Types of Financial Advisors and How to Choose
There are more types of financial advisors than pumpkin spice products in October, and that can make it hard to find the best advisor for your own unique needs. Hard, maybe, but not impossible, and look at you, here doing your research. Knowledge is power, friends. You’ve come to the right place
Below is a list of a few types of financial advisors you might come across. This is not a complete list. To keep things simple as you look for the right financial advisor for you, remember that, no matter what title an advisor uses, make sure they are a fee-only fiduciary.
Why a fiduciary
A fiduciary has to put your interests first at all times, and a fee-only advisor will work solely for you. You represent their bread and butter. A fee-based advisor, in contrast, is collecting money from other sources as well as you. Those other sources of income might sway the advisor into pitching you products that aren’t ideal for you.
- Financial advisor: Strangely, this term doesn’t signify much. There are no rules governing who calls themselves a financial advisor. If you happen to walk into your bank or brokerage company, you may get helped by a friendly advisor, but that person’s loyalties could well be to their company first. You’re in second place. For example, if the company has its own investment products, you might get pitched those products rather than equally good, cheaper products from another company. That’s why we talk a lot about finding a fee-only fiduciary advisor, no matter what title the advisor uses.
- Wealth manager: Just like it sounds, a wealth manager focuses on managing wealth. Their comprehensive services can include investment management, estate and tax planning, and more. The bad news: If you don’t have a lot of money sitting around waiting to be invested — we’re talking, say, $1 million — there’s a good chance a wealth manager won’t be willing to work with you.
- Certified Financial Planner: CFPs are like wealth managers for the rest of us. They tend to offer holistic planning, looking at all of your financial goals and coming up with a plan to reach those goals. Many CFPs charge by the hour or by the service — that means they don’t mind if you don’t (yet) have $1 million to invest. CFPs act as fiduciaries, which means they put your best interests front and center. That’s a very good thing. However, you still need to interview CFP advisors to find the best advisor for you.
- Broker-dealer: Broker-dealers are companies that buy and sell investments. This is important work, but it can become problematic if you’re seeking investment advice. A broker's goal is often to sell investments rather than assessing your overall financial needs and finding the best investment for your situation. While brokers now must abide by a rule to act, to some degree and some of the time, in clients’ best interests, they aren’t fiduciaries. If you want help deciding how to invest, find a fiduciary advisor.
- Registered Investment Advisor (RIA): The “R” in “RIA” stands for “registered,” as in on file with the SEC and/or a state agency. Any reputable wealth manager or financial advisor or planner is highly likely to be working at an RIA firm. The good news: Getting advice from an advisor at an RIA firm is generally a good thing because they are legally required to act as fiduciaries — that means they must put your best interests ahead of their own. The bad news: Some RIA firms are dually registered as both RIAs and brokers, which means that when their advisors meet with you they could switch back and forth between fiduciary and not-fiduciary, like some kind of sci-fi alien brain-meld situation. Be wary of investment advisors who are also brokers, and ask them if they are giving you advice as a fiduciary.
- Automated robo-advisor: So you know you need to invest for your future, but the thought of figuring out how to actually get your money into the stock market makes you freeze up? You’re not alone, and that’s exactly what a robo-advisor can help you with. These companies generally are RIAs — thus, fiduciaries — who’ve embraced the idea of passive investing for the masses. In plain English: They’ve come up with a handful of investment portfolios that can help you build wealth, and the management fee tends to be low (often about 0.25% of the money you invest). You’ll answer a handful of questions online; based on your responses the robo-advisor picks an investment portfolio for you. You’ll need to do some digging to find the best robo-advisor for your situation. For example, some offer access to live advisors; some don’t. Some of the biggest names are SoFi, Wealthfront and Betterment, but many big brokers also offer a robo option, including Charles Schwab, Vanguard and Fidelity.
- Financial coach: A financial coach can help you manage debt, improve credit and create a budget so you know where your money is going every month. These can be hugely helpful tasks to get done before shelling out the bigger bucks for a financial advisor. Keep in mind that, similar to the way anyone can call themselves a financial advisor, there’s no required training to become a financial coach. That said, the Association for Financial Counseling and Planning Education (AFCPE) offers the Accredited Financial Counselor (AFC) certification, so if you work with an AFC-designated coach, you know they’ve committed to ongoing education and to being a fiduciary.
- Consumer credit counselor: A consumer credit counseling agency can be a great resource for help dealing with credit and debt challenges as well as day-to-day money management. Be wary of for-profit companies that promise credit repair for a price. Stick with nonprofit agencies.
Our study shows that conflicts of interest and disciplinary actions are more common at hybrid financial advisor firms — those that operate as broker-dealers and are not held to a fiduciary standard. Learn more about this type of firm and what to look for when working with one.
How to choose a financial advisor
How do you choose which advisor is right for you? The first thing to do is to figure out what your goals are. You’ll need at least some sense of what you’re hoping to do, so that you can find the best advisor for your situation.
Here’s a guide to jump-start your thinking, and below the guide are links for finding each type of advisor.
|I need help with...||...then consider going with:|
|Planning for future financial goals||Certified Financial Planner, Registered Investment Advisor, or a financial coach|
|Managing debt||Financial coach or a consumer credit counselor|
|Investing for retirement||Registered Investment Advisor, robo-advisor, or a Certified Financial Planner|
|Managing finances as I build my small business or startup||Certified Financial Planner or a Registered Investment Advisor|
|Saving for the future||Certified Financial Planner, Registered Investment Advisor, or a financial coach|
|Coming up with a plan to pay off my debt||Consumer credit counselor or a financial coach|
|Improving or building my credit||Consumer credit counselor or a financial coach|
|Creating an estate plan||Certified Financial Planner, Registered Investment Advisor, or an attorney|
Andrea gives you her top tips for finding a financial advisor you can trust.
Where to find a financial advisor
Here are some ways to find the experts above:
Certified Financial Planner:
Registered Investment Advisor:
- Use our handy tool to search for a highly rated financial advisor company .
Consumer credit counselor:
- Search for a certified consumer credit counselor on the U.S. Justice Department website or the National Foundation for Credit Counseling website.
- The U.S. Consumer Financial Protection Bureau offers tips on how to tell the difference between a reputable credit counselor and a scam credit repair company.
Glossary of certifications
There are hundreds of professional designations that financial advisors might have. Below is a handful of the certifications that we feel are among the most robust and valuable. To search for certifications not listed below, check out Finra’s helpful tool.
|Certification||What it stands for||General area of expertise||Organization that offers it|
|CFP||Certified Financial Planner||Holistic financial planning||CFP Board|
|CFA||Chartered Financial Analyst||Investment management||CFA Institute|
|CPA||Certified Public Accountant||Tax planning||Association of International Certified Professional Accountants|
|PFS||Personal Financial Specialist||Holistic financial planning combined with tax planning (all PFS holders also have a CPA)||Association of International Certified Professional Accountants|
|EA||Enrolled Agent||Tax planning||National Association of Enrolled Agents|