Financial Advisors

What Is a Financial Advisor?

A financial advisor is a professional who offers individuals advice on how to manage their personal finances. The services a financial advisor provides can include researching investment opportunities, informing clients about specific investments that might meet their needs, monitoring clients’ financial accounts and recommending changes if needed.

As an initial step, financial advisors prioritize offering a financial needs analysis, which serves as a fundamental component of a comprehensive financial plan. This analysis takes precedence during initial consultations with new clients or when assessing the financial situation of existing clients.

Most financial advisors work regular full-time hours during the work week. Many advisors are employed by firms, but about 19% of financial advisors are self-employed, according to data from the Bureau of Labor Statistics.

In terms of qualifications, financial advisors typically have at least a bachelor’s degree in a related subject like business, finance or mathematics. Additionally, financial advisors can obtain certifications to enhance their reputation.

There are a lot of excellent financial advisors in the market, but there are also some unscrupulous ones. Finding one that is experienced and credentialed is very important. However, it’s also important to consider the demeanor of a financial advisor. The most effective advisors are patient, empathetic and inclined to educate their clients.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

How Is a Financial Advisor Different From an Accountant?

Financial advisors and accountants are both professionals that can help you manage your finances. However, there are some key differences between a financial advisor and an accountant that you should know.

Accountants are more focused on tax planning and preparation, while financial advisors take a holistic look at a client’s financial situation and help them plan for long-term financial goals such as retirement. In other words, accountants deal with the past and present of a client’s finances, and financial advisors are focused on the client’s financial future.

Another difference between financial advisors and accountants is how they interact with their clients. Accountants tend to be hired on a short-term basis and can be thought of as contractors, whereas financial advisors are more likely to develop a long-term professional relationship with their clients.

Finally, accountants and financial advisors differ in their approach to financial topics. Accountants tend to specialize in a certain area, while financial advisors are often generalists when it comes to their financial expertise.

How Is a Financial Advisor Different From a Financial Planner?

The terms “financial advisor” and “financial planner” are sometimes used synonymously to describe finance professionals, said Stephen Kates, Annuity.org’s Principal Financial Analyst. However, there are some subtle differences between the two professions.

A financial advisor’s focus is on investment management. They might help their clients choose which assets to invest in, monitor those investments and recommend changes in strategy. The advisor might even have permission from their client to buy and sell stocks and bonds on the client’s behalf.

In contrast, financial planners adopt a wider scope in the advice they offer to their clients. “Financial planners use their expertise in taxes, budgeting, pensions and assets to develop a comprehensive plan for your finances,” Bruce Mohr, a senior investment advisor and credit consultant at FairCredit, told Annuity.org.

What Do Financial Advisors Do?

Financial advisors provide their clients with a range of services, from reviewing investments and managing portfolios to tax planning, estate planning, and more.

For many clients, the main reason to hire a financial advisor is to build and manage their investment portfolio. Advisors help their clients craft a portfolio that balances minimal risk and efficient growth. Your advisor can keep you informed on how much return you can expect from your investments and help you react to market volatility.

In addition to asset management, financial advisors sometimes help their clients plan for different financial goals. For many people, their investment portfolio is their retirement fund, so retirement planning goes hand in hand with managing their investments. A financial advisor can also help you decide how best to achieve goals like saving for your child’s college education or paying off your debt.

Although financial advisors are not as well-versed in tax law as an accountant might be, they can offer some guidance in the tax planning process. An advisor can help you predict the tax liability of your investment strategies and might advise you on how to lower that liability while remaining compliant with regulations.

Some financial advisors offer estate planning services to their clients. They might be trained in estate planning, or they may want to work with your estate attorney to answer questions about life insurance, trusts and what should be done with your investments after you die.

Finally, it’s important for financial advisors to stay up to date with the market, economic conditions and advisory best practices. To do so, advisors are constantly sharpening their skills and broadening their expertise by reading and watching news publications, continuing their education, attending industry conferences and earning professional designations.

What Credentials Do Financial Advisors Need?

Although there are no specific credentials or training required for someone to call themselves a “financial advisor,” most professional advisors have some sort of relevant license or certification.

According to the U.S. Securities and Exchange Commission (SEC), an “investment advisor” is any person or firm that “engages in the business of providing investment advice to others about the value of or about investing in securities” for compensation. Investment advisors are required to register with the SEC or state securities authorities.

To sell investment products, advisors must pass the relevant Financial Industry Regulatory Authority-administered exams — such as the SIE or Series 6 exams — to obtain their certification.

Advisors who wish to sell annuities or other insurance products must have a state insurance license in the state in which they plan to sell them.The most common credentials that financial advisors earn are Certified Financial Planner™ (CFP® professional), Chartered Financial Analyst (CFA) and Personal Financial Specialist (PFS). Each of these designations requires the advisor to pass an examination to demonstrate their expertise.

How Do Financial Advisors Make Money?

Financial advisors may be paid an annual salary plus commission, or they may charge a fee equal to a percentage of the assets under management (AUM). In some cases, advisors charge a fee plus a commission.

The three financial advisor compensation models:

• Fee-based
• Fee-only
• Commission-based

Fiduciaries are generally fee-only advisors because they are obligated to act in the best interest of the client at all times. Commissions would present a conflict of interest for a fiduciary because such incentives are based on selling specific products, as opposed to growing a client’s portfolio.

What Do Financial Advisors Charge in Fees?

As previously stated, financial advisors charge fees based on the value of the assets they’re managing. A typical percentage a financial advisor might use ranges from 0.25% to 1% per year.

For example, let’s say you have $5 million in assets to manage. You hire an advisor who charges you 0.50% of AUM per year to work for you. This means that the advisor will receive $25,000 a year in fees for managing your investments.

Because of the typical fee structure, many advisors will not work with clients who have under $1 million in assets to be managed. The fees an advisor would receive for those smaller accounts just aren’t worth the time it takes to manage a portfolio properly.

Investors with smaller portfolios might seek out a financial advisor who charges an hourly fee instead of a percentage of AUM. Hourly fees for advisors typically run between $200 and $400 an hour. The more complex your financial situation is, the more time your advisor will have to devote to managing your assets, making it more expensive.

Who Is a Financial Advisor Right For?

If you want to achieve financial goals like retiring early, leaving behind an inheritance or getting out of debt, you may find working with a financial advisor beneficial. Advisors are skilled professionals who can help you develop a plan for financial success and implement it.

You might also consider reaching out to an advisor if your personal financial circumstances have recently become more complicated. This could mean buying a house, getting married, having children or receiving a large inheritance. Having an advisor’s guidance can help you think strategically about your finances and choose the path that’s right for you.

Another situation that might require the guidance of a financial advisor is starting your own business. “Business owners may benefit from a financial advisor’s expertise in areas such as tax planning, business strategy and growth,” Matt Welsh, a CFP® professional with Materetsky Financial Group, told Annuity.org. Financial advisors can help small-business owners make the most of their money by integrating business and personal finances.

How Do I Find the Financial Advisor That’s Right for Me?

Choosing a financial advisor is a big decision and is not something to be taken lightly. To find the financial advisor that’s right for you, Welsh recommends considering their qualifications, expertise and experience.

Your advisor should hold a designation from an industry organization, such as the CFP® Board or the CFA Institute. You may want to research the advisor online to find out if they’ve had complaints filed against them or poor reviews from past clients.

Before you meet with the advisor for an initial consultation, consider what services are most important to you. Older adults may need help with retirement planning, while younger adults may be looking for the best way to invest an inheritance or starting a business. You’ll want to seek out an advisor who has experience with the services you want.

Besides asking about their experience, here are some other questions to ask an advisor before you start working with them.

Questions To Ask a Financial Advisor

• How long have you been advising?
• What business were you in before you got into financial advising?
• Who makes up your typical client base?
• Can you provide me with names of some of your clients so I can discuss your services with them?
• Will I be working with you directly or with an associate advisor?

You may also want to look at some sample financial plans from the advisor. Ask if you can see multiple samples and compare them. If all the samples you’re provided are the same or similar, it may be an indication that this advisor does not properly customize their advice for each client.

Types of Financial Advisors

There are three main types of financial advising professionals: Certified Financial Planner™ professionals, Chartered Financial Analysts and Personal Financial Specialists.

Certified Financial Planner™

The Certified Financial Planner™ professional (CFP® professional) certification indicates that an advisor has met a professional and ethical standard set by the CFP® Board. According to the CFP® Board of Standards, these professionals have “completed extensive training and experience requirements and are held to rigorous ethical standards.”

Financial advisors pursuing this designation must pass the CFP® Certification Exam. The exam covers financial topics including financial planning, tax planning, retirement and estate planning and investment management and insurance.

In addition, applicants must have at least three years of experience with the financial planning process to qualify for the CFP® professional designation.

Chartered Financial Analyst

Chartered financial analysts, or CFAs, have several career paths within various investment management sectors. CFA charterholders can provide clients with services such as wealth and asset management, commercial and investment banking and insurance.

Personal Financial Specialist

The personal financial specialist professional designation is offered and recognized by The American Institute of Certified Public Accountants (AICPA).

To qualify for the PFS designation, advisors must hold a valid CPA license and be a current member of the AICPA. The advisor must have earned a minimum of 75 hours of continuing professional development and completed 3,000 hours of business or teaching experience within the five years prior to applying for the PFS designation.

Advisors must also pass the PFS Exam unless they have passed the CFP® or Chartered Financial Consultant (ChFC) exam — in which case, AICPA considers the advisor to have met the exam requirement.

Frequently Asked Questions About Financial Advisors