5 types of financial advisors
A young couple meets with a financial advisor.
Having a financial advisor in your life can provide significant benefits, including organizing your finances and making smart financial decisions. A good advisor can get you to stick to your long-term plan even during challenging times, ensuring that you’re doing not just what feels safe in the present but rather what will foster your wealth in the future.
But financial advisors can vary substantially, depending on their focus and expertise, their professional standards and how they get paid. To gain a deeper understanding, Bankrate explains five types of financial advisors, what they can do for you and their pros and cons.
What is a financial advisor?
A financial advisor is a general term that has come to encompass a person who provides guidance on financial topics. That definition allows virtually anyone who offers financial help to call themselves an advisor. But the types of financial advisor can vary dramatically, and those looking for guidance should understand the kinds of service that various advisors may offer.
An advisor can help you plan for retirement, get your finances in order with a budget, set up an estate plan, manage your investments, find the best time to take Social Security and a whole lot more. In short, an advisor can help with any of the questions and strategies surrounding money.
An advisor may be compensated in a variety of ways. They may be paid by the hour or by the job, or they may earn a percentage of your assets under management if they’re working with investments. Some advisors are fee-only, meaning only their clients pay them. Others may earn a fee from clients as well as from the financial companies whose products they sell. Still others may be compensated entirely by the financial products they sell to clients.
5 types of financial advisors
A man consults with an advisor online.
Below are five types of financial advisors and the types of services they might offer as well as their pros and cons. Of course, many of these roles overlap in key places with each other.
A robo-advisor is a kind of financial advisor that automates the investing process, building an investment portfolio for you. A robo-advisor can handle many of the rote investment tasks, and can also perform some high-end tasks that it would be difficult for a human advisor to manage.
- Low cost, often just 0.25 percent of assets annually, or $25 for every $10,000 invested
- High-end features, such as tax-loss harvesting and portfolio rebalancing
- May offer human advisors, including highly qualified certified financial planners
- Easy to use, just deposit money regularly after setting up an initial investment plan
- Uniform advice, meaning you may not get advice highly tailored to your situation
- May not get motivation to stick to the plan, if you’re not working with a human advisor
2. A certified financial planner (CFP)
A certified financial planner is a highly qualified advisor who has been awarded the CFP designation by the CFP Board. A CFP may understand a wide range of financial issues, and importantly is charged to act with a fiduciary duty to you as a client.
- Experienced professionals, who have a minimum of 4,000 hours of service and have passed qualifying exams
- Held to a fiduciary standard, meaning they’re charged with doing what’s best for clients
- Wide-ranging knowledge, including the key financial and investing topics
- May motivate you to stick to your investing plan during a downturn
- May not be pros on every topic, meaning you may need an expert on a specific topic
- May require significant money to start
- May not fit your personality or financial needs
3. A wealth manager
A wealth manager provides holistic advice to high-net-worth individuals on a broad range of financial topics, especially those surrounding building and maintaining wealth over time. Key topics include investment management, financial planning, estate planning and tax planning.
- Comprehensive financial management around wealth
- Focused on high-net-worth issues, including building wealth and passing it on to heirs
- May be focused on more arcane issues such as tax and estate planning
- May also hold a CFP or other professional designations
- May help you stick to your long-term plan during a downturn
- Fees based on assets under management could become expensive
- May not be a fiduciary, meaning they may not always act in your best interest
- Will require significant investable assets to get started
- May still need an expert on niche topics, such as legal issues
4. A portfolio manager
A portfolio manager is more narrowly focused on your investments, and everything concerning them. So a portfolio manager selects your investments, decides when to sell, harvests capital losses as a tax write-off and generally manages other investment issues in your life.
- May help you find attractive investments and grow your net worth
- May be well-versed in securities, helping you outperform the market
- Help during a market downturn, when it can be tough to keep investing
- May hold key professional designations such as chartered financial analyst (CFA)
- Narrow focus, meaning the advisor is less versed in other financial issues
- May not be a fiduciary charged to act in your best interest
- May require a lot of money to begin
5. A financial salesperson
Some financial advisors are actually salespeople for a financial company, meaning they’re really interested in selling products marketed by their firm. While these products may be okay for your needs, they may come with high commissions or not be the best for your specific situation.
- Knowledgeable about the company’s products and services
- May have wide expertise in the industry
- Incentivized to sell products, meaning your needs may be second or third priority
- May not be able to trust them, because of the misalignment of incentives
- High commissions may be baked into the price of financial products
- “Free” advice is often not so free if your investment performance lags
How to choose the right type of financial advisor
A woman advises a young couple in an office setting.
The right type of financial advisor starts with what you need, so your potential new advisor must align with your goals and aspirations. Smart and aligned advisors can help drastically improve your financial life, and you need to be able to trust them with your money. So when you’re hiring a financial advisor, it’s basically a job interview to make sure the advisor is aligned with you.
Here are five key questions that you should ask any potential advisor:
- Are you a fiduciary? A fiduciary is charged to work in your best interest, helping align their actions with your goals, and is especially powerful when it’s a fee-only fiduciary
- How are you paid? “He who pays the piper calls the tune.” Fee-only advisors paid by you are more likely to work in your best interest than salespeople acting as advisors or those compensated in some other way.
- How will you help me stick to my financial goals? It can be easy to overlook the value of having an advisor who can motivate you during the tough times that inevitably arise. Sticking to the game plan is even more vital during the down days.
- How does your firm measure your performance as a financial advisor? This question gets to the importance of incentives and ensuring that the firm measures the advisor’s performance along dimensions that help you achieve your goals.
- What happens if you change companies? Ideally, you’re hiring an advisor for the long term, and you want to build up trust with an advisor who is aligned with your goals. So if that advisor moves to another firm, you want to be able to follow them.
The answers to these questions will help you gauge whether a specific financial advisor makes sense for you. It may also be worthwhile to see which advisors are recommended by your friends and colleagues, since you may be able to piggyback off their experience. But you should always conduct your own interview to see if the advisor will work for your needs.
Here are six key things to look for when searching for a new financial advisor.
Investors may encounter many kinds of financial advisors, so it’s vital to know your own goals and whether you need investment advice, financial planning or something farther afield. The advisor is there to work for you, so you want to ensure that they’re aligned with your goals.