Before you can choose anyone to work with, it helps to have some understanding of the types of financial advisors out there and all of the abbreviations after their names. Under the rules of the U.S. Securities and Exchange Commission, a person or service that engages in providing advice to others or issues security reports or analysis for compensation is an investment advisor. The party must register with the SEC and their state in these situations.
However, this is an industry that is less regulated than others, and as a result of that, it is critical that you know what any type of financial professional is actually able to offer. For example, a “financial advisor” does not mean a person has any specific education, training, or certification.
Also important is to consider if the advisor has a fiduciary duty to clients. This means they must act in the client’s best interest, not their own. It is typically beneficial to work with such a provider because it minimizes the risk that the party is being paid a commission to sell you a specific financial product.
Considering all that information, the next decision you need to make is which types of financial advisors are the right fit for your specific needs. To give you some insight into the options and what to look for, consider the following before you start planning your financial future.
- Investment advisor: Provides stock, bond, mutual fund, and other investment-specific guidance and oversight.
- Financial planner: Designated to provide wealth-building, estate planning, and long-term retirement planning.
- Wealth manager: Specific to high net worth individuals to manage all of their financial well-being, including investments, tax mitigation, and estate planning.
- Brokers: Provides access to purchasing stocks, bonds, and other securities, with limited advice provided.
- Robo advisors: Limited advice provided and a self-managed app-style approach to investing.
Investment Advisor
An investment advisor is a person or company that provides financial advice and manages the investments of their clients. Those who are just starting to build a portfolio or those who have a significant investment already in place could benefit from working with these professionals. If you select an investment advisory firm, they are likely to be called a Registered Investment Advisor (RIA), and the person working with you for the company is an Investment Advisor Representative (IAR).
A quick note about spelling. You’ll notice the SEC rules use the term “advisor” while most people today use the term “advisor.” The difference is common but they represent the same type of person and skill set. Also, note that those investment advisors who manage $110 million or more in client assets must be registered with the SEC. Those with less than these assets must still register but they do so with the state.
Financial Planner
Another common term used to describe a financial professional who provides financial advice is a financial planner. There are various degrees of financial planners, though all tend to offer comprehensive financial planning advice and guidance. Typically, their objective is to help people with the following:
- Budgeting
- Emergency savings building
- College educational funds
- Retirement planning
- Estate planning
- Insurance planning
They typically perform most of these services, structuring financial plans to meet their clients’ unique needs. While some sell investment or insurance products, many are brokers instead. Keep in mind that there is no state or federal authority that governs or oversees financial planners specifically.
As you consider the types of financial advisors, if you decide to choose a financial planner, your objective could be to look for a Certified Financial Planner (CFP). These professionals have gone through specific training and have met specific certification requirements to provide these services. They are registered to operate as fiduciaries to their clients, which means they must act in your best interests.
Wealth Manager
When it comes to managing a client’s investment portfolio, the work of a wealth manager is often sought after. These professionals provide investment advice and often offer comprehensive financial management.
Many times, wealth managers just work with those who have a high net worth. Their objective is not just to build on that wealth to add value but also to provide support for other needs the high-net-worth client has, such as:
- Philanthropic planning
- Tax mitigation strategies
- Estate planning
- Investment management
- Insurance planning
It is not uncommon for a wealth manager to be a CFP since these financial professionals have a higher level of education and training beyond just personal finance. For those with significant wealth, working with a wealth manager enables a more custom solution, meaning that you can choose from various services available. Most of the time, these are fiduciaries. This can be essential in protecting your investment strategies and objectives.
Broker
Another type of financial advisor you may see readily available is a broker. A broker is a person that sells stocks or bonds, or other types of securities. To purchase stocks or bonds, you must work directly with a broker of some type as they operate as an intermediary between investors and the security exchanges, such as stock markets.
There are various types. A full-service broker is common and costs more. However, they provide personalized investment advice and guidance to their clients. That is more along the lines of what you may expect as you seek out a financial advisor role.
Alternatively, you may wish to choose a discount broker. This person or company will charge a much lower fee and commission for the services they offer. However, significantly lower levels of service are provided. The most challenging aspect of this process is that most will require you to select the investment you want to make and offer very little to no actual advice to you.
Robo Advisors
A robo advisor is not a specific type of financial advisor. Instead, they are a software tool that facilitates the process of buying and selling investments and securities. They allow you to set up your financial goals the way you desire, you then apply your specific timeline for reaching those goals and adjust your risk tolerance. The tool then goes to work for you investing in an automated fashion to try to achieve your goals.
That sounds simple enough, and for some entry-level investing, it may be a good option. However, not all services are the same, and not all produce positive results. You will likely have very little guidance in the process. Instead of speaking to a financial advisor in person, for example, you will answer a series of questions about your financial goals. Then, the tool will choose the combination of investment options it believes is best for you. That could include exchange-traded funds, stocks, bonds, or mutual funds.
Once you set them up, the robo advisors will monitor the market. As there are shifts, it works to automatically adjust the way you are investing to compensate based on the specific goals and strategies you have. These are lower-costing tools, but they do not provide official investment advice to you in the same way that an advisor would do, and that could be a concern for many people looking for a reliable professional to ask questions to and follow.
Use our free financial advisor tool to help you find the specific asset manager, financial planner, or financial advisor right for your situation.
Essential Considerations Before Choosing an Advisor
Investment advisors, Certified Financial Planners, and whether they are members of the Securities and Exchange Commission are just some of the factors to think about before you choose a professional to help you.
Know What the Best Advisor Can Offer to You
The right financial advisor should be someone:
- You feel comfortable talking to about your financial goals and needs.
- You can verify their experience and success in providing the types of investments you need.
- Their education, training, and certifications.
- The ease of working with them.
- Their cost structure.
- Their recommendations for your portfolio.
The right financial advisor depends on how well the person can help you achieve your goals. Not all financial advisors have the same level of success as others. The advisors credentials are one component that can help you with deciding, but don’t overlook others. If you are choosing human advisors, consider how readily available they are and if they will work as a financial coach to help you overcome current struggles. What is the financial advisor’s background in terms of helping clients like you?
What is their Fee Structure?
Whether you are choosing a wealth advisor or a robo advisor, you need to consider their specific services, how they structure payment, and if they are a fiduciary. Their fee structure helps you to see how they are paid and that could influence how they work to meet your financial goals.
When you consider the options in advisor fee schedules, keep in mind that you should clarify if they are fiduciary. Not all financial advisors operate as a fiduciary. That means that not all operate under the premise that they should provide you with recommendations and investment support based on what is in the best interest of you and only you.
In situations where the financial advisor is not a fiduciary, for example, that can mean that they make additional profits if they sell specific financial products. A fiduciary advisor cannot do that.
Most financial advisors will operate as a fee-only, fee-based, or a commission-based provider. Here is the difference in each of these.
Fee-Based Advisors
A fee-based financial advisor is paid in a mixture of commissions and fees. Most of the time, you pay a base fee. However, in some situations, you may also pay a commission on the investment trades or other financial products they sell to you and support you with as they build your financial portfolio.
Commission-Based Advisors
Another option is to turn to a commission-based financial advisor. This person is paid a commission for the work they do based on what they sell to you. Most of the time, a financial advisor is trustworthy enough to still provide you with recommendations based on what is financially best for your situation. However, they are paid based on the products they sell to you.
Fee-Only Advisor
This professional charges you a flat fee for the services they provide. This fee could be an hourly rate, depending on if they are providing wealth management support, or it may be a percentage of the assets they manage for you. This is dependent on the financial services the professional offers.
Are They a Credentialed Financial Advisor?
As noted, one of the most important questions you should have before working with anyone is what type of experience they have. In some situations, a financial advisor will have gone to school, obtained a degree, and worked for years in the industry without having an actual certification. However, there are some professionals who must maintain certification, and working with credentialed financial advisors could help you manage more sensitive, complex, or critical investment decisions with more support.
There are various credentials out there, but there are two to keep in mind:
Registered Investment Advisor (RIA)
A Registered Investment Advisor is registered with the state’s securities administrators if they have under $110 million in client assets to manage or by the SEC if they have more than $110 million in client assets. They are always fiduciaries, meaning they are tasked with providing only investment advice that is considered in the best interest of their clients.
Certified Financial Planner (CFP)
A Certified Financial Planner is a person with training, education, and certification that is recognized by the Certified Financial Planner Board of Standards, Inc. These individuals have specific services to offer related to estate planning, insurance, retirement savings, and financial planning. To maintain their designation, they must meet ongoing educational requirements.
Choosing the Right Type of Financial Advisors
These individuals have specific services to offer related to estate planning, insurance, retirement savings, and financial planning. To maintain their designation, they must meet ongoing educational requirements.
As you consider this and all investing topics, it is quite important to think about your objectives. Choosing a professional who can help you facilitate your objectives is beneficial. There are a few key factors to keep in mind as you consider the options for these professionals:
- Know your financial needs. If you are just starting out with personal finances or you are looking for help with a financial situation, seek out a professional that offers specific skills in that area.
- If you want to buy and sell securities and make your own investments in the stock market at a lower level, you may do well with the help of a robo advisor, especially if you have the time to put into the education.
- For long-term investing, especially if you have a sizable amount of money you are planning to invest or manage, turn to wealth advisors for their more extensive experience and ability to support you with tax strategies and comprehensive portfolio management
Finding the Right Support for Your Needs
Choose a financial advisor capable of providing specific insight into your goals. Look at the credentials and services offered before making a choice. Always consider costs as well.
At Invested Better, we take pride in helping our clients build strong outcomes by connecting them with the professionals they want and need to work with based on their financial situation.
If you are considering all of the options in financial advisors and still unsure where to get started, utilize their tools to help you. You can get matched with a financial advisor in a matter of minutes and start working with someone who can offer you the guidance and support you need.
