What kind of financial advisor do you need? (2024)

Hiring a financial advisor is a great way to help you manage your money, set financial goals, and plan for retirement. But if you're just starting to look for a financial advisor, you may need help understanding the different types. Let's take a look at the most common titles and what they can do for you.

Types of Financial Advisors

There are different types of licensed financial advisors. Professional names include:

• Registered Investment Advisor (RIA)
• Certified Financial Planner (CFP)
• Chartered Financial Advisor (ChFC)
• Chartered Financial Analyst (CFA)

Other terms to refer to a financial advisor who may or may not have obtained a professional qualification include:

• Financial Advisor
• Financial coach
• Money trains
• Retirement planner
• Asset manager
• Investment Adviser

What is an investment advisor?

An investment advisor is a company or individual that advises clients and manages their investments. Whether you are just starting with a modest amount or have already built up six or seven figureswalletan investment advisor can help you choose the right securities and then manage them for you.

An investment advisory firm is called a registered investment advisor (RIA), and employees of an RIA who work as advisors are called Investment Advisor Representatives (IARs). Although "consultant" with an "o" is the most common spelling, the laws governing these professionals generally use the term "consultant" with an "e," so you'll encounter both when researching RIAs.

Investment advisors who manage $110 million or more in client assets must register with the U.S. Securities and Exchange Commission (SEC). Those who manage less than $110 million in client assets register with the securities regulator in the states where they do business.

How do investment advisors work with you?

Investment advisors provide you with personal advice, tailored to your objectives and risk tolerance. They can help you choose investments,rebalanceyour portfolio or manage your entire investment portfolio. Most also offer brokerage services.

RIAs have oneposition of trusttowards their customers, which means that they must act in the best interests of their customers. In other words, a registered investment advisor must recommend the best investment products and services for each individual, not the products for which he or she pays the highest commissions or fees.

Typically, an investment advisor charges an annual advisory fee that is a percentage of the assets he or she manages for you. From 2019 onwardsaverage compensation for investment advisorsamounted to 1.17% of the assets under management. However, some investment advisors offer fixed fees or hourly rates to clients who need only more limited advice.

According to Brian R. Littlejohn, a Certified Financial Planner (CFP) and financial advisor at Sherwood Investment Management, there are certain designations to look for when looking for an investment advisor.

“Someone looking for investment expertise should look for a Chartered Financial Analyst (CFA),' he said. 'This designation is the gold standard for investment management. It takes an average of more than 1,000 hours of study, along with four years of professional experience and the successful completion of three rigorous exams, to earn the CFA designation.”

If you're looking for broader financial advice that covers your entire financial life, look into seeing a financial planner.

What is a financial planner?

Financial planners take a holistic approach and provide advice on all aspects of their clients' financial lives. A financial planner aims to create a plan that covers budgeting, emergency savings, college funds for your children, insurance needs,retirement planningand estate planning.

Some financial planners sell investment or insurance products, and some may also be brokers. There is a very wide range of different services and offerings among financial planners – and there are no federal or state agencies that directly regulate them. In principle, anyone can call themselves a financial planner and start taking on clients.

For these reasons, when evaluating financial planners, it is best to look for certified financial planners (GVB's). The CFP designation is the highest professional standard in the financial planning industry. The CFP states that a financial planner has extensive training and knowledge, as there are strict training requirements and a lengthy certification exam to obtain the certification. In addition, CFPs are now required to act as trustees for their clients at all times.

To find out if a financial planner is CFP, you can search for their name on the Certified Financial Planner Board of Standards'database.

How do CFPs work for you?

Like investment advisors, CFPs have a fiduciary duty to their clients. They should recommend financial products or plans that are best for the customer; they cannot recommend products simply because they would benefit financially from doing so.

Many CFPs are fee-only, meaning you pay a fee for their services, but they don't make a profit on the recommendations they give you. Others are fee-based, which allows them to earn a commission based on certain referrals. But even these CFPs can't recommend one product over another simply because it would earn them a higher commission. Yet many CFPs believe that fee-based compensation structures can influence their recommendations, so they opt for fee-only.

What is an asset manager?

An asset manager is oneFinancial Advisorthat focuses on wealthy individuals. Wealth managers offer similar services to financial planners – retirement planning, insurance and investment management – ​​but they also specialize in areas such as philanthropic planning and estate planning, areas that are needed by wealthy people with a lot of assets.

“A high-net-worth individual should consult a CFP because their situation is likely more complex and requires knowledge in several areas of personal finance,” says Littlejohn. “CFP professionals are adept at coming up with creative solutions that meet the needs of people with significant wealth.”

In addition to professional references, ask potential asset managers if they are fiduciaries. As with financial planners, anyone can call themselves a wealth manager, which means some – but not all – wealth managers are fiduciaries. To find a fee-only wealth manager who has a fiduciary duty to clients, visit the National Association of PersonalFinancial Advisor's website or use the SEC's advisor search tool.

What is a real estate agent?

Only designated individuals and companies can place orders at trade fairs. When you want to buy or sell securities for your portfolio, e.gsharesInbonds, you need a real estate agent.

INbrokeris an individual or a brokerage firm that acts as an intermediary between individual investors and a stock exchange. Brokers typically receive a commission if you buy or sell securities through them. There are two main types of brokers:

• Full-service real estate agents.Full-service brokers are more expensive than discount brokers, but generally offer personalized investment advice.
• Discount brokers.Discount brokers charge lower fees and commissions, but you usually have to choose investments yourself. Increasingly, discount brokers are moving away from self-directed trading fees entirely.

Before working with a broker, make sure they are licensed in your state. For information about the broker, including to see if there have been any formal complaints against your potential broker, visitBrokerCheck.

Note that many RIAs, financial planners, and asset managers may also be or are affiliated with brokers. This means you may not have to look for a separate broker yourself.

What is a Robo-advisor?

Instead of choosing investments yourself,robo-advisorssimplify the process. Robo-advisors are brokerage firms that offer automated investment portfolios based on your financial goals, timeline and risk tolerance.

When you sign up with a robo-advisor, you'll typically need to answer a few questions about your investment needs and your comfort with risk. The robo-advisor uses your answers to build a portfolio to help you achieve your goals, usually investing in a mix ofexchange traded funds(ETFs), investment funds, shares and bonds.

The Robo Advisor monitors your account for market changes andrebalancing your portfolioas requested. Some robo-advisors have financial professionals you can talk to about your investments and financial needs and create a plan, although this is not standard. Robo-advisors typically do not charge trading fees, only advisory fees of typically around 0.25%, which can make their fees lower than other brokers and financial advisors.

What does a financial advisor do?

A financial advisor is someone who is qualified to advise you on various aspects of your financial life. They first make an appointment with you and determine your situation and financial objectives. They then make a plan on how to best achieve those goals. In many cases they manage your investments for you, but that is not all they do. A financial advisor can help you choose health insurance, determine a debt repayment strategy, and even plan your estate.

Other things to consider when choosing a financial advisor

Forselection of financial advisor, it's important to do some research to ensure you make the right choice for your needs. When evaluating financial advisors, ask the following questions:

Are they a confidant?

Not all financial advisors are fiduciaries. A financial advisor is obliged to take your interests into account when making recommendations. If a financial advisor is not a financial advisor, he or she can make recommendations that may benefit him or her. For example, they may recommend certain investment or insurance products that allow them to earn a higher commission, even though a similar product may offer you similar performance at a lower cost. A fiduciary advisor, on the other hand, could not do this.

What is their typical customer like?

When screening potential advisors, look at their materials and ask what their typical client is like. You want to choose an advisor who has experience with clients in a similar financial position as you. For example, CFPs work with clients of varying income levels, while wealth managers typically only work with people with high net worth.

What is their fee structure?

Before entering into an agreement with a financial advisor, review their fee structure. The most common types of payments are fee-based, fee-based, and commission-based.

• Compensation only:A fee advisor charges a fixed amount, hourly rate or percentage of the assets he manages for you for his services. Many CFPs prefer the fee-only structure.
• Compensation based:Fee-based payments are a combination of commissions and fees. You pay a basic fee, but you can also pay a commission for investment transactions or other financial products.
• Commission based:With a commission-based structure, the financial advisor makes a commission based on the financial products he sells you. This doesn't necessarily mean that the products they sell you aren't the best products for you, but that doesn't have to be the case.

Do they have a disciplinary file?

BrokerCheck allows you to view a financial advisor's background, fee structures, and disciplinary actions. When viewing an advisor's profile, look for any disciplinary actions or complaints filed against him or her.

Are they certified?

Although many people use "financial advisor" as a title, there are professional designations that set some advisors apart. For example, CFPs must complete extensive training and have years of experience before becoming certified.

You can find an advisor and then research their credentials using the following databases:

• The National Association of Professional Financial Advisors
• Certified Financial Planner Board of Standards
• Alliance of Comprehensive Planners
• Garrett Planningnetwerk

Be sure to double-check an advisor's credentials and history using BrokerCheck before entering into an advisory relationship with them.

How much does a financial advisor cost?

How much a financial advisor costs depends on the advisor you choose and their fee structure. Some advisors charge a fee based on assets under management (AUM), which means you pay a percentage based on the amount you invest with them. Fees are typically 0.5% to 1%, but can be as high as 5%. Other consultants charge a flat rate per visit or on an annual basis that can range from a few hundred to several thousand dollars. Some counselors have even started membership-based subscription services where you pay a monthly fee and are entitled to a certain number of sessions and usually get access to educational resources from your counselor.