Financial Advisor: Definition, Roles, Types and FAQs
A financial advisor is any professional that provides financial advice, assistance, or guidance to customers for a specific form of compensation, either a fee or a commission. Financial advisors offer various services, such as tax planning, investment management, and estate planning to various customers regardless of net worth.
Registered advisors must complete the Series 65 license to conduct business with clients. A wide variety of licenses and certifications may be required depending on the specified services provided by the given financial advisor.
While the term “financial advisor” has precise industry distinction, the title can describe many different types of financial professionals. Stockbrokers, insurance agents, investment managers, tax preparers, and financial planners can all be considered financial advisors, with more specified industries in the personal finance space, like estate planners and bankers in wealth management may also fall under this umbrella.
Regardless of the specialization, a financial advisor must provide guidance and advice that is within the client’s best interest as opposed to serving the interests of a financial institution by maximizing the sales of specific products or capitalizing on commissions from sales. Registered Investment Advisors (RIAs) are governed by the Investment Advisers Act of 1940 and are held to a proper fiduciary standard. This fiduciary standard mandates that an RIA must always unconditionally put the client’s interests ahead of their own, regardless of all other circumstances or firm commissions.
The Responsibilities of a Financial Advisor?
Financial advisors are tasked with managing the aspects of one’s personal financial life, from estate planning to retirement planning to investing and savings. Financial advisors are responsible for more than just advising and assisting on investment choices or the purchase of various financial products; they can also assist in assessing one’s financial status and understanding one’s financial goals to create a tailored financial plan to achieve those goals. Financial advisors will work with individuals to get a complete picture of their assets, liabilities, income, and expenses to build a specialized financial plan for the client. In doing so, financial planners get a bigger picture and understand future pension plans, income sources, retirement needs, and other long-term financial obligations. They can also help reduce the taxes one pays and maximize the returns on any financial assets one may own.
Helping you achieve your evolving financial objectives
How Much Does a Financial Advisor Charge?
The cost of a financial advisor depends on the specialized services they provide; there is no size-fits-all solution that fits all advisors. The average fee a financial advisor charges is 1% of the assets under management (AUM). However, this fee or cost can depend on how advisors are compensated within the firm and whether the services they intend to provide are scheduled on an ongoing basis or only completed one time for the client. While this is often the standard type of fee and fee percentage a financial advisor may charge, some advisors operate on a sliding scale, meaning that the more business you do with the advisor, the lower the fee becomes. Returning clients will continue to lower their fees, meaning that more money stays in the client’s pocket. Different fees are associated with various tasks and specializations that a financial advisor may perform due to their specialties or designated fields in the personal finance space. Many financial advisors charge a flat annual fee between $2,000 and $7,500 and between $1,000 and $3,000 for creating a tailored financial plan. Depending on the agreement, commissions of 3% to 6% on the account may be applied in the absence of a set fee. The amount that a financial advisor makes depends on a variety of factors, such as their experience, the types of products they sell, the region in which they work, and the type of financial advice they provide.
What Qualities or Certifications should a Financial Advisor have?
Financial advisors must complete a bachelor’s degree in a relevant degree to personal finance. Degrees in finance, economics, or accounting can all work to satisfy that requirement. Earning multiple licenses in personal finance, such as the Series 7, Series 63, Series 65, and Series 6, can help financial advisors stand out from the rest in terms of qualifications.
Robo-advisors vs. Traditional Financial Advisors
A digital financial advisor, or robo-advisor, is an online financial advising tool many companies provide for their customers. A robo-advisor uses computer algorithms to manage an individual’s money based on answers to questions about their goals and risk tolerance. Robo-advisors are quick to set up and typically don’t require a lot of money to get started, often costing less than human advisors.
Some drawbacks to a robo-advisor are that they are unable to understand, nor speak about personal finance topics like the best way to get out of debt, how to best fund your child’s education, or talk you out of selling your investments or assets out of fear, or help you manage a portfolio of stocks and etfs. Without the human factor, Robo-Advisors are mainly great for quick and decisive planning with the set requirement the client provides to the algorithm, with no emotions involved in the process. Robo-advisors typically invest money in a portfolio of exchange-traded funds (ETFs) and mutual funds that provide stock and bond exposure by tracking a market index. The risk of these funds is dependent on the financial situation of the client and the client’s risk tolerance.
A Robo-advisor is perfect for low-net-worth individuals or families with non-complex financial structures. These companies are ideal for individuals needing investment and portfolio management but not holistic financial planning. Robo-advisors can build and manage a portfolio of low-cost assets suited for your financial goals. Many Robo-advisors charge 0.25% or less of your account balance. The investment mix and portfolio are determined by a computer algorithm and are automatically adjusted when your financial outlook changes. At the basic account level, one can start investing with $500 or less.
However, for those with more complex or ongoing planning needs, a traditional, in-person financial advisor may be a better fit for those with complicated or ongoing planning needs. A financial advisor can provide holistic, one-on-one advice for these complex financial situations. Financial advisors have undergone rigorous formal training and testing to receive their certifications and designations. A finance professional such as a wealth manager or investment advisor can also act as a specialized advisor, particularly working for high net worth clients or mainly with investments.
It is essential to choose an advisor that will work for your best interests. A fiduciary financial advisor has to follow the obligation of putting your best interests above their own. They are not allowed to collect commissions from the sale of any investment recommended by their firm and typically operate on a fee-based system. Clients pay a flat fee (monthly, annually) for their services. Any fees charged are paid separately and aren’t taken out of your investment balances or trade proceeds. Meanwhile, a non-fiduciary financial advisor can work with institutions incentivizing them via commissions for selling their particular investment products. They are held to a more simplified standard where their investments should be suitable for your needs but not necessarily the lowest cost or best match. This isn’t a red flag, but asking how their fee policy and commission system works is essential as it could impact your portfolio earnings over time.
Criteria for Choosing a Proper Financial Advisor
Everyone has their own unique financial situation and different needs. One should determine their needs before they decide what kind of financial advisor to work with. Ideally, finding someone who has experience working with clients in similar situations as your own could give you the confidence that the financial advisor you are working with has the experience that closely aligns with the position you are currently facing. The more complex the financial situation, the more likely you will benefit from a financial advisor. Financial advisors can bring expertise to decisions about how you should invest your money, provide an objective perspective on your finances, what your financial priorities should be, and what sort of insurance coverage and other protections you need. A financial advisor can be especially useful when facing a life change like marriage, a divorce, or an inheritance.
Some questions you should consider asking include deciding what part of your finances you require assistance for, the different types of financial professionals that can help you with your finances, and deciding on the allotted budget you have to spend for a financial advisor. Financial advisors provide more than just investment advice. The best financial planner is one who can help you make a plan for all of your financial needs. This can cover investment advice for retirement plans, debt repayment, and estate planning. Depending on your situation, you may not need comprehensive financial planning. People with relatively straightforward financial lives, like young families or individuals, might just need help with retirement planning. People with more complex financial needs, however, may need extra assistance. Individuals may be looking to establish college funds or trusts for their children and navigate aggressive debt payments or tax situations. Not all types of financial advisors offer the same services, so decide which services you need and let this guide your search.
Financial advisors are responsible for managing a multitude of daily aspects of one’s financial life, from estate planning to retirement planning to savings and investing. They not only suggest investment choices or selling financial products, but they can also help you make actionable concrete plans to further assist with budgeting, retirement planning, or estate planning.
- Bureau of Labor Statistics. “Personal Financial Advisors: Summary.”. Accessible From: https://www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm
- U.S. Securities and Exchange Commission. “General Information on the Regulation of Investment Advisers.”. Accessible From: https://www.sec.gov/investment/divisionsinvestmentiaregulationmemoiahtm
- Personal Capital. “How Much Does a Financial Advisor Cost?”. Accessible From: https://www.personalcapital.com/blog/personal-finance/how-much-does-a-financial-advisor-cost/
- Congressional Research Service. “The SEC’s Best Interest Proposal for Advice Given by Broker- Dealers.”. Accessible From: https://crsreports.congress.gov/product/pdf/IF/IF11073
- U.S. Securities and Exchange Commission. “Regulation Best Interest.”. Accessible From: https://www.sec.gov/info/smallbus/secg/regulation-best-interest#Effective_Date
- “Investment Adviser Guide”. NASAA. Retrieved 22 March. Accessible From: https://www.nasaa.org/industry-resources/investment-advisers/investment-adviser-guide/