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What Is a Financial Advisor and How to Choose One

May 23, 2018
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 one-size-fits-all, and 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 a wide variety of people or to digital services called robo-advisors. They all help you manage your money, in various ways.

Digital services: Robo-advisors offer a simplified, low-cost way to invest. You answer questions online, then computer algorithms build a portfolio according to your goals and risk tolerance. They offer regular rebalancing and financial planning tools. And if you prefer some human guidance, most offer a hybrid model that lets you consult with advisors.

» If you’re ready to take action, here are our top picks for best robo-advisors.

People: “Financial advisor” isn’t an official designation, it’s a broad term for several types of specialists. A certified financial planner generally will focus on helping you reach your financial goals, for example, while an enrolled agent prepares your taxes.

  • 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.
  • Certified financial planner: Provides financial planning advice. This designation from the Certified Financial Planner Board of Standards requires completing a lengthy education requirement, passing a stringent test and demonstrating work experience.
  • Robo-advisor: These online services use computer software and algorithms to manage clients’ investment portfolios, often at a fraction of the cost of a live advisor. Many 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

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. services you want

If you 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 robos 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 need a human advisor.

2. Cost

Robo-advisors’ annual fees range from 0.25% to 0.89% of your assets.

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. Some require at least $250,000 in investable assets. Others may charge a flat fee, an hourly rate or a retainer. Understand their costs and fees before you commit.

3. qualifications and standards

Check out the record of the company or person you’re considering. And ask 10 important questions of any human advisors you’re considering — including whether they hold to the fiduciary standard, which requires that they act in your best interest.

Here’s a quick cheat sheet:

Digital Advisors
Human Advisors
  • Provide investment guidance and portfolio management
  • Many offer access to human advisors when you have questions
  • Good for those starting out or when your situation is not complex
  • Provide investment guidance and portolio management
  • Can offer holistic financial advice on topics like estate planning
  • Good for more-complex situations and/or more assets (some require $250,000+)
Fees: 0.25% to 0.89% Fees: Median 1%
Qualification check: Form ADV covers an advisor’s or company's history, including any misconduct. Qualification check: In addition to Form ADV, there are more ways to background check financial pros.

 

OK, what’s next?

Now that you know about the different types of financial advisors, it’s time to take the next step. We spent over 300 hours reviewing the top robo-advisors before selecting the best for our readers.

Read: The best robo-advisors of 2018 »

More resources

In the market for a human advisor? Check out these resources:

Tips: How to choose a financial advisor in 3 steps

  1. Services: Decide what help you want, whether it’s simply investment management or more holistic planning services
  2. Cost: Understand the costs and fees (robo-advisors typically cost less than a human advisor)
  3. Qualifications: Check the record and certifications of the company or person you plan to hire

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