What do financial advisors do?

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When it comes to financial advisors, a common misconception is that they only help manage your investments. So while there are financial advisors who specialize in investment management, you can turn to others to help with budgeting, taxes, and even purchasing a home.

Because there are so many types of financial advisors, the space has several different professional designations, such as certified financial planner (CFP) and chartered financial consultant (ChFC). Some financial advisors have a fiduciary duty that requires them to act in your best interest, while others are not committed to doing so.

As you can see, there are many types of financial advisors covering a variety of roles. This article will look at what financial advisors typically do, how they get paid, and how to know whether they are acting in your best interests.

Key financial advisor objectives

Depending on the type of financial advisor, their objectives may include:

  • Helping you create a financial plan.
  • Helping you save and create a budget.
  • Helping you manage your investments and plan for retirement.
  • Assisting with tax preparation, buying a home, or insurance.

What do financial advisors do?

Financial advisors play many roles, including helping you pay off debt, create a budget, or set up a savings account. Later, their work may progress to assisting with taxes, estate planning, or investments. Financial advisors also work to help you understand both basic and complex personal finance topics as you progress through your financial journey.

The term “financial advisor” does not require any specific credential, but common titles include CFP, ChFC, and chartered financial analyst (CFA). Some credentials are more narrowly focused, such as certified investment management analyst (CIMA).

Different types of financial advisors

You might think financial advisor refers to one specific profession or set of responsibilities, but it is actually an umbrella term that encompasses many types of jobs. This is part of the reason financial advisors may have many different credentials.

Financial consultant

A financial consultant is a financial advisor who holds the chartered financial consultant (ChFC) designation. They often do the same work as CFPs.

Ideal for: Anyone who needs general help with their finances, including budgeting, saving, and investments.

Investment advisors

An investment advisor is an individual or company that helps people manage their investments. They may be a CIMA and should be registered with the Financial Industry Regulatory Authority (FINRA). That designation can be verified by using FINRA’s BrokerCheck site.

Ideal for: People who want human help in managing their investments.

Certified financial planner (CFP)

A CFP is a financial advisor who has completed the training and experience requirements put forth by the CFP Board. CFPs must also pass the CFP exam. They are fiduciaries, meaning they must act in their clients’ best interest.

Ideal for: People who want help creating a long-term financial plan to help them meet their goals.

Money coach

A money coach or financial coach is a professional who helps people with the absolute basics of personal finance. For example, if you need an extra push to make a budget or start saving, a money coach can help.

Ideal for: Those who are just getting started on their financial journeys and need the motivation to start.

Wealth advisors

Wealth advisors are financial advisors who work primarily with high-net-worth individuals. They may offer both general financial planning as well as investment management.

Ideal for: Those with a high net worth (some wealth advisors require a $100,000 net worth — or even higher).

Robo-advisor

A robo-advisor is an algorithm-driven investment management platform that helps people manage their assets while keeping fees much lower than a human investment advisor can offer.

Ideal for: People who need minimal help managing their investments or who don’t have much to start, as many robo-advisors have no minimum investment.

When to get a financial advisor

Developing (and maintaining) a comprehensive financial plan can be overwhelming. Even after you put a plan in place, a financial advisor will check in with you regularly to ensure you are on track. Financial advisors can also help with big financial decisions, such as planning for a wedding or home purchase.

Retirement planning

Unless you’ve already retired, you probably aren’t quite sure how to plan for it. Investment choices are almost unlimited, and a financial advisor will help you select the right mix so you can achieve the type of retirement you want.

A friend or colleague may only talk about whichever stocks are hot. A financial advisor, on the other hand, knows what you actually need to meet your retirement goals and will help you develop a plan to get there.

Estate planning

You might be amassing a great deal of wealth, but all of us will eventually pass away. When that happens, all your assets — including physical ones like a house or a car — will have to be passed on.

For instance, should the family home be passed down or sold? How should your investments be handled? Estate planning includes developing a will, setting up trusts, and naming a benefactor or executor. Your estate plan may also include methods to limit taxes when passing assets to your beneficiaries.

College education fund

College education funds, such as 529 plans, are an excellent way to get ahead of paying for your child’s college expenses. These funds let you invest the money which can help ease the burden of rising tuition costs. A financial advisor can help you decide which plan is best and how to invest the money.

Buying a home

Buying a home is more than just paying a mortgage: there are assessment fees, closing costs, agent commissions, and more. A financial advisor can help you sort through these costs as well as decide which repayment term works best for your situation.

FAQs

How will I know if my advisor is acting in my best interest?

The best way to know your financial advisor will act in your best interest is to look for one with a fiduciary duty. A fiduciary duty is a commitment to act in your best interest and not in a way that maximizes revenue or profit. A good test: Ask potential advisors if they’re willing to put their fiduciary duty in writing and then have them do it.

Another thing to look for is a fee-only financial advisor. Commission-based financial advisors earn money for selling certain investments that may not best serve their clients’ interests, while fee-only providers earn a predetermined rate that is paid by you. This pay structure helps align the advisor’s interest with yours.

How are financial advisors paid?

The three primary ways financial advisors are paid: fee-only, fee-based, and commission-based. Fee-only financial advisors earn a fee only from their individual clients, usually as a percentage of assets under management (AUM) or an hourly rate. Fee-based advisors are similar, but they may earn money other ways, such as through commissions from the broker. Commission-based financial advisors, then, earn money based only on which investments you purchase or sell.

What is the average fee for a financial advisor?

As outlined above, fees vary depending on how the financial advisor is paid. However, typical fees on an AUM basis are 0.25 percent to 1 percent or about $150 to $400 on an hourly basis.

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Written by
Bob Haegele
Contributing writer
Bob Haegele is a contributing writer for Bankrate. Bob writes about topics related to investing and retirement.
Edited by
Senior wealth editor