What Is a Financial Advisor — and Do I Need One?

Advisors, Brokers, Financial Planning, Investing, Personal Finance, Retirement Planning
What Is a Financial Advisor — And Do I Need One?

When you’re trying to make smart decisions, you sometimes need expert guidance. Financial advisors earn a living by helping people decide how to manage their money, including investments, and reach financial goals.

“Financial advisor” isn’t an official designation, and the term can apply to people with a variety of specialties. For example, a registered investment advisor is a type of financial advisor who typically focuses on investment portfolios. A certified public accountant is another type of financial advisor who generally focuses on tax and accounting services. Some CPAs also hold the personal financial specialist designation that signals a broader focus on financial planning.

A financial advisor can also hold multiple designations and licenses. A registered investment advisor, for example, could hold both the certified financial planner and CPA designations. The alphabet soup can get confusing, but with a little research, you can find the best expert for your situation.

» Not sure which financial advisor is right for you? This NerdWallet guide can help.

4 types of financial advisors

To start, it’s important to know if your advisor is a fiduciary, meaning that he or she puts clients’ interests first. Many advisors, such as registered investment advisors and members of the National Association of Personal Financial Advisors, the Garrett Planning Network and other groups, abide by the fiduciary standard in all of their work with clients. (The fiduciary rule you might have heard about in the news applies only to retirement accounts. Also, it’s under review and might change. Get a rundown on the U.S. Department of Labor website.)

Here are the major types of financial advisors:

Registered investment advisor. 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. Some RIAs focus on investment portfolios, while others take a more holistic, financial planning approach.

Certified financial planner. 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.

Broker. Also known as registered representatives, these people sell stocks, mutual funds and other investments at a brokerage or broker-dealer. 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. For example, a suitable investment might cost more — and bring a higher commission to the broker — than an investment that’s in your best interest. The Labor Department’s fiduciary rule currently applies to brokers only with regard to retirement accounts.

You also might come across 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; as well as other types of experts.

Check on fee structure

One crucial distinction among advisors is how they get paid. In general, “fee-only” advisors don’t receive commissions on products they sell, avoiding a potential conflict of interest. “Fee-based” advisors charge a fee, but also might receive commissions on some products. Another category is “commission only” — these advisors get paid only if they sell certain products to clients.

How do I know if I need a financial advisor?

It might make sense to hire a financial advisor if you’re:

  • Undergoing or planning a big life event. If you’re getting married, having a baby, buying a house, taking care of aging parents, starting a business or experiencing another life change, consider hiring a financial expert. Or maybe you want to quit your job to travel the world for a year. “That can be a scary thing to try to figure out on your own,” says Tyler Reeves, CFP and founder of Plimsoll Financial Planning.
  • Juggling multiple financial goals and have limited funds. An advisor can help you prioritize.
  • Feeling overwhelmed by money issues. These could include investing an inheritance, handling finances during an impending divorce or reducing your tax bill.
  • Looking for someone to hold you accountable. Sometimes making money decisions is much easier than sticking to those decisions. “Most plans fail because they aren’t implemented,” says Robert Lindstrom, CFP and associate financial planner at the Financial Consulate. “Think of your planner as a coach.”
  • Making decisions in the dark. Do you know your net worth or how to figure it out? Do you know your retirement portfolio’s asset allocation? If not, it might make sense to consult an expert, says Bob Carroll, a CFP, CPA and managing director of the Cincinnati office of Carnegie Investment Counsel.
  • Not feeling financially secure. If your life and career are going great but your finances aren’t, Carroll says “that’s a telltale sign” you should probably talk to someone.

Keep in mind that some advisors (think: fee-only, CFP types) are happy to get hired for a few hours to answer specific financial questions. You don’t necessarily need oodles of cash or a long-term arrangement.

OK, what’s next?

Take time to research the best type of advisor for you. Our handy guide explains the options available to you based on your assets and needs.

Read: Find a financial advisor »

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