What Exactly Is a Financial Advisor? - SmartAsset

The term financial advisor is generally a catchall phrase for financial professionals filling a number of different roles and performing a number of different tasks. Generally speaking, a financial advisor provides financial advice and guidance to clients tailored to their situation and goals. This can include estate planning, managing investment portfolios and drawing down assets during retirement. If working with a financial advisor is something that interests you, make sure you understand what your financial advisors are doing for you and how they can help your finances.

What Exactly Does a Financial Advisor Do?

A financial advisor is a financial professional who helps clients with topics related to their personal finances. While financial advisors are generally thought of in terms of working for individuals, many financial advisors also provide services to institutional clients like pension plans, charitable organizations, municipal governments and corporations. Some even advise other financial advisors. For the purpose of this article, though, we will focus on what financial advisors do for individuals.

Financial advisors help clients with money issues and planning. The exact services they provide will depend on their specialty and training. Broadly speaking, there are two kinds of financial advisory services: financial planning and asset management. Some advisors do only one of these while others do both.

Financial planning refers to things that involve the future, like retirement, your children’s college fund, buying a home and more. Some of the most prominently offered services in this area of financial advising include tax planning, retirement planning, estate planning, insurance planning and more. Many of these offerings are typically combined into a single financial plan, that accounts for your current assets, future plans, investments and any other applicable finances.

Asset management, sometimes referred to as investment management, is the area where an advisor will take care of your investments for you. These usually align with clients’ financial plans, and it involves building an investment strategy for your portfolio. These strategies are often customized to your specific needs and risk profile, but some firms also use model portfolios and other set options.

Types of Financial Advisors

There are a number of more specific financial professionals you’ll find under the financial advisor umbrella. Here are the three most common roles that individuals under the financial advisor umbrella play:

Registered Investment Advisor (RIA): RIAs are registered with a state or federal agency to give investment advice. They can help with buying and selling securities and other investment practices. RIAs are bound by fiduciary duty.
Financial Planner: Financial planners are more general advisor who helps with the creation of a holistic plan for your finances. They can help with areas like retirement planning, education funding and budgeting.
Wealth Manager: Wealth managers tend to be for those with more assets, especially high-net-worth individuals. These professionals help with areas like risk management, capital gains and estate planning.

Services Offered by Financial Advisors

One service that many financial advisor provide is financial planning. Financial planning generally refers to the non-investing aspects of wealth planning. This can mean a lot of different things but some of the services you can expect include:

Tax Planning: Help you minimize your tax payments and possibly to actually file your taxes.
Estate Planning: Help you leave your estate in good shape and with minimal taxation to your family when you die.
Retirement Planning: Ensure you’ve saved enough to retire comfortably when you’re ready.
Philanthropic Planning: Help you give back in a tax-efficient way.
Insurance Planning: Make sure you’re adequately covered and get the best option for your situation.
Budgeting: Make sure you know what you should be spending and saving each month.

As noted earlier, financial advisors are not required to get specific degrees to call themselves financial advisors. That said, many do get specialized training to be certified in topics like accounting, investing and life insurance. Some of the most common certifications are: certified financial planner (CFP), certified public accountant (CPA), chartered financial analyst (CFA) and chartered life underwriter (CLU).

How Financial Advisors Manage Your Assets

Asset management, on the other hand, is when financial advisors help you with your investments and manage how your money is working for you. There are two basic types of asset management: discretionary and non-discretionary.

Discretionary asset management means that your financial advisor has complete control over your money and will make investment decisions for you. Non-discretionary asset management means your advisor has to get your approval before making any trade or investment decisions.

Each advisor who does asset management will also have a unique investing style. Some will focus on mutual fund investments and index investing. Others will be all about bonds. Some will make stock picks, while others specialize in Treasurys. If you are choosing an asset manager, make sure you know their style and that you agree with their investing strategies.

How to Choose a Financial Advisor

Working with a financial advisor can be beneficial to people in many different financial situations. As we covered above, financial advisors can help you with a wide range of tasks, from strategically investing your assets to creating a financial plan to keep you on track to achieve your long-term goals.

Once you’ve decided you want to work with one, you have to find a financial advisor who meets your needs. This is sometimes easier said than done. Consider using your network to get recommendations. Your family and friends may have an advisor they know and trust, or a firm they like. If you’re already a client of a major bank, you could consider using that bank’s advisory arm. Alternatively, you can use SmartAsset’s free financial advisor matching tool.

As you evaluate your options, it’s important to do your research and ask questions. Make sure you know what services your advisor offers and understand how he or she makes money before deciding to move forward so that you can determine if it’s a good fit for your appetite for risk and overall financial goals.

How Financial Advisors Make Money

There are two types of fee structures that financial advisors generally use. Fee-only financial advisors exclusively make money from the fees they charge for financial advisory services. Investment advisors most commonly charge a fee based on a percentage of assets under management.

Other common types of fees include fixed fees, where you pay a single predetermined fee for the services you are receiving, and hourly fees, where you’re charged based on the time your advisor spends on your account.

Fee-based advisors also charge asset-based fees or work on a flat fee or hourly basis. Additionally, they may act as insurance agents or representatives of broker-dealers and collect sales commissions or brokerage fees from third parties. This arrangement can present potential conflicts of interest. If you’re concerned about this, you may be better off working with a fee-only advisor.

Bottom Line

A financial advisor is a professional who helps individuals and institutions manage their money and other financial concerns. Financial advisors may provide financial planning, asset management or some combination of the two. Two types of fee structures exist: fee-based and fee-only. Since “financial advisor” is generally a catchall term rather than a specific one, make sure you know exactly what services a financial advisor does and does not offer before you sign up to work with one.

Tips for Finding a Financial Advisor

If you’re looking for a financial advisor, the process doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When you talk to the advisors, ask them if they are fiduciaries. This means they put their clients’ interests before their own and their firm’s. If they aren’t fiduciaries, they must only make suitable recommendations.