial advisor, depending on your financial situation and understanding of investing and retirement.
What is a financial advisor?
Put simply, a financial advisor gives advice about what you should do with your money. After collecting information about your financial situation, they work with you to develop a plan to help you reach your goals.
A financial advisor may help you decide:
- How to save for retirement
- How to invest your money
- How to handle a windfall
- How to manage taxes
Financial advisors can also hold you accountable. As your life changes, your financial advisor should help you change your actions and adjust your budget so you can stay on track.
While financial advisors aren’t required to hold any certifications, if they’ll be handling your investments, they must be licensed. Furthermore, a financial advisor with a certification, such as the certified financial planner (CFP) designation, will act as a fiduciary. That means they’re required to always act in your best interest.
» MORE: What is a good investment?
Financial advisors and fiduciary duty
A fiduciary is a professional required by law to put their client’s needs above all others (including their own). When giving financial advice, an advisor who’s a fiduciary doesn’t earn a commission from any products they recommend and should lawfully recommend the lowest-cost financial products that fulfill their client’s needs.
Joe Wilson, a financial advisor at Ten Point Financial in Grand Ledge, Michigan, described a fiduciary as “someone who is legally obligated to put your interests above their own. It is a legal term that is meant to ensure advisors are doing what is best for clients and not what is best for their pocketbook.”
Professional licensing typically regulates a financial advisor’s fiduciary duty. For example, an advisor may have a CFP or certified financial analyst (CFA) designation.
If you work with an advisor with none of these certifications, they may not be held to the same fiduciary standard. For example, hiring a financial advisor who works for a broker may recommend the broker’s products over a competitor’s, even if it’s not the best solution for you. Plus, they may receive compensation for recommending certain investments, causing a conflict of interest.
(Fiduciary) is a legal term that is meant to ensure advisors are doing what is best for clients and not what is best for their pocketbook.”
It’s important to ask if your financial advisor is working as a fiduciary before you hire them to ensure they’re always acting in your best interest.
Financial advisor services
Financial advisors provide a variety of services.
Investment advice
Financial advisors can help you decide which types of investments and investment accounts to use. This includes education on exchange-traded funds (ETFs), mutual funds, stocks and other investments. They can also help you choose an asset allocation that fits your risk tolerance and investment profile.
Retirement planning
Retirement planning is one of the core services that most financial advisors provide. In addition to helping set up your investments and accounts for retirement, they can help you create a detailed plan for how to live on those investments after you’re no longer working. This includes a comprehensive drawdown strategy and tax strategy, as well.
Budgeting
Financial advisors can help you put together a spending plan that fits your lifestyle and goals. Creating a budget based on your income, expenses, savings and investing plans can help you efficiently use your money.
Debt payoff planning
Financial advisors can help you create a debt payoff plan, including helping you choose which debts to pay first. They might also advise on how to negotiate debt settlements and help you lower interest rates.
Tax planning
Financial advisors who help with investing should know the different types of tax-advantaged accounts. They can help with tax-efficient retirement planning and show you which account would work best for your timelines and objectives. While they might not be able to prepare your tax returns, they should be able to refer you to a trusted tax professional.
Insurance
Financial advisors might not be fully licensed to sell you insurance. Still, they can advise on the different types of insurance you should get and the types of coverage available.
Types of financial advisors
“Financial advisor” is an umbrella term that doesn’t necessarily require any qualifications, but specific types of financial advisors may have more stringent requirements. For instance, investment advisors must register with their state or the Securities and Exchange Commission (SEC).
Make sure the advisor’s area of expertise aligns with where you need help, and look through online reviews from their current and past customers.
Here are some of the different types of financial advisors:
Financial planners
Tax professionals
If you need help dealing with the Internal Revenue Service (IRS), choose an advisor with Enrolled Agent status. This type of tax professional can legally represent taxpayers before the IRS in all 50 U.S. states.
Investment professionals
Wealth managers
Financial counselors
Robo-advisors
Financial advisor costs
When comparing financial advisors, look at the actual dollars the financial advisor's service would cost you each year versus your investment or budgeting return. Ensure you’re comfortable spending that much money to gain your financial advisor's expertise.
Investment advisors
Financial advisors providing investment advice and services typically charge a percentage of the client's total assets under management (AUM). That’s between 0.5% and 2%, depending on the account’s size.
For example, if you have $100,000 to invest and your financial advisor charges an annual fee of 1.5%, you'll pay $1,500 per year (or $125 per month) for their services.
However, some financial planners get an average of 3% to 6% in commission for opening certain accounts or referring clients to a specific financial institution. You can avoid conflicts of interest by making sure your advisor is a fiduciary.
Fee-only financial planners
There's more to financial planning than managing investments, and you may want a financial planner to help you handle your money beyond your stock allocations.
Fee-only financial planners may charge a flat fee ($1,500 to $7,500) or a per-hour rate ($100 to $400 per hour) to help you work out your budget, plan for retirement, set up education accounts or decide how much money to invest.
Financial counselors
Some communities provide free financial coaching for recent graduates and people trying to improve their financial situation. Your credit union or local bank may also offer free, basic financial coaching to help you learn about building credit, budgeting and saving money.
Robo-advisors
Like financial planners, robo-advisors typically charge a percentage of your total managed assets, but it’s often much lower than a traditional advisor. They charge from 0.15% to 0.35% of total AUM, with additional fees to meet with a human advisor.
Do you need a financial advisor?
While hiring a financial advisor can be the right move, not everyone needs one. If you’re just starting your financial journey and don’t have much to invest or save, hiring a financial advisor might not benefit you much. Instead, consider learning a bit more about personal finance through books, YouTube videos and blog posts.
If you’re further along and have questions about investing, debt payoff or retirement, a financial advisor might be able to help. They can help you navigate difficult situations without making expensive mistakes.
Wilson said it’s time to hire an advisor “if you do not have the knowledge, skills or time to create a plan for yourself. The services we provide can be done by individuals, but similar to fixing your own plumbing, it can be easier to hire a professional and avoid any costly mistakes.”
While everyone can potentially benefit from working with a financial advisor, people in the middle of significant life changes are more likely to need professional financial advice. Consider hiring a financial advisor if you’re:
- Graduating from college
- Getting married
- Starting a new career
- Wanting to start a family
- Receiving an inheritance
- Planning for retirement
Wilson also added that older investors may need more help. “I find that as people get older and their situations become more complex that an advisor can help alleviate the stress of planning your future,” Wilson said.
|
|
FAQ
Can a financial advisor help me get out of debt?
Yes, financial advisors can help you develop a debt payoff plan. This includes taking inventory of your current debts, creating a plan to pay them off and potentially helping you work with a credit counselor to settle them (if necessary).
Do financial advisors have access to your bank account?
Financial advisors can only move money between your bank and investment accounts to help you manage your investments. There are restrictions typically set up for how financial advisors can access the money in your bank account. Make sure you understand exactly the type of access they get before hiring an advisor.
Is a financial advisor the same as a financial planner?
In many contexts, the terms “financial advisor” and “financial planner” are used interchangeably. But “financial advisor” is a broader term, encompassing many types of financial advice. In contrast, a financial planner typically refers to an investment advisor who helps manage your investments and retirement planning.
Are there free financial advisors?
In some cases, you may be able to talk to a financial advisor for free. There are free credit counseling services to help you come up with a financial plan or pay off debt. For investment advice, some financial planning associations offer pro bono (free) financial advice to underserved communities. Additionally, some banks and other financial institutions offer free access to financial advisors for clients.
Bottom line
Hiring a financial advisor can help you navigate the complicated world of investing, retirement and more for a reasonable fee. They can also help you create a financial plan for your whole life, including budgeting, debt payoff, investing, taxes and even insurance.
But it’s important to understand the different types of planners and ensure you work with a fiduciary. Otherwise, you risk being charged unnecessary fees and investing in things you shouldn’t.
A financial advisor is not for everyone, but if you’re looking to handle a significant life change or a large financial goal, hiring the right advisor can make a huge difference.
Article sources
- Certified Financial Planner Board of Standards, “ Code of Ethics and Standards of Conduct .” Accessed July 25, 2023.
- CFA Institute, “ Fiduciary Duty: Fiduciary Standard & Regulations .” Accessed July 25, 2023.
- U.S. Securities and Exchange Commission, “ Investment Adviser Registration .” Accessed July 25, 2023.
- IRS, “ Enrolled Agent Program .” Accessed July 25, 2023.
- FINRA, “ What We Do .” Accessed July 25, 2023.
You’re signed up
We’ll start sending you the news you need delivered straight to you. We value your privacy. Unsubscribe easily.