Advertiser Disclosure

What Is a Financial Advisor and How to Choose One

Advisors, Financial Planning, Investing, Retirement Planning
how-to-choose-a-financial-advisor

Financial advisors help people decide how to manage their money and reach their financial goals.

But financial planning isn’t a one-size-fits-all activity. There are several types of advisors.

Let’s figure out which is the best for you.

What is a financial advisor?

The term “financial advisor” can apply to people or to digital services called robo-advisors.

It applies to people with a variety of specialties, certifications and titles, but all of them help you manage your money. It isn’t an official designation. For example, a certified financial planner generally will focus on helping you reach your financial goals, while an enrolled agent prepares your taxes. Both provide a type of financial advice.

So does a robo-advisor, which can help you choose and rebalance your investments using a computer algorithm. Most of these digital advisors also offer access to a human advisor, under a hybrid model.

Broker or stockbroker: Buys and sells financial products on behalf of clients in exchange for a fee, commission or both. Must pass exams and register with the U.S. Securities and Exchange Commission. They’re generally required to sell products that are “suitable” for clients, a lower standard than the fiduciary standard, because a suitable investment isn’t necessarily the best one for you. (The Labor Department’s fiduciary rule currently applies to brokers only with regard to retirement accounts.)

Registered investment advisor: Provides advice and makes recommendations in exchange for a fee. RIAs are registered with the U.S. Securities and Exchange Commission or a state regulator, depending on the size of their company. They’re held to a fiduciary standard in dealing with clients, putting your best interest ahead of their own. Some RIAs focus on investment portfolios, while others take a more holistic, financial planning approach.

Certified financial planner: Provides financial planning advice. This designation, offered through the Certified Financial Planner Board of Standards, requires completing a lengthy education requirement, passing a stringent test and demonstrating work experience. All abide by a fiduciary standard when providing financial planning services.

Robo-advisor: These online advisors use computer software and algorithms to manage clients’ investment portfolios, often at a fraction of the cost of a live advisor. Read more about how robo-advisors work and what they cost. Some offer access to live advisors as well.

There are other specialties, too, including chartered financial analysts, who can help you build an investment portfolio; enrolled agents, who focus on tax preparation; and wealth managers, who usually concentrate on high net worth clients.

How to choose a financial advisor

When choosing a personal financial advisor, two key factors to consider are cost and the complexity of your financial situation. If you don’t, you risk spending more money than necessary on a service that may not suit your needs.

Most Americans assume their only option is a human advisor, but depending on your situation a digital provider could offer the same level of service at a fraction of the cost. Human advisors who charge a percentage of the assets they manage typically only work with people who have at least $250,000 in investable assets and charge 1% to 2% in fees. But digital providers have no or low account minimums and charge only 0.25% to 0.89%.

And if the idea of a “robot” manager is off-putting, most digital providers offer a hybrid model that lets you access a human advisor if you have additional questions.

Here’s a cheat sheet on what category of financial advisor might be right for you:

Choose a digital advisor if: You are looking for guidance on what to invest in and ongoing management of your portfolio.

Choose a human advisor if: You have a complicated financial situation and have specific needs (typically more than $250,000 in assets is required).

Digital Advisor
Hybrid Advisor
Human Advisor
Fees: 0.25% to 0.50%
Fees: 0.3% to 0.89%
Fees: 1% to 2%
Good for those just starting out (<$25K)
Good for those with some wealth built ($25K-$250K)
Good for those with established wealth and/or complex situations ($250K+)
Most human advisors won't take on clients with less than about $250,000 in assets. You could hire an hourly or flat-rate financial advisor, but it might make sense to start with a low-cost digital advisor.
Robo-advisors can be a solid fit at this stage, but if you want a human expert to weigh in, a hybrid advisor can provide the direction you need. Some have higher account minimums than typical digital advisors.
Your options for personalized financial services increase when your investments run north of $250,000. If you’re not deterred by the management fee, a human advisor might be the right solution.

How to get started

If you think you need a human advisor, these resources can help you find one:

If you’re interested in a robo-advisor, here are a few of our top picks for best overall digital and hybrid advisors. If you’d like more guidance on choosing one, check out our full roundup of the best robo-advisors.

NerdWallet rating

Fees

0.25%

management fee

Account minimum

$500

Promotion

$5,000

amount of assets managed for free

The bottom line

Wealthfront has built client trust by offering free management on the first $5,000 — with NerdWallet’s promotion — but the company’s direct indexing service really shines, adding as much as 2% to annual investment performance for eligible accounts.

Show pros & cons

Pros

  • First $5,000 managed free (NerdWallet promotion).

  • Low ETF expense ratios.

  • Daily tax-loss harvesting.

  • Direct indexing on accounts over $100,000.

  • Automatic rebalancing.

Reader favorite

Cons

  • No fractional shares.

  • No large-balance discounts.

Read full review
NerdWallet rating

Fees

0.25%

management fee

Account minimum

$0

Promotion

Up to 1 year

of free management with a qualifying deposit

The bottom line

Betterment has maintained its status as the largest independent robo-advisor for a reason: The company offers a powerful combination of goal-based tools, affordable management fees and no account minimum.

Show pros & cons

Pros

  • No account minimum.

  • Fractional shares limit uninvested cash.

  • Robust goal-based tools.

Reader favorite

Cons

  • No direct indexing.

Read full review
NerdWallet rating

Fees

0.50%

management fee

Account minimum

$0

Promotion

$50

cash bonus with deposit of at least $1,000 in first 30 days

The bottom line

Wealthsimple’s $0 minimum balance requirement, hands on human help and its no-fuss, streamlined design make it an attractive place for beginners to start their investing journey. But the company’s real standout feature among the robo-advisor competition is its lineup of socially responsible investment (SRI) portfolios, a refreshing addition for values-based investors. Another unusual offering that customers with taxable investment accounts will appreciate is free free tax-loss harvesting, no minimum account balance required.

Show pros & cons

Pros

  • Free access to human advisers

  • Free portfolio analysis

  • Free tax-loss harvesting

  • Socially-responsible investment options

  • No account minimum

Cons

  • Higher account management fees

  • Limited free-management promotion

  • Limited personal finance tools

Read full review
NerdWallet rating

Fees

0.25%

management fee

Account minimum

$0

Promotion

Up to $750

cash bonus with qualifying deposit

The bottom line

This advisor markets itself to women and takes a goal-focused approach that factors in women’s lower incomes, lifetime earnings and longer lifespans. With its $0 account minimum, competitive advisory fees (ranging from 0.25% - 0.5% of assets) and unlimited access to financial advisors (Premium clients can talk to CFPs), Ellevest is an appealing choice for investors of any gender.

Show pros & cons

Pros

  • Low account minimum and fees

  • Goal-focused investing approach

  • Portfolio mix that factors women’s needs

Cons

  • Few accounts supported

  • No tax-loss harvesting

Read full review

About the authors