What Does a Financial Advisor Do?
In a perfect world, the job of a financial advisor would be clear, the way we all know "airline pilot" means the person flying the plane. This world? Not so perfect.
Put simply, financial advisors offer advice and services aimed at increasing clients' wealth. But advisors use a slew of different titles and often focus on disparate specialties, such as tax or divorce planning, and specific types of clients, such as entrepreneurs, athletes, young families, or people close to retirement age.
Maybe you see retirement approaching fast and want to make sure you're ready financially. Or you want to start a family but are in shock over how much you're expected to save for your kids' future college costs. Whatever your financial goals, it's important to find the right advisor for you.
There's another consideration, too: Some people who call themselves advisors are salespeople, pitching products that put money in their own pockets. That can cost you, which is why it's best to work with a fee-only fiduciary advisor.
“Fee-only” means the advisor makes money solely from a fee for services, clearly spelled out — not from commissions. They are working for you. “Fiduciary” means they put your interests first, ahead of their own, at all times. That's why, when looking for the right advisor for you, it's important to find a fee-only fiduciary advisor.
“Fee-only” means the advisor makes money solely from a fee for services, clearly spelled out — not from commissions. They are working for you.
Happily, you've come to the right place. We're here to help you do just that. Here's what we'll cover below:
- What is a financial advisor?
- What does a financial advisor do?
- What does a fiduciary financial advisor do?
- Fee-only vs. fee-based financial advisors
- Are financial advisors worth it?
What is a financial advisor?
Weirdly, there's no legal definition of what a "financial advisor" is or what education or certifications they must have. Yep, someone who calls themselves a financial advisor could have zero financial education or experience. Sadly, because a small but not insignificant number of "advisors" interpret their job as "let me advise your money straight into my pocket," it's smart to educate yourself before you hand over your hard-earned cash. Let's dive in.
Here's just a sample of some of the (mostly unregulated) titles that financial experts may use:
- Financial advisor
- Wealth manager
- Portfolio manager
- Investment manager
- Financial planner
- Financial coach
That said, there are some rules:
- A Registered Investment Advisor, or RIA, is registered with the Securities and Exchange Commission (SEC) or a state authority, and is required to act as a fiduciary, which means putting your interests first at all times. That's a very good thing. Here's more on what a fiduciary is and why that matters.
- Certifications such as Certified Financial Planner (CFP), Personal Financial Specialist (PFS), Chartered Financial Analyst (CFA), and others, mean that advisor has fulfilled educational requirements and usually passed an exam. There is a brain-melting number of certifications, all with different requirements — some way more stringent than others. Check out the glossary in our story on types of financial advisors, where we list some of the most rigorous and highly regarded certifications. (The Financial Industry Regulatory Authority, or FINRA, also offers this handy tool for digesting the alphabet soup.)
What all of this means for you: There are different types of financial advisors with different areas of expertise. It's up to you to find someone who can help you with your specific financial needs. Let's talk more about that.
What does a financial advisor do?
A financial advisor helps you manage your money, either by offering advice on what to do or by actually managing your financial accounts.
Working with a financial advisor could mean getting guidance on how to invest a lump sum of money, coming up with a plan to save for retirement, or getting help managing your finances as you build your small business or start-up. Or it could mean coming up with a plan to buy a house, save for your children's college costs, or some combination of all of the above and more.
Here are just some things a financial advisor can help you with:
- Retirement planning.
- Investing and investment management.
- Reducing financial risks (often this means buying insurance products).
- Guidance on buying a home or managing a mortgage.
- Setting goals and staying on track to reach them.
- Getting a handle on budgeting and saving.
- Connecting with other experts (e.g., an estate plan attorney or insurance expert).
- Planning for taxes.
- Estate planning.
- Helping you decide what to do with an inheritance or work bonus or stash of savings.
- Planning for long-term health care costs.
You want to find an advisor who's willing and able to work with you on your particular money needs. The good news is that most advisors offer an initial free consultation, so you can meet, ask some questions, find out if they can help you with your specific needs, and see if your personalities mesh. This is important! You're going to be sharing a lot of personal information with your advisor — they're going to want all the details, like where's your money going every month — so you want to be sure you get along with that person and trust them.
Most advisors offer an initial free consultation, so you can meet, ask some questions, find out if they can help you with your specific needs, and see if your personalities mesh.
» Eager to get started? Find out about different types of financial advisors and how to choose one in our next article.
What does a fiduciary financial advisor do?
We here at investor.com are huge fans of financial advisors who are fiduciaries. A fiduciary is someone who has to put your best interest first at all times. Strange as it sounds, a financial advisor who's not a fiduciary can sometimes put their own interests above yours.
Say you want to invest your money, and your financial advisor suggests investing in some mutual funds that his company offers. These mutual funds sound great. What your non-fiduciary advisor may not tell you is that there are other mutual funds, offered by a different company, that are exactly the same and with substantially lower fees than what he's offering you. Because he's not a fiduciary, he can make money off of you without even telling you (or by burying that disclosure in a pile of paperwork).
Here's the thing: Fees matter! If you invest $100,000 and pay a 1% annual fee over 20 years, that's going to cost you almost $30,000 more than a 0.25% fee would have. Check out this SEC bulletin on investment fees.
Make sure your financial advisor is a fiduciary. Here's more about what a fiduciary is and why it matters.
Fee-only vs. fee-based financial advisors
The difference between "fee-only" and "fee-based" is so minimal, it couldn't really matter all that much, right?
Not so much.
The difference between these two really similar-sounding terms can represent a big difference in how much money you end up shelling out for financial advice.
Fee-only means that the only way the advisor gets paid is by the fee you pay. That helps keep the advisor working for you — and no one else.
Fee-based means the advisor collects your fee plus gets paid in other ways too. Often, that means earning a commission for selling certain products. Now, maybe that product is good and suitable for you. But is there a cheaper way to accomplish the same goal? An advisor who collects commissions is less likely to bother answering that question.
Stick with a fee-only advisor who's a fiduciary.
Are financial advisors worth it?
Is it worth paying for a financial advisor? There's no question that much of the work of managing our money is not rocket science. It's absolutely possible to do most of the work yourself. The more important question is: Will you?
Here are just three ways a financial advisor can help:
- A financial advisor can help you stay on track with your goals, acting like an accountability partner.
- An advisor may ask questions that you didn't realize you should be asking, such as, "Have you considered personal liability insurance?" or "How are you going to create a reliable stream of income from your retirement savings?"
- A financial advisor can develop an investment plan for you. Investing is the key to building wealth over time, so if you're hesitant to invest on your own, absolutely hire a financial advisor (or consider a low-cost robo-advisor) for help getting started.
Of course, you don't want to overpay for these services. Read more on how much a financial advisor costs.
Got questions about working with a financial advisor? We've got answers! Explore our complete course:
- Read about what a financial advisor does.
- Find out more about types of financial advisors and how to choose one.
- Learn what a fiduciary is and why it matters so much.
- Find out how much a financial advisor costs.
- Decide if you need a financial advisor or if you can DIY it.
- Find out which questions to ask a financial advisor.
- Find a trusted financial advisor near you.
About the author
Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point. Read more about Andrea.
About the editor
Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money. Read more about Carolyn.