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What Is a Financial Advisor and How to Choose One

A financial advisor helps you save or invest for financial goals. Financial advisors can also assist with tax planning, estate planning or insurance coverage. There are several types of financial advisors.
Oct. 8, 2019
Advisors, Financial Planning, Investing, Retirement Planning
how-to-choose-a-financial-advisor
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Financial advisors help people manage their money and reach their financial goals. They can provide a range of financial-planning services, from investment management to budgeting guidance to estate planning.

There are several types of financial advisors. Here’s more about what they do, and how to choose the right financial advisor for you.

What is a financial advisor?

A financial advisor offers assistance with — or, in some cases, complete management of — your finances. The term financial advisor is used to describe a wide variety of people and services, including investment managers, financial consultants and certified financial planners. A financial advisor can also be a digital investment management service called a robo-advisor.

What does a financial advisor do for you?

The services provided by a financial advisor will vary based on the type of advisor, but generally speaking, a financial advisor will assess your current financial situation — including your assets, debts and expenses — and identify areas for improvement.

Financial advisors can work with you to help reduce spending, ensure your insurance needs are covered, help you save and manage your investment accounts.

A good financial advisor will also ask you about your goals and create a plan to help you reach them. That may mean calculating how much you should save for retirement, making sure you have an adequate emergency fund, offering tax-planning suggestions or helping you refinance or pay off debt. Financial advisors also help invest your money, either by recommending specific investments or providing complete portfolio management.

» Looking for help? Here’s how to find a financial advisor

Types of financial advisors to choose from

There are several types of financial advisors, from online digital services to local, in-person traditional advisors. Here’s a rundown of each:

Robo-advisors: A digital service offering simplified, low-cost investment management. You answer questions online, then computer algorithms build an investment portfolio according to your goals and risk tolerance. Robo-advisors monitor and regularly rebalance your investment mix, offering portfolio management at a lower cost. (Sound right for your needs? See our top picks for best robo-advisors.)

Online financial planning services: This is the next step up from a robo-advisor: An online financial planning service that offers virtual access to human advisors.

A basic online service might offer the same automated investment management you’d get from a robo-advisor, plus the ability to consult with a team of financial advisors when you have questions. More comprehensive services roughly mirror traditional financial planners — you’ll be matched with a dedicated human financial advisor who will manage your investments and work with you to create a holistic financial plan. Facet Weath and Personal Capital are examples of services in this space.

Traditional financial planners, financial consultants and financial advisors: Broad terms for professionals in the financial services industry, covering a variety of specialists, including:

  • CFP: Provides financial planning advice. To use the CFP designation from the Certified Financial Planner Board of Standards, an advisor must complete a lengthy education requirement, pass a stringent test and demonstrate work experience.
  • 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.
  • 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. Some focus on investment portfolios, others take a more holistic, financial planning approach.
  • Wealth managers: Wealth management services typically concentrate on high net worth clients and provide holistic financial management.

In addition, the same person can have more than one of these titles. For instance, a CFP may also be a registered investment advisor.

How to choose a financial advisor

Consider three factors when choosing a personal financial advisor so you get the advice you want — and don’t pay too much or pay for things you don’t need:

1. Figure out what services you want

If you simply want help choosing and managing investments, a robo-advisor is a streamlined, cost-efficient choice. It’s also good for those just starting out, because robo-advisors typically have low or no account minimums.

If you have a complicated financial situation or want holistic advice on topics like estate planning, insurance needs, etc., you might want to choose an online financial planning service or a human financial advisor in your area. If you don’t mind meeting with your advisor virtually, you may save money with an online service. These services also typically have lower account minimum requirements than a human advisor might.

Keep in mind that you can start with a robo-advisor or online service, then reassess your planning needs as your financial situation changes or grows more complex.

2. Consider what cost level works for you

It’s important to understand a financial advisor’s costs and fees before you commit to services. Generally speaking, there are three cost levels you’re likely to encounter:

  • Robo-advisors often charge an annual fee that is a percentage of your account balance with the service. Robo-advisor fees frequently start at 0.25% of the assets they manage for you, with many top providers charging 0.50% or less. On a $50,000 account balance, 0.25% works out to $125 a year.
  • Online financial planning services that offer more comprehensive financial planning and access to dedicated CFPs will charge more than robo-advisors, but less than traditional financial advisors. Online services typically charge either a flat subscription fee, a percentage of your assets or both. For example, Personal Capital charges 0.89% of assets under management per year. Facet Wealth charges an annual fee that ranges from $480 to $5,000 a year, depending on the complexity of your financial situation. That flat fee includes portfolio management.
  • Traditional human advisors also often charge a percentage of the amount managed, with a median fee of 1%, although it can range higher for small accounts and lower for large ones. Others may charge a flat fee, an hourly rate or a retainer. Some require at least $250,000 in investable assets to get started.

3. Check out qualifications and standards

It’s important to always check out the record of the company or person you’re considering, by looking up the firm’s Form ADV. Among other things, this form will outline how the firm or advisor charges for its service (and what the specific fees are), conflicts of interest and any past disciplinary actions.

We also have a list of 10 questions you should ask a financial advisor — including whether they hold to a fiduciary standard, which requires that they act in your best interest.

Recommended financial advisors

Now that you understand what a financial advisor is and we’ve gone over the options, you might be looking for specific recommendations for advisors. Below are some of our picks for the best robo-advisors and online financial planning services:

Robo-advisors
SoFi Automated Investing

Why we like SoFi:

SoFi charges no management fee and offers unlimited access to a team of CFPs.

» Read our full review
Management fee: 0%

Account minimum: $0

Promotion: Free career coaching, plus loan discounts with qualifying deposits.
Wealthfront

Why we like Wealthfront:

Wealthfront is strictly digital, with powerful financial planning tools and a low management fee.

» Read our full review
Management fee: 0.25%

Account minimum: $500

Promotion: $5,000 managed free for NerdWallet readers.
Online financial planning services
Facet Wealth

Why we like Facet Wealth:

Facet Wealth offers dedicated CFPs and charges a flat fee based on how much financial advice you require. Investment management is included.

» Read our full review
Management fee: $480 to $5,000 per year.

Account minimum: $0

Personal Capital

Why we like Personal Capital:

Personal Capital offers dedicated CFPs and charges a percentage of assets under management.

» Read our full review
Management fee: 0.89%

Account minimum: $100,000

Promotion: 2 free months of financial advisory services for NerdWallet readers.

Compare more advisors

You can view our full list of recommended robo-advisors here.

More resources

Want more information? Check out these articles:

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