What is a financial advisor? (2024)

Are you thinking about hiring a financial advisor to help manage your finances but don’t know where to start? Before you decide whether to hire a financial advisor, it’s important to understand what financial advisors do and how they can help you achieve your goals.

What is a financial advisor?

It’s perfectly normal to feel confused about the best ways to invest and save for retirement, or how best to budget and borrow. Financial issues can be complicated and confusing, which is why so many people consider using a financial advisor. But even understanding precisely what a financial advisor is and does isn’t always as easy as it might seem.

So, let’s start at the beginning. The quick and easy definition of a financial advisor is someone who is trained and typically licensed and/or holds credentials to provide financial advice.

What does a financial advisor do?

At one time, financial advisors were synonymous with stockbrokers or others who gave advice about investing. Today, many advisors still specialize in investing, but many others help with financial basics, such as budgeting, saving and borrowing, while some provide tax-related advice or insurance.

Sometimes, one person does all that and more, while other financial advisors specialize in one area. Some people want a financial advisor who can make financial decisions and carry them out on their behalf, especially when those decisions involve selecting investments. Other people may want to work with an advisor or receive an advisor’s suggestions and then carry out those suggestions themselves.

Types of financial advisors

Another difference between financial advisors today and in the past is the kind of firms they work for. In the past, “financial advisor” usually suggested someone working for a large financial organization.

They may have been called a stockbroker, financial consultant or investment consultant. Such large firms still exist, of course, but there also are many financial advisors who have their own businesses. These often are affiliated with large financial companies that are not household names.

Whether employed by a big or small firm or in their own business, the largest number of financial advisors in the U.S. are legally known as registered representatives and are licensed and regulated by the Financial Industry Regulatory Authority (FINRA), which is overseen by the U.S. Securities and Exchange Commission (SEC).

Other kinds of advisors technically are known as registered investment advisors (RIAs). They are regulated by the SEC or state regulators. Many RIAs have their own firms, ranging from one-person shops to very large businesses with offices across the country.

Another type of financial advisor is a financial planner. Anyone can call themselves a financial planner, but those who hold the certified financial planner (CFP) designation overseen by the Certified Financial Planner Board of Standards have passed a rigorous training program and must take continuing education courses to maintain their certification.

While many CFP holders provide investment-related advice, others focus exclusively on aspects of financial planning dealing with spending, saving and budgeting issues, leaving investments, insurance and tax issues to others. In many cases, financial advisors who are registered representatives or investment advisors may also hold the CFP designation.

Many times, people also seek financial advice from their accountant or insurance agent, some of whom provide broad-based financial advice and can be considered financial advisors.

Robo-advisors

Existing only online, a new kind of financial advisory service has emerged in recent years: robo-advice. Using questionnaires to assess a user’s goals and objectives as well as risk tolerance, robo-advisory services create financial plans and/or investment portfolios.

Ease of use and costs — usually less than half what conventional firms charge — are two main attractions of robo-advisors, which can be a standalone company or part of a larger traditional firm.

Traditional in-person financial advisors

While comfortable with online tools, many people prefer to deal directly with a human advisor. The truth is that most traditional financial advisors rely on automated tools for financial planning, portfolio selection and management, and even client contact.

The advantage in using a human advisor is that you may receive more personal service as well as insights and judgment that can help you stick to your plan, which usually leads to better results.

In-person advisors often dissuade clients from making rash investment decisions, such as buying securities when markets are booming and prices are soaring, or selling when markets turn down and everyone panics. Clients also come to appreciate the personal relationships they develop with their financial advisors.

Services typically offered by financial advisors

While the specific services an advisor and their firm may offer vary, most financial advisors will create a basic financial plan for clients, design and implement an investment portfolio based on goals and risk tolerance, and provide ongoing monitoring of that portfolio, recommending changes as they see fit. If you wish, they also will coordinate with your attorney and accountant.

When should you get a financial advisor?

People hire a financial advisor for many reasons and at different stages of their lives. Often, saving and planning for a house, retirement, and a child’s education are three key reasons someone decides to seek out a financial advisor. If you come into a large windfall, such as an inheritance or your company goes public in an initial public offering, you may need help optimizing those funds.

There are many good times to hire a financial advisor. One such time is when a couple marries. For younger couples, a financial advisor can provide suggestions about how to combine finances, how best to take advantage of workplace savings plans, how to manage any debt and how to set long-term goals such as saving for a home.

Those marrying later in life may seek help blending finances, planning estates or making sense of Social Security benefits and retirement income strategies. Consulting an advisor in one’s 40s or early 50s is helpful to get a timely start on planning ahead for retirement.

How much does a financial advisor cost?

The cost of financial advice varies. Depending on the advisor, you can pay for financial advice through commissions when buying or selling securities, through fees or a combination of the two.

Again, depending on the advisor, those fees can be based on an hourly rate, on a project basis, on a subscription basis or as a percentage of assets managed. Fees based on assets under management (AUM) typically are around 1% at most firms. So, if the client has a portfolio worth $1 million, they might pay $10,000 a year to the advisor. Robo-advisors, on the other hand, typically charge between 0.25% to 0.50% of AUM.

Do I need a financial advisor?

While professional financial advice can be very helpful — whether on a continuing or short-term basis — not everyone needs a financial advisor. Only you know what works best for you, and there are no right or wrong answers that are true for everyone.

To more clearly assess your situation, here is a checklist of questions to ask yourself when considering hiring a financial advisor:

• Do I feel comfortable taking responsibility for making my own financial decisions or would I rather delegate that responsibility to a specialist?
• Do I have the time and interest to gather the information I need to make sound financial decisions?
• Am I disciplined and unemotional enough to stick to an investment or savings plan or do I need someone to help keep me on track?
• Has something unusual — a divorce, an unexpected large expense, windfall income, etc. — come up in my life that requires special attention and specific expertise?
• Am I offered savings or investment plans at work that I’m not sure how to handle?
• Am I facing a decision, such as claiming Social Security benefits or withdrawing funds from a retirement plan, that could have long-term and costly consequences if I make a mistake?