What do financial advisors do?
Everything you need to know and whether you should hire one
Hiring a financial advisor can be a smart move if you don't have the time or desire to involve yourself in the world of money management. However, you may be asking yourself, "What do financial advisors do?"
Put simply, a financial advisor gives advice about what you should do with your money. After collecting information about your personal situation, they should work with you to develop a plan that will help you reach your financial goals. A financial advisor may help you decide:
- How to save for retirement
- How to invest your money
- How to handle a windfall
- How to manage taxes
Financial advisors can also hold you accountable as you work toward your goals. As your life changes, your financial advisor should help you change your actions and adjust your budget so you can stay on track.
Types of financial advisors
“Financial advisor” is an umbrella term that doesn’t necessarily require any qualifications, but there are many different types of financial advisors that may have more stringent requirements. For instance:
A financial advisor can help you maintain discipline and stay on track to achieve your financial goals.
- Investment advisors get paid to provide investment analysis or securities reports. They must register with either their state or the Securities and Exchange Commission (SEC).
- Other types of financial coaches, planners and advisors may not have to obtain a specific license, credentials or education to charge clients for advice, though.
The right type of advisor for you depends on your goals. Make sure their area of expertise lines up with where you need help and look through online reviews from their current and past customers.
Here are some of the different types of financial advisors.
- Financial planners
- Financial planners help businesses and individuals meet long-term financial goals. Financial planners may specialize in asset allocation, estate planning, retirement planning, risk management or tax planning. Being a financial planner doesn’t usually require any set qualifications.
- Tax professionals
- Tax professionals prepare and file state and federal tax returns for businesses and individuals. A tax professional may also be an accountant, a certified public accountant (CPA) or a tax attorney with additional certifications, licenses and education.
If you need help dealing with the Internal Revenue Service (IRS), choose an advisor with enrolled agent status. This type of tax professional can legally represent taxpayers before the IRS.
- Investment professionals
- Investment professionals create and execute investment strategies for their clients. An investment professional may be a registered stockbroker, an insurance agent, an accountant or a lawyer. Registered investment advisors are regulated by the Financial Industry Regulatory Authority (FINRA) and the SEC.
- Wealth managers
- Wealth managers help affluent clients create and execute personalized strategies that help them reach their financial goals. Wealth managers may help with estate planning, tax strategies and investing. Credentials may include being a chartered financial analyst (CFA), a certified financial planner (CFP) and/or a personal financial specialist (PFS).
- Financial counselors
- Financial counselors help clients understand how to budget, pay down debts and save money. They may specialize in helping lower-income clients navigate public benefit programs. Financial counselors may have experience or education in finance, but there isn't a specific degree or certification they must obtain.
- Robo-advisors
- Robo-advisors are automated financial planning services that rely on algorithms to give financial advice. A robo-advisor collects your information via an online survey and uses that information to invest and give you financial insights. Robo-advisors may offer portfolio management, education, account services and goal planning for low fees.
- Online financial planning professionals
- Online financial planners may offer a variety of services. People hire online financial planning professionals to get advice about investing, 401(k) management, retirement planning, debt management and complex financial matters. One advantage to getting one-on-one help from an online financial planner is that you aren't limited to financial planners in your geographical area.
- In-person financial planning professionals
- Financial planning professionals may also provide face-to-face services to clients seeking a personalized approach. While you may be able to get the help you need from an in-person financial planner, you are restricted to financial planners in your area of the country.
When to get a financial advisor
Financial advisors can help you navigate difficult situations without making expensive mistakes. While everyone can potentially benefit from working with a financial advisor, people in the middle of significant life changes are more likely to need professional financial advice. Consider hiring a financial advisor if you are:
- Graduating from college
- Getting married
- Starting a new career
- Wanting to start a family
- Receiving an inheritance
- Planning for retirement
Most adults don't know enough about complicated financial matters to make confident decisions about their financial future. According to a 2020 Northwestern Mutual study, 71% of adults in the United States say their financial planning could use improvement. However, just 29% of U.S. adults currently work with a financial planner.
How to choose a financial advisor
There are three main steps to choosing a financial advisor:
1. Make decisions about your financial goals
Before you shop for a financial advisor, understand what you want to get from the relationship. Some financial planners specialize in helping people navigate retirement, while others work with young people who want to learn how to save and invest their money.
2. Find an advisor
Choose a financial advisor with a successful track record of helping people like you work toward their financial goals. If you are interested in investing, choose a financial advisor whose strategy is compatible with your risk tolerance. If you’re a risk-averse investor, you won't be happy with a financial advisor who pushes you to put your money into assets that could produce intolerable losses. If you want faster growth, you might be frustrated with an advisor that plays it safe.
3. Check your financial advisor's credentials
Not all financial planners need specific credentials. However, some advisors may have third-party certifications to demonstrate their commitment to excellence, and advisors generally need a license if they plan to work with investment products.
- Series 6 license
- Passing the Series 6 test (Investment Company and Variable Contracts Products Representative Qualification Examination), administered by FINRA, allows financial advisors to sell mutual funds, variable annuities and other packaged securities but not individual stocks or bonds.
- Series 7 license
- The Series 7 exam (General Securities Representative Qualification Examination), also administered by FINRA, allows advisors to sell almost any type of investment, including bonds, options, futures and stocks. Series 7 license holders can also sell packaged securities, even if they haven't passed the Series 6 test. Financial advisors who pass the Series 7 and Securities Industry Essentials (SIE) exams can get a General Securities Representative registration.
- Series 63 license
- Financial advisors must pass the Series 63 exam (Uniform Securities State Law Examination), in addition to the Series 6 or Series 7 exams, to conduct business in their state of residence. This test covers financial regulations and laws.
- Series 65 license
- Financial advisors working on a fee basis (instead of commission) must pass the Series 65 exam (NASAA Investment Advisers Law Examination). A chartered financial analyst (CFA) or certified financial planner (CFP) can request that FINRA waive the Series 65 test requirement, though.
Financial advisor pros and cons
Hiring a financial advisor isn't the right move for everyone, and it isn’t necessary at every stage of life. While you may be able to reach your goals faster when you have a qualified financial advisor, hiring a professional could be a waste of time and money if you’re not ready. Here are some of the advantages and disadvantages of hiring a financial advisor.
Pros
- You get access to investment knowledge and experience
- It may help you reach financial goals faster
- Professional guidance helps stop emotional investing
- You get a personalized roadmap for managing your money
- You may be more likely to stick with a financial plan from a professional
Cons
- The expense could outweigh the benefits
- Finding the right advisor can be difficult
- It might be prohibitively expensive, especially if you don’t have much money
- Your advisor's area of expertise may be limited
- You may be more likely to stick with a financial plan from a professional
- You may pay even if you don't make any extra money
Average cost of a financial advisor
If you’re considering professional financial help, you may be wondering how much a financial advisor costs. The answer depends on what type of advisor you’re considering.
Investment advisors
Financial advisors providing investment advice and services on behalf of their clients typically charge a percentage of the client's total assets under management (AUM) between 0.5% and 2%, depending on the size of the account. For example, if you have $100,000 to invest and your financial advisor charges an annual fee of 1.5%, you'll pay $1,500 per year, or $125 per month, for their services.
It's also important to understand that some financial planners get an average of 3% to 6% in commission for opening certain types of accounts or referring clients to a specific financial institution. You can help avoid conflicts of interest by making sure your advisor is a fiduciary.
When comparing costs, look at the actual dollars the financial planner's service would cost you each year. Make sure you are comfortable spending that much money to gain your financial advisor's expertise.
Fee-only financial planners
There's more to financial planning than managing investments, and you may want a financial planner to help you with handling your money beyond your stock allocations. Fee-only financial planners may charge a flat fee ($1,500 to $7,500) or a per-hour rate ($100 to $400 per hour) to help you work out your budget, plan for retirement, set up education accounts or decide how much money to invest.
Financial counselors
Some communities provide free financial coaching for recent graduates and people trying to improve their financial situation. Your credit union or local bank may also offer free basic financial coaching to help you learn about building credit, budgeting and saving money.
Bottom line: Do I need a financial advisor?
Whether it's worth hiring a financial advisor or not depends on your goals and budget. While the do-it-yourself route may be tempting, it involves extra work on your part, and you may end up losing money as you learn the ropes. Having a qualified, experienced financial advisor to lean on could be well worth the investment both in terms of convenience and financial returns.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- Northwestern Mutual, "Planning & Progress Study 2020." Accessed May 8, 2021.
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