24 February 2021

What Kind of Financial Advisor Do You Need?

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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 beginning your search for a financial adviser, you may need some help sorting through the variety of different professional titles used by different advisors. Let’s take a look at the most common types of advisor and what they can do for you.

What Is an Investment Advisor? 

An investment advisor is a company or an individual who provides clients with investing advice and manages their investment portfolios. Whether you’re just starting out with a modest amount of money or you’ve already built up a six- or seven-figure portfolio balance, an 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 a RIA who work as advisors are called Investment Advisor Representatives (IARs). While “advisor” with an “o” is the most common spelling, the laws regulating these professionals generally use the term “adviser” with an “e,” so you may see either 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 personalized advice tailored to your goals and risk tolerance. They can help you select investments, rebalance your portfolio or manage your entire investment portfolio. Most offer brokerage services, too.

RIAs have a fiduciary duty to their clients, meaning they must act in their clients’ best interests. In other words, a registered investment advisor must recommend the best investment products and services for each individual, not the products that pay them the highest commissions or fees.

Typically, an investment advisor charges an annual advisory fee that is a percentage of the assets they manage for you. As of 2019, the average investment advisor fee was 1.17% of assets under management. However, some investment advisors offer flat fees or hourly rates for clients who only need more limited advice.

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

“A person who is looking for investing expertise should seek out a Chartered Financial Analyst (CFA),” he said. “This designation is the gold standard for investment management. It takes an average of 1,000+ hours of study, along with four years of professional experience and successful completion of three rigorous exams, to earn the distinction of being called a CFA.”

If you’re looking for broader financial advice speaking to your whole financial life, check out a financial planner.

What Is a Financial Planner? 

Financial planners take a holistic approach, providing advice about every aspect of their clients’ financial lives. A financial planner aims to build a plan that encompasses budgeting, emergency savings, college funds for your kids, insurance needs, retirement planning and estate planning.

Some financial planners sell investment or insurance products, and some may also be brokers. There is a very wide variety of different services and offerings among financial planners—and there are no federal or state authorities who directly regulate them. Basically anyone can call themselves a financial planner and begin taking on clients.

For these reasons, when evaluating financial planners it’s best to look for ones who are certified financial planners (CFPs). The CFP designation is the highest professional standard in the financial planning industry. CFP denotes that a financial planner has extensive training and knowledge, as there are rigorous education requirements and a lengthy certification exam to earn the certification. In addition, CFPs are now required to always act as fiduciaries for their clients

To find out if a financial planner is a 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 responsibility to their clients. They must recommend financial products or plans that are best for the client; they can’t recommend products simply because they would benefit themselves financially.

Many CFPs are fee-only, meaning you’ll pay a rate for their services but they won’t profit off any of the recommendations they provide you. Others are fee-based, so they might earn a commission based on certain recommendations. Even these CFPs, however, cannot recommend a product over another simply because it would net them a higher commission. Still, many CFPs believe that fee-based pay structures can influence their recommendations, so they opt for fee-only payments.

What Is a Wealth Manager? 

A wealth manager is a financial advisor that caters to high-net-worth individuals. Wealth managers offer similar services as financial planners—retirement planning, insurance and investment management—but they also specialize in areas like philanthropic planning and estate planning, areas of need among wealthy people with lots of assets.

“A high-net-worth individual should consult a CFP since their situation is likely to be more complex and require knowledge in several different areas of personal finance,” says Littlejohn. “CFP professionals are adept at devising creative solutions that meet the needs of those with significant wealth.”

In addition to professional distinctions, also ask potential wealth managers if they are fiduciaries. As with financial planners, anyone can call themselves a wealth manager, meaning 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 Personal Financial Advisor’s website or use the Securities and Exchange Commission’s advisor search tool.

What Is a Broker? 

Securities exchanges only allow designated individuals and firms to place orders. When you want to buy or sell securities for your portfolio, like stocks and bonds, you need a broker.

A broker is an individual or brokerage firm that serves as the intermediary between individual investors and a securities exchange. Brokers are usually paid commissions when you buy or sell securities through them. There are two main types of brokers:

  • Full-Service Brokers. Full-service brokerages are more expensive than discount brokerages, but they generally provide personalized investment advice.
  • Discount Brokers. Discount brokerages charge lower fees and commissions, but you typically have to select investments on your own. Increasingly, discount brokers are discontinuing self-directed trading fees entirely.

Before working with a broker, make sure they are licensed in your state. For information about the brokerage, including to see whether there have been any formal complaints filed against your prospective broker, visit BrokerCheck.

Note that many RIAs, financial planners and wealth managers may also be brokers or be affiliated with them. This means you may not have to find a separate broker on your own.

What Is a Robo-Advisor? 

Rather than picking investments on your own, robo-advisors simplify the process. Robo-advisors are brokerage firms that provide automated investment portfolios based on your financial goals, timeline and risk tolerance.

When you sign up with a robo-advisor, you typically will have to answer a few questions about your investment needs and comfort with risk. The robo-advisor uses your answers to create a portfolio to help you achieve your goals, usually investing in a mix of exchange-traded funds (ETFs), mutual funds, stocks and bonds.

The robo-advisor monitors your account for market changes and rebalances your portfolio as needed. Some robo-advisors have financial professionals you can meet with to talk about your investment and financial needs and create a plan, though this is not standard. Robo-advisors typically do not charge trading fees, only an advisory fee of usually around 0.25%, which may make their costs lower than other brokerage firms’ and financial advisors’.

Other Things to Consider When Choosing a Financial Advisor 

Before selecting a financial advisor, it’s important to do some research to make sure you choose the right one for your needs. When evaluating financial advisors, ask the following questions:

Are They a Fiduciary? 

Not all financial advisors are fiduciaries. A fiduciary financial advisor is required to keep your best interest in mind when making recommendations. If a financial advisor is not a fiduciary, they can make recommendations that may profit them. For example, they may recommend certain investment or insurance products that give them a higher commission, even if a similar product might offer you similar performance at a lower cost to you. A fiduciary advisor, in contrast, could not do this.

What Is Their Typical Client Like? 

When screening potential advisors, look at their materials and ask about what their typical client is like. You want to select an advisor who has experience with clients in a similar financial position as you. For example, CFPs work with clients at varying income levels while wealth managers usually only work with people with a 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-only, fee-based and commission-based.

  • Fee-Only: A fee-only advisor charges a flat fee, hourly rate or percentage of the assets they manage for you for their services. The fee-only structure is preferred by many CFPs.
  • Fee-Based: Fee-based payments are a mix of commissions and fees. You’ll pay a base fee, but you might also pay a commission on investment trades or other financial products.
  • Commission-Based: With a commission-based structure, the financial advisor makes a commission based on the financial products they sell you. This doesn’t necessarily mean the products they sell you aren’t the best products for you, simply that they don’t have to be.

Do They Have a Disciplinary Record? 

You can view a financial advisor’s background, fee structures and disciplinary actions with BrokerCheck. When looking at an advisor’s profile, look for any disciplinary actions or complaints that were lodged against them.

Are They Certified? 

While many people may use “financial advisor” as their title, there are professional designations that set some advisors apart. For example, CFPs are required to undergo extensive training and have years of experience before they’re certified.

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

  • National Association of Professional Financial Advisors
  • Certified Financial Planner Board of Standards
  • Alliance of Comprehensive Planners
  • Garrett Planning Network

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

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