What is a Financial Advisor?

A financial advisor is a professional who helps people manage their finances and achieve short and long-term financial goals. These professionals can assist with many different financial situations, from investing in stocks to understanding your taxes.

If you want to take control of your financial health, meeting with a financial advisor can be a big step in the right direction. With their help, you can start building wealth, growing your retirement savings, and help you choose the right kinds of investments and even insurance.

Keep reading to learn more about what financial advisors do, how to choose the right one for your needs, and more!

Financial Advisor Description: What Does a Financial Advisor Do?

Financial advisors often have regular one-on-one meetings with their clients – and they will usually start the relationship by identifying the client’s goals. While some clients may want to focus on buying a home or starting a family, others are more interested in investing and planning for retirement. Everyone will have a different end goal, and the financial advisor creates a customized plan for all of their clients so that each client is able to reach their monetary goal.

For example, let’s say you want to retire in 15 years. To achieve this goal, you and your advisor will discuss several steps you can take, including the amount of money you should be investing every month, the accounts you’ll need, insurance options you should consider, and the tax implications of all of these steps.

Not only is it your financial advisor’s job to create a plan for you to follow, but they are also your personal financial educator. It is their job to educate you on the different financial options available and how to execute their plan.

When you first meet with your financial advisor, you might discuss budgeting and saving. Still, as your knowledge increases, they can help you understand more complex financial topics, like insurance, tax matters, and complicated investment options.

On the day-to-day, a financial advisor might meet with a few different clients, do some market research for their clients, and monitor different investments their clients have made. While the exact daily schedule will depend on the financial advisor and their workload, their day usually centers around managing their customers’ finances.

Services Provided by Financial Advisors

At this point, you might be wondering if a financial advisor can help you with your financial goals and personal situation. Check out the list below for a complete list of the ways a financial advisor can help:

Debt management: They can help you create strategies to avoid debt and pay off existing debt.
College savings: Financial advisors can give you specific tips on preparing financially for higher education costs.
Budgeting help: Your advisor can give you a budgeting plan for both short and long-term goals.
Retirement planning: They can help you create a customized savings and investing plan to be fully prepared for retirement.
Investment advising: Even if you don’t know a single thing about investing, your financial advisor can give you helpful insight on how to start investing, the accounts you’ll need, and how much you need to invest each month.
Estate planning: Your advisor can help you identify the people you want to receive your assets after you pass, creating a plan to carry out your wishes.
Tax planning: Taxes can be complicated, but your financial advisor is there to help you. They can prepare tax returns, ensure the best use of capital gains tax rates, maximize tax reductions, and plan to minimize taxes during your retirement years.
Long-term healthcare and insurance assistance: An advisor can offer the best long-term solutions and insurance options that align with your current finances.

While some financial advisors offer only some of these services, others offer comprehensive services, like Northwestern Mutual financial planning.

Different Types of Financial Advisors

Below, you’ll find a list of the different types of financial advisors and what they specialize in.

Investment advisors

An investment advisor is paid to provide financial advice to clients and can also manage client assets directly. Be sure to verify an investment advisor’s registration with BrokerCheck by FINRA, also known as the Financial Industry Regulatory Authority.

Broker-dealers and brokers

This is a company or individual that buys and sells securities like stocks, bonds, and mutual funds. Broker-dealers can buy and sell on behalf of their customers – in this case, they are acting as a broker. If they buy and sell for their own account, they act as a dealer.

Broker-dealers can do both, and they are usually members of FINRA and are registered with the SEC.

Financial consultant

A “financial consultant” is a general term that anyone can use. However, some financial consultants hold the title of a chartered financial consultant, or ChFC, which has similar education requirements as a CFP (below). ChFC must adhere to The American College’s code of ethics and have a fiduciary duty to clients.

Certified financial planner

Also known as a CFP, these individuals have met experience requirements and rigorous training of the CFP Board. Those working as CFPs are required to pass a certification exam and are also held to certain ethical standards.

As a result, if you are looking for a financial advisor, a CFP is usually the best option. Financial advisors can use the term “financial planner” without actually meeting the criteria for a CFP, so be sure to check their credentials with the CFB Board before working with them.

Portfolio, investment, and asset managers

This title is exactly what it sounds like – portfolio, investment, and asset managers manage client investment portfolios. They may deal only with a customer’s investment portfolio, or they might offer other services as well. Double-check that they are registered as an investment advisor through BrokerCheck before working with them!

Financial coach

If you need someone to help you with the basics of financial literacy, a financial coach is the best option! They can help you budget, save money, or pay off debt, perfect if you are at the beginning of your financial wellness journey. An investment advisor can later manage the wealth they help you generate.

Wealth advisors

Wealth advisors typically only work with very wealthy people, and they offer holistic financial planning and investment advice. Advisors who specialize in wealth management usually help their clients in every aspect of their financial planning, including estate planning, tax advice, and health insurance.

Robo-advisor

If you only need help managing your investments, a robo-advisor could be a great option. This automated investment management service uses computer algorithms to manage investment portfolios based on the client’s goals.

Financial therapist

Need to improve your money mindset? A financial therapist could be a great solution. Combining behavioral therapy with financial coaching, these professionals can help you with trauma and other negative emotions surrounding money. After all, budgeting, saving, and investing can cause strong negative emotions for many people.

How Financial Advisors Get Paid

At this point, you may be wondering how your financial advisor earns an income – here are the main ways financial professionals get paid.

Client fees

When it comes to paying your financial advisor, you’ll either do so through an hourly fee, a fixed fee, or as a percentage of your assets under management. The latter is the most common, with the financial advisor taking a percentage of the funds they manage for you.

For example, if you have a $1 million investment portfolio that your financial advisor is managing, they could charge a 1.5% fee, so you’d essentially be paying them $15,000 per year. These fees could be divided on a quarterly or monthly basis.

Some advisors may also charge performance fees, charging you additional fees if your investments meet specific benchmarks.

Other advisors charge a flat or hourly fee. For example, some firms may charge a $250 fee for an hour of financial planning or a larger flat fee for a consultation. They may also charge a flat fee for a specific kind of project, like estate planning.

Commissions

Many financial advisors get paid through commissions. This is when they recommend a particular financial product, like an annuity or mutual fund, and get a kickback for selling it (in addition to client fees!).

For example, you could invest $3,000 into a mutual fund recommended by your advisor. Then, they receive a 3% commission fee, earning them $90. This could also be true if they sell you a life insurance policy or annuity.

Salaries

Some financial advisors get a salary from the investment firm they work for. They may have opportunities to earn incentives or bonuses for hitting specific goals, like onboarding a high number of new clients each year.

Fee-Only vs Fee-Based

If a financial advisor works off of fees, they will either be fee-only or fee-based. Here’s a breakdown of these two structures:

Fee-only: These advisors don’t work off commissions – instead, they only earn income through client fees, which could include percentage-based management fees and flat or hourly financial planning fees.
Fee-based: These advisors earn income from both client fees and commissions. You’ll get charged for asset management or financial planning, and your advisor will also make more income from the products they are selling to you.

As you can imagine, commissions represent a potential conflict of interest. Your advisor may only recommend products they get the biggest kickback from and not what’s best for you and your needs. This is why finding an advisor that works on a fee-only model is essential.

So, how much does a financial advisor make? While the answer depends on the level of experience, area where they reside, and business model, the Bureau of Labor and Statistics estimates that the median pay for a financial advisor in the United States is around $99,000 as of 2023. Newer financial advisors will likely earn less than this, while those with more experience can earn much more.

How to Choose the Right Financial Advisor

So, how do you choose the right financial advisor for you? Follow the steps below!

Determine your financial goals: To get the most out of your financial advisor, you need to begin with the end in mind. Do you need help investing? Budgeting? Saving for retirement? Different advisors specialize in different areas, so knowing your goal ahead of time can help you find the right person.

Know what credentials to look for: While there are many different kinds of financial advisors, there are two credentials you should look for in order to get the best results.

Certified Financial Planner: A CFP has a fiduciary duty to their clients. For best results, find one who works on a fee-only structure, so you know they are looking out for your best interests.
Registered Investment Advisor: An RIA provides many different financial services, and they are registered with and regulated by either the U.S. Securities and Exchange Commission or state regulators. This can give you more peace of mind.

Review advisor service types: You can choose between robo-advisors, online advisors, or traditional in-person advisors. The one you choose will depend on your needs and financial situation. For example, while robo-advisors are extremely affordable, in-person services are the highest-cost option. On the other hand, if your situation is complex, in-person services are likely the best option – it just depends on your particular needs.

Vet their background: Always double-check your advisor’s background and credentials before working with them. You can do this by looking up their Form ADV or reviewing their employment record on FINRA’s Broker Check website.

Hire the financial advisor: Once you’ve chosen a professional and vetted their background, you can start working with them! You can start with a consultation, which is often free. Then, you’ll likely receive an engagement letter and legal documents to sign before you officially start working together.

Conclusion

A financial advisor can assist you with many different tasks, whether you’re saving for your kids’ college education or preparing for retirement. Regardless of what you need, this is an excellent step in the right direction for your financial well-being.

Start researching advisors to take the first steps toward financial education and planning – your future self will thank you!