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What Is a Financial Advisor, and What Do They Do?

If you're struggling to manage your money, you might benefit from a financial advisor. Here's more about what a financial advisor is, what they do and how to know if you need one.
Sept. 21, 2020
Advisors, Financial Planning, Investing
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Financial advisors help you create a plan for meeting your financial goals and guide your progress along the way. They can help you save more, invest wisely or reduce debt.

Financial advisor definition

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

» Looking for an advisor? View our list of the best financial advisors

What financial advisors do

The services provided by financial advisors 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.

A good financial advisor will 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 investment management.

In some cases, you can choose which services you want or need based on the type of advisor you select. For example, a traditional in-person advisor will likely offer personalized, hands-on guidance for an ongoing fee. A robo-advisor is a low-cost, automated portfolio management service, typically best for those who want help managing their investments. Then there are online financial planning services, which marry the lower costs of a robo-advisor with the holistic guidance of a human advisor.

Below, an overview of each type of financial advisor and what they do:

1. Robo-advisors

If you’re looking to invest for retirement or another goal, a robo-advisor can be a great solution. They’re almost always the lowest-cost option, and their computer algorithms will set up and manage an investment portfolio for you. You’re probably a good candidate for a robo-advisor if:

You need to save for retirement but aren’t sure where to begin.

You want to benefit from stock market returns but don’t have a lot of time to learn how to invest.

You have a lump sum you want to invest for one or more future financial goals.

You don’t have much money to invest yet — robo-advisors typically have low or no account minimums.

Here’s what to expect from a robo-advisor:

  • Your first interaction will most likely be a questionnaire from the company you’ve selected as your provider. The questions help identify your goals, investing preferences and risk tolerance.
  • Based on the information you provide, the robo-advisor’s algorithm will recommend an investment portfolio that’s typically built using low-cost exchange-traded funds and index funds.
  • The service will then provide ongoing investment management, automatically rebalancing your investments as needed and taking steps to reduce your investment tax bill.

The low-cost, easy-entry nature of robo-advisors makes them a good choice for many consumers.

» Sound like the right fit? Check out NerdWallet’s picks for the best robo-advisors

2. Online financial planning services

Online financial planning services offer investment management combined with virtual financial planning. The cost is higher than you’ll pay for a robo-advisor, but lower than you’d pay a traditional advisor.

Consider an online financial planning service if:

You want to work with a human advisor, but you don’t mind meeting that advisor by phone or video. You’ll save money by meeting virtually but still receive investment management and a holistic, personalized financial plan.

You want to choose which financial advice you receive. Some services, like Facet Weath, charge a flat fee based on the complexity of the advice you need (and investment management is included). Others, like Betterment, charge a fee for investment management and offer a la carte planning sessions with an advisor.

For many people, this model is the right fit — it combines lower costs with a high level of service. Here’s what to expect from an online planning service:

  • Some services function like hybrid robo-advisors: Your investments are managed by computer algorithms, but you’ll have access to a team of financial advisors who can answer your specific financial planning questions.
  • At the other end of the spectrum are holistic services that pair each client with a dedicated CFP, a highly credentialed expert.
  • Either way, you should receive investment management and personalized financial guidance to help you meet your goals.

 

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3. Traditional, in-person financial advisors

In addition to robo-advisors and online planning services, the term “financial advisor” can refer to people with a variety of designations, 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. Learn more about investment advisors.
  • Wealth managers: Wealth management services typically concentrate on clients with a high net worth and provide holistic financial management.

Human financial advisors generally cost more than robo-advisors and online services, and may have minimum investment requirements of $250,000 or more. But you may decide to go for it if:

You’re undergoing or planning a big life change, such as getting married or divorced, having a baby, buying a house, taking care of aging parents or starting a business.

Your investments have grown or your financial life has gained complexity beyond what a robo-advisor or online advisor can handle.

You want to meet with someone in person and willing to pay more to do so.

Here’s what to expect from a traditional advisor:

  • You’ll likely meet in person at a local office.
  • The advisor will provide holistic planning and assistance to help you achieve financial goals.
  • You’ll have in-depth conversations about your finances, short- and long-term goals, existing investments and tolerance for investing risk, among other topics.
  • Your advisor will work with you to create a plan tailored to your needs: retirement planning, investment help, insurance coverage, etc.

Hire an advisor you’ll be comfortable working with and, of course, one who’s qualified — ideally a CFP and a fiduciary, meaning she’s required to put your interests first.

» Ready to start? Here’s how to choose a financial advisor.

When to get a financial advisor

If you’re struggling to prioritize your financial goals, need a plan for where and how to save, or want help with investment management, you may want to work with a financial advisor.

Financial advisors bring an expert and outside view to your finances, take a holistic look at your situation and suggest improvements. Financial advisors also can help you navigate complex financial matters such as taxes, estate planning and paying down debt.

A good financial advisor or robo-advisor can be worth the cost if you’re able to save more money, cut your expenses or better plan for the future. A financial advisor can also help you feel more secure in your financial situation, which can be priceless.

But financial advisors can also come with high fees. Depending on the type of advisor you choose, you might pay anywhere from 0.25% to 1% of your balance each year. Some advisors charge a flat fee to create a financial plan, or an hourly, monthly or annual rate. (Here’s a full overview of how much financial advisors cost.)

If you’re just starting out, a robo-advisor or online planning service is likely the best fit for you.

» Compare online advisors: Our list of the best financial advisors

FAQs about financial advisors and what they do

Which type of financial advisor is right for me?

There are many different types of financial advisors to choose from and considerations to make when deciding who is right for you. Think through the following factors:

  • End goal: What would you ultimately like to achieve (e.g., investment recommendations vs. holistic financial planning)?
  • Comfort level: How much experience and confidence do you have in your own investing prowess?
  • One vs. many: Do you prefer building a long-term relationship with one go-to person or are you willing to consult with different advisors when questions arise?
  • In-person vs. virtual: Do you prefer meeting face-to-face or will a conference call or video conference suffice?
  • Cost: How much are you willing to pay for advice and guidance?

Remember to interview various advisors to find someone you feel comfortable discussing your personal financial situation with. You can use our list of 10 questions to ask a financial advisor when conducting your due diligence.

What should I expect from a financial advisor?

A financial advisor should first take the time to understand the ins and outs of your personal financial situation and financial goals. Using this information, the advisor should offer recommendations on how to improve your situation, including:

  • Assisting with saving and budgeting.
  • Planning to meet short- and long-term goals.
  • Explaining various account structures and investment products that make sense for your situation.
  • Identifying the right asset allocation or investment mix for your portfolio.
  • Helping to minimize tax consequences.
  • Answering questions about any other financial issues you bring up.

Best practice includes touching base with your advisor periodically (at least once a year) to review your portfolio’s progress over time and determine if any changes should be made to course-correct.

How do financial advisors make money?

Not only are there many different types of financial advisors, but advisors also make money in many different ways. Some advisors charge an ongoing fee based on the amount of assets they manage for you, some are paid commissions from the products they sell to you (annuities, life insurance, mutual funds, etc.) or from trades they place on your behalf, and some charge an hourly fee for the services they provide. Often, it’s a combination of these methods. Don’t be afraid to ask any advisor what they charge and compare their fees to others before moving forward. (Learn more about financial advisor fees here.)

What’s the difference between a financial advisor and a financial planner?

A financial advisor can also be a financial planner or provide financial planning as part of their repertoire of services. A financial planner usually focuses on creating and analyzing financial plans and may not provide direct investment advice and/or manage assets. Finding a professional who is skilled in the particular area of your finances that you need help with will likely make the most sense.

How do I know I can trust a financial advisor?

There are many ways to assess an advisor’s reputation. You can look up any registered broker, investment advisor or firm using BrokerCheck, a free service provided by FINRA, the Financial Industry Regulatory Authority. This tool shares background on the advisor’s employment history, licenses and certifications, along with any disciplinary actions or violations the advisor has been subject to while in a broker or advisor capacity.

Seeking an advisor with a certified financial planner designation helps, as they’ve had to meet rigorous standards surrounding education, experience, ethics and examination. They also must pledge to always act as a fiduciary, which means they make all decisions in the best interest of their clients.

The reputation of the firm the advisor is attached to, along with their tenure at the firm, testimonials from existing clients (feel free to ask for names to contact) and your own gut reaction when interacting with the advisor can all help provide peace of mind that you’ve selected a trustworthy and experienced advisor. And remember, you always have the power to change advisors at any time.

What investment return should I expect from a financial advisor?

Historically, the average annual return for the stock market has come in around 10%. Taking inflation and other factors into consideration, you might expect an average annual return of 6% for stock market investments. However, the investment return you earn will ultimately depend on your portfolio’s overall asset allocation, time frame and market volatility.

For example, an investor with a moderate portfolio (generally speaking, a portfolio with a 60-40 investment mix, or 60% in stocks and 40% in fixed income) will not usually beat the S&P 500 index, which is composed of 100% large-cap U.S. stocks, during a rising market environment. By the same token, in times of market downturn, that same less-risky, moderate portfolio should hold up better than the S&P 500.

With a financial advisor’s advice, guidance and expertise, hopefully your portfolio will beat market returns, adjusted for risk. But remember that historical averages reflect market returns over a full market cycle, so it could take some patience to see results from investing, particularly if you entered the market during a down year.

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