A financial advisor is a professional who helps people manage their money so they can reach their financial goals. A financial advisor’s services include creating budgets and monitoring spending; establishing savings plans; estimating future income needs; and recommending insurance products and securities. Finding the right financial advisor is important because you don’t want to trust just anyone with your money.
- What Are the Types of Financial Advisors?
- What Should I Look For in a Financial Advisor?
- Questions To Ask a Financial Advisor
- How To Find a Financial Advisor
- How To Avoid Financial Advisor Fraud
Financial advisors offer a range of services to meet the needs of their customers. Here are some of the most common types of financial advisors.
Robo-advisors are digital services available through websites and mobile apps that provide automated portfolios based on the investor’s preferences and needs. They’re best for people who need assistance with investments but don’t require human interaction. On the plus side, robo-advisors are much cheaper than traditional financial advisors because they typically don’t include financial planning — only investing help.
Unlike robo-advisors, traditional financial advisors use a personalized approach to provide a full range of financial planning options. As your life circumstances and needs change, a traditional financial advisor can guide you in making the best decisions regarding your finances — a service that a robo-advisor cannot provide. If you desire face-to-face interaction, a traditional financial advisor is likely your best choice.
Hybrid financial advisors offer traditional financial advising services coupled with technology. They are more hands-off than traditional financial advisors, often use technology to come up with your investment plan and conduct business over the phone or online. These professionals are best for people who need some help but don’t want to hire a full-service financial advisor.
If you’re not sure how to choose a financial advisor, consider the following factors as you search.
Fiduciary duty means advisors must act in their clients’ best interests at all times by putting their personal interests aside. They must refuse to take actions that would allow them to profit from their positions and disclose potential or current conflicts of interest. Although any financial advisor can choose to abide by fiduciary duty, not all of them are required to do so.
Financial advisors come from many different backgrounds and offer a variety of different services. Their credentials provide insight into their education, experience and areas of practice. Here are some of the most common titles held by financial advisors.
Certified Financial Planner
A CFP is a professional designation issued by the Certified Financial Planner Board of Standards. Someone who holds this designation is best at offering general planning advice on a wide variety of personal finance issues, including investing, saving, paying for college, purchasing long-term care insurance, choosing a mortgage and planning for an estate.
To qualify for this designation, the professional must:
- Have at least a bachelor’s degree
- Have at least 6,000 hours of professional experience or 4,000 hours of apprenticeship experience
- Complete a CFP Board registered program
- Pass a certifying exam
- Take 30 hours of continuing education courses every two years
- Follow designated conduct standards and an ethics code
Personal Financial Specialist
The personal financial specialist credential is a professional designation issued by the American Institute of CPAs. Those who hold this designation are experts in the following areas of personal financial planning: estate, investment, personal income tax, retirement and risk management.
To qualify for this designation, prospective candidates must:
- Belong to the AICPA
- Possess a valid CPA certificate issued by a state authority
- Have a minimum of two years of full-time teaching or business experience — or 3,000 total hours — in personal financial planning within the previous five years
- Have at least 75 hours of personal financial planning education within the previous five years of application
- Successfully complete the final certification exam
Chartered Financial Analyst Certificate
The chartered financial analyst designation is issued by the CFA Institute. Although investment advisors holding CFAs often work for corporate clients, they are still regarded as investment management specialists. People looking for help with selecting stocks might find an advisor with a CFA designation to be a good option.
To attain this professional designation, candidates must meet one of these requirements:
- Be in the final year of a bachelor’s degree program
- Possess four years of work experience
- Possess a combination of work and university/college experience totaling at least four years
Other requirements for this designation include:
- Completion of a self-study program
- Passing three separate six-hour course exams
- Four years of professional experience in the investment decision-making process, either before, during or after completing the CFA program
Another important consideration when you’re searching for a financial advisor is how they’re compensated. Compensation is one of the factors that influence how much it costs to go to a financial advisor. Here are the ways financial advisors are usually paid.
- Commissions: Financial advisors who only receive commissions typically sell investment products and earn money when they sell these products to customers.
- Fees only: Financial advisors who only receive fees might charge a flat, hourly or retainer fee to help customers manage their finances.
- Fees and commissions: Financial advisors who receive both fees and commissions charge a flat, hourly or retainer fee for financial planning services and earn a commission on eligible investments they sell.
Ultimately, what you’re looking for in a financial advisor depends on your personal goals. The two most common reasons people seek the services of a financial advisor are to help them with investing or planning for retirement. Make sure the individual you choose offers the products or services you need.
According to the National Association of Personal Financial Advisors, here are some important questions to ask a financial advisor you’re considering hiring. The answers to the following questions can help you evaluate the financial advisor so you choose the person best suited to help you meet your financial goals:
- How are you compensated?
- Do you itemize commissions, if applicable?
- Do you accept referral fees?
- Are you held to a fiduciary standard at all times?
- Are you willing to sign a fiduciary oath that states you’ll always put my interests first?
- Have you ever been disciplined by the Securities and Exchange Commission or the Financial Industry Regulatory Authority?
- Do you provide full-service financial planning or just investment management?
- Do many of the clients you work with fit my profile?
- Will you or an associate work with me?
When you’re ready to start searching for a financial advisor, ask friends and family members you trust for names of advisors they trust. Or, check professional networking organizations such as the Financial Planning Association, NAPFA or the Garrett Planning Network for advisors in your area. Some banks also have financial advisors on staff.
Consider: Is a Financial Advisor Worth It?
Unfortunately, fraud is not uncommon in the financial planning and advice industry. The first step in avoiding fraud is to verify the credentials of any financial advisor you’re planning to work with via FINRA’s BrokerCheck tool or the SEC website. You also need to keep an eye out for signs of fraudulent activities.
Be on the lookout for any financial advisor — or anyone claiming to be one — who is involved in any of these potentially fraudulent activities:
- Claims to have special credentials or experience
- Promotes limited-time offers with a sense of urgency
- Offers guaranteed or overly consistent returns that don’t match market conditions
- Refuses to explain the investment, including how it makes money and the potential risks
- Promises large profits from a small investment
- Requires an advance payment
You should also watch out for any investment termed “Prime Bank” or “Prime World Bank,” which are scams.
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This article has been updated with additional reporting since its original publication.