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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