What is a financial advisor and how to choose a financial advisor – USA TODAY Blueprint

Financial Planners

Key points

  • Knowing what services you need from a financial advisor is an important first step.
  • Not all advisors call themselves fiduciaries.
  • Financial advisors can charge fees or commissions, though it’s common for clients to pay a percentage of their assets under management.

A financial advisor can come to your rescue when you’re experiencing a major life change or need help with your finances. These professionals can help tackle various financial challenges — from managing your cash flow and finding the best low-risk investments to devising a plan to save for your child’s college education.

But given the sheer number of professionals and types of credentials, it can be difficult to find the best and most trustworthy advisor for you. To make your search easier, we’ve broken down what you need to know about financial advisors, the available types, and how to choose the right one.

“It is essential to make sure that the financial advisor you choose is the right person for you, starting from your comfort level with them,” says Alissa Krasner Maizes, a registered investment advisor and founder of the financial advisory firm Amplify My Wealth. 

Besides feeling comfortable sharing your financial details, she says the advisor should listen to you and answer your questions. “(See) whether their offerings seem to match with the life you want to live and align with your long- and short-term goals,” Maizes adds.

What is a financial advisor?

A financial advisor is a broad term encompassing many financial professionals. Generally speaking, it describes individuals who advise customers on their finances.

Some financial advisors solely work with clients to build and manage their investment portfolios. Others take a more holistic approach by advising clients on every area of their finances, from their budget to retirement plans.

“Advisors can help you identify and prioritize your financial and life goals, develop a plan or strategy to achieve those goals, and help ensure that you stay on track to meet those goals as conditions change and evolve over time,” says Mike Foy, senior director and head of wealth intelligence at J.D. Power.

It’s important to note there’s little regulation around who can call themselves a financial advisor. While many financial professionals—including certified financial planners and registered investment advisors — must meet certain criteria and pass exams to receive designations, anyone could theoretically call themselves a financial advisor.

Decide on the financial services you need

Financial advisors can offer various financial services. Some provide a specific service, such as portfolio management, while others offer a broader menu of options.

“Some financial advisors are also financial planners who emphasize creating a financial plan,” Maizes says.
Advisors form a strategy around your goals, cash flow, debt, retirement, and estate plans, among other factors. “Yet some financial advisors are brokers that buy and sell securities and other financial instruments, sell their clients’ insurance and annuities, or even a combination of these varied services,” Maizes adds.

Financial advisors can offer various financial services, from cash flow management to estate planning. Here’s a general overview of some services they can provide: 

  • Cash flow management and budgeting.
  • Debt management.
  • Retirement planning.
  • Investment management.
  • Tax plan.
  • Estate planning.
  • Planning for financial goals.
  • Overall financial advice.

Knowing what services you need from a financial advisor is an important first step in finding the right one. Remember that an advisor who’s the best fit today might not be the best fit in a decade or two, depending on how your financial situation and goals change.

Know the different types of financial advisors

It used to be the case that if you wanted to work with a financial advisor, you’d have to find an advisor in your area and meet in their office. The industry has changed significantly, and you have many more options now.

1. Robo-advisors

A robo-advisor is an online investment platform that builds an automated portfolio based on your financial goals and other factors.

When you sign up for a robo-advisor, you’ll answer a questionnaire about your financial situation and objectives. Based on your responses, the robo-advisor will use its algorithm to build you a diversified investment portfolio, usually comprised of index mutual funds or exchange-traded funds.

“The appeal to investors is a ‘set it and forget it’ model for what is often a much lower cost than a human advisor would charge,” Foy says.

The downside, of course, is that robo-advisors offer a limited selection of services. While this platform can build and manage your investment portfolio, robo-advisors often can’t answer your personal finance questions. Nor can robo-advisors help you create a cash flow or debt management plan or address other areas of your financial plan.

2. Traditional financial advisors

A traditional financial advisor is an individual who works with clients to manage many areas of their finances. Some traditional advisors focus on just one area, such as investment management, while others help clients with each facet of their finances.

There are many specialties within the financial advisory space, some of which require additional training.

  • Certified financial planners: Many people consider the CFP designation as the gold standard for financial advisors and planners. A CFP is trained to offer holistic financial services to help clients with each area of their finances. Earning this certification requires education and training in financial planning.
  • Certified divorce financial analysts: This type of financial professional advises clients who are going through or who have recently gone through a divorce. Unlike a divorce lawyer, who helps negotiate the divorce settlement, a CDFA helps clients organize their finances amid a divorce and reach their financial goals.
  • Certified financial transitionists: The CeFT designation is available to financial professionals with an existing certification. These individuals are trained to help clients through life transitions and major life changes, addressing not only the financial difficulties but also the mental and emotional ones. 
  • Estate planners: This financial professional is trained to help clients build their estate plans and provide advice along the way. Estate planners help prepare legal documents, create trusts and more. They may also be attorneys or coordinate with estate planning attorneys during the process.
  • Retirement planning specialists: A retirement planning specialist helps clients plan for retirement. They may consult clients on their workplace retirement plans and manage individual retirement plans to help people reach their retirement goals.
  • Wealth planners: This type of financial professional specializes in helping clients with their investments. Wealth planners generally advise individuals on the best investments to reach their goals. They may also build and manage their clients’ portfolios.

This is just a small sampling of the different types of professionals who might be considered financial advisors.

“Although someone can refer to themselves as a financial advisor, the standard of care they must adhere to for those they advise varies, making it a bit confusing to potential clients seeking a trusted advisor,” Maizes says.

Under the umbrella of financial advisors, you’ll find that some advisors call themselves fiduciaries while others don’t. A fiduciary has a responsibility—both legally and ethically—to act in the best interests of their clients. Not all advisors are required to do this. 

Hiring a fiduciary can be especially important when it comes to your investments since fiduciaries are required to recommend the best investments for you. Meanwhile, non-fiduciaries might recommend products based on the commission they’ll make.

3. Online-only advisors and hybrid robo-advisors

A hybrid robo-advisor, or an online-only advisor, offers the benefits of both a robo-advisor and a traditional in-person advisor.

When you work with an online-only advisor, you’re often still working with a real person who looks at your financial situation and makes personalized recommendations. They may also have a robo-advisory component to their services.

These online and hybrid financial advisors are more affordable than traditional financial advisors but offer more comprehensive services than basic robo-advisors. As more of our lives move online, the ability to meet with your advisor virtually rather than in an office may be attractive.

Find a financial advisor that fits your budget

One of the most important aspects to consider when choosing a financial advisor—or any service, for that matter—is the cost. 

There are several different fee structures that advisors can use. The fee and the amount you’ll pay will depend on the type of advisor you choose, the services you need and other factors. Here are some common types of financial advisor fee structures:

Fee-based financial advisors

A fee-based financial advisor charges clients a fee for their services. Here are the most common fees advisors charge:

  • Assets under management: With this fee, advisors charge a percentage of the assets they’re managing. Traditional advisors often charge around 1% AUM for investment amounts of $1,000,000 or less, according to a 2021 Advisory HQ News Corp. For instance, if your advisory firm handles $500,000 in assets for you and charges a 1.05% AUM annual fee, that adds up to $5,250 in AUM fees per year.  The fee percentage typically goes down when the amount of assets goes up.  Robo advisors usually cost less than traditional advisors. For instance, Fidelity Go charges 0.35% per year for balances of $25,000 and more.
  • Flat fee: Some advisors charge a flat fee for their services. The fee may be applied annually or as a one-time fee for creating your financial plan. “The cost of hiring a flat fee financial advisor can vary significantly from $1,000 to $10,000 per year (or more), depending on the scope and detail of the financial plan provided,” according to Wealthtender, a marketing services firm for financial advisors.
  • Hourly fee: Some advisors charge an hourly fee, meaning you’ll only pay your advisor when they’re actively working for you. Regarding fees, fee-only financial planners may charge around $200 to $500 per hour, according to Wealthramp.

Foy says that people may gravitate toward fee-based advisors since they may be less likely to have conflicts of interest. But that doesn’t impact client satisfaction. 

“J.D. Power research suggests that fee transparency and understanding is a more important driver of client satisfaction than whIch fee model or structure is in place,” Foy says.

Commission-based financial advisors

With a commission-based fee schedule, an advisor earns a commission for recommending certain financial products. For example, an advisor might be paid a percentage for recommending a specific mutual fund.

It’s not necessarily bad to have an advisor that makes a commission from recommending certain financial products, nor does it mean they’ll recommend products that aren’t the best fit for you simply to earn a higher commission.

But it can be difficult to separate good commission-based advisors from those who are out for their personal best interests. Some advisors recommend certain products because they make a lot of money doing so, even if the product isn’t the best for their customers.

That’s where a fiduciary advisor can help. Because fiduciaries are legally required to put your best interests first, you’ll know their recommendations are legitimate, and the commission they’ll earn is a lower priority.

Hybrid financial advisors

Some advisors make money from both fees and commissions. Many advisors are fee-based, meaning they primarily earn money from the fees they charge their clients. However, they also earn commissions when they recommend certain products.

Frequently asked questions (FAQs)

Whether or not hiring a financial advisor is worth it depends on your financial situation. A financial advisor may not be necessary if you have relatively simple finances and are comfortable managing your investments. 

If you’re going through a major life change, have a complex financial situation, or aren’t comfortable managing all areas of your finances, a good financial advisor might be right for you.

There’s no shortage of free advice available online, but it’s important to ensure you get information from trustworthy sources. Many financial institutions, including banks, credit unions, and brokerage firms, share free educational articles and host events. 

You can even turn to the Consumer Financial Protection Bureau, a U.S. government agency, which ensures that banks and financial institutions treat consumers fairly. Or check out the many organizations that certify financial professionals, such as the Certified Financial Planner Board of Standards, also known as the CFP Board.

Finally, you can get advice directly from financial advisors. While many require that you pay for their personalized advice, you can find free articles that were either written by or include advice from credentialed financial professionals.

The cost of a financial advisor can vary, but many traditional advisors charge 1% of assets under management. So if your advisor is managing a portfolio of $100,000, you can expect to pay about $1,000 annually. If you’re working with a robo-advisor, you might pay $250 per year, if the annual fee rate charged is 0.025% AUM.

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