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What Is a Financial Advisor and How to Choose One

Nov. 30, 2018
Advisors, Financial Planning, Investing, Retirement Planning
how-to-choose-a-financial-advisor
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Financial advisors help people decide how to manage their money and reach their financial goals. But financial planning isn’t one-size-fits-all, and there are several types of advisors. Let’s figure out which is the best for you.

What is a financial advisor or financial planner?

The term financial advisor can apply to a wide variety of people or to digital services called robo-advisors. This umbrella term can also include financial planners, who have a special designation for qualification. All these types of advisors help you manage your money, in various ways:

Digital services: Robo-advisors offer a simplified, low-cost way to invest. You answer questions online, then computer algorithms build a portfolio according to your goals and risk tolerance. They offer financial planning tools and will regularly rebalance your investment mix. And if you prefer some human guidance, most offer a hybrid model that lets you consult with advisors. (Sound right for your needs? See our top picks for best robo-advisors.)

People: “Financial advisor” and “financial planner” are broad terms that can indicate several types of specialists, including:

  • Certified financial planner: Provides financial planning advice. To use this designation from the Certified Financial Planner Board of Standards, an advisor must complete a lengthy education requirement, pass a stringent test and demonstrate work experience.
  • Broker or stockbroker: Buys and sells financial products on behalf of clients in exchange for a fee, commission or both. Must pass exams and register with the U.S. Securities and Exchange Commission.
  • Registered investment advisor: Provides advice and makes recommendations in exchange for a fee. RIAs are registered with the U.S. Securities and Exchange Commission or a state regulator, depending on the size of their company. Some focus on investment portfolios, others take a more holistic, financial planning approach.
  • Chartered financial analyst: Can help you build an investment portfolio.
  • Enrolled agent: Focuses on tax preparation.
  • Wealth managers: Typically concentrate on high net worth clients and provide holistic financial management.

In addition, the same person can have more than one of these titles. For instance, a certified financial planner may also be an enrolled agent.

How to choose a financial advisor

Consider three factors when choosing a personal financial advisor so you get the advice you want — and don’t pay too much or pay for things you don’t need:

1. Figure out what services you want

If you simply want help choosing and managing investments, a robo-advisor is a streamlined, cost-efficient choice. It’s also good for those just starting out, because robos have low or no account minimums.

If you have a complicated financial situation or want holistic advice on topics like estate planning, insurance needs, etc., you might need a human advisor.

You can even have it both ways: Get started with a robo now, so you’re not missing out on stock market gains, and add a human advisor later for comprehensive planning.

2. Consider what cost level works for you

Robo-advisors’ annual fees start at 0.25% of the assets they manage for you, with many top providers charging 0.50% or less.

Human advisors also often charge a percentage of the amount managed, with a median fee of 1%, although it can range higher for small accounts and lower for large ones. Some require at least $250,000 in investable assets to get started.

Others may charge a flat fee, an hourly rate or a retainer. Understand their costs and fees before you commit to anyone.

3. Check out qualifications and standards

Check out the record of the company or person you’re considering.

And ask 10 important questions of any human advisors you’re considering — including whether they hold to a fiduciary standard, which requires that they act in your best interest.

Here’s a quick cheat sheet:

Digital Advisors
Human Advisors
  • Provide investment guidance and portfolio management
  • Many offer access to human advisors when you have questions
  • Good for those starting out or when your situation is not complex
  • Provide investment guidance and portolio management
  • Can offer holistic financial advice on topics like estate planning
  • Good for more-complex situations and/or more assets (some require $250,000+)
Fees: From 0.25%, many at 0.50% or less Fees: Median 1%
Qualification check: Form ADV covers an advisor’s or company's history, including any misconduct. Qualification check: Use Form ADV and also check out these other ways to background check financial pros.

OK, what’s next?

Now that you know about the different types of financial advisors, it’s time to take the next step. Our guide will help you pick the exact right provider for you.

Read: The top picks for best robo-advisors of 2018 »

More resources

Want more information? Leaning toward a human advisor? Check out these resources:

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