A financial advisor creates individualized financial plans, provides education and advice, and outlines strategies to help clients reach their goals. You should hire one if you need assistance in these areas.
Just like no two people are the same, no two financial advisors are the same either. The best way to find an advisor who understands your needs and agrees with you on how to get there is to interview a number of different counselors.
To help you make your decision, here’s a look at the types of financial advisors, what they typically charge for their services, and how you can find the right one for you.
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What Does a Financial Advisor Do?
As the name implies, a financial advisor provides advice about various topics related to your finances. However, professional financial advisors don’t simply provide obvious tips about investing in the market or offer a selection of hot stocks. Here are the services that a good financial advisor will offer.
Analyze Your Risk Tolerance and Investment Objectives
Good advisors take the time to know and understand their client’s entire financial situation, which includes everything from where they live, how much they earn, how many kids they have and what their lifelong financial dreams are. When devising a financial strategy, advisors will try to generate the greatest return possible for a given amount of risk.
Help Minimize Tax Consequences
Taxes can act as a drag on your financial results, so a good advisor will incorporate your total financial picture to attempt to minimize your tax burden.
Provide Budgeting Advice
A financial advisor will help construct a budget that works most appropriately for your needs.
Suggest Strategies To Manage Debt
Debt, particularly the high-interest variety found with credit cards, can ruin even a good financial plan. Your advisor will implement strategies to help you wrangle your high-interest debt.
Offer Estate Planning Solutions
Estate planning refers to important decisions to be made on assets or property due to incapacity or death. Incorporating various solutions such as life insurance, trusts and various tax-avoidance strategies, a financial advisor will help preserve your assets for your heirs.
Make Investment Recommendations
Investment recommendations can help you achieve your financial goals. A financial advisor can help you construct an investment plan that is prudent yet earns you enough to meet your financial goals. In some cases, you can also authorize your financial advisor to manage your investments on your behalf.
When Should You Use a Financial Advisor?
You should use a financial advisor when you don’t have the time, interest or ability to properly manage your own finances. Take a look at your financial life and see where there are any shortfalls:
- Are you struggling to stick to a budget?
- Is your debt becoming unmanageable?
- Do you have any long-term financial plans to take care of your retirement, education, housing and long-term care needs?
- Are you taking big losses in the stock market?
If you find yourself coming up short in any of these areas, a financial advisor is likely going to prove beneficial.
Another good time to consider meeting with a financial advisor is if you are going through any major life changes, such as getting married, having a baby or buying a new home.
What Are the Types of Financial Advisors?
The field of financial advice has evolved greatly over the past 50 years. Computers can manage your portfolio for you, and there’s a seemingly endless supply of financial information on websites and financial television shows.
If you’re looking to hire a professional, however, you’ll choose from one of three broad categories of advisors: in-person financial planners, robo-advisors and online financial planning services.
In-Person Financial Planners
In-person financial planners are more traditional advisors that you can meet in an office or consult with over the phone. However, even within this category, there are a wide variety of types of financial advisors.
- Financial Advisors: Financial advisors are the broadest category, covering any individual providing financial advice. Traditionally, the term “financial advisor” refers to a traditional stockbroker.
- Certified Financial Planners: Certified financial planners are investment professionals who must meet various educational and experience requirements, pass an examination and maintain ethical standards to practice.
- Fiduciary Financial Advisors: Fiduciary financial advisors are required to provide advice that is in a client’s best interest, rather than merely providing “suitable” investments.
- Registered Investment Advisors: Registered investment advisors, as the description implies, must be registered with either the Securities and Exchange Commission or state securities regulators.
- Financial Coaches: Financial coaches provide guidance and support regarding your financial plans, but may not be professional financial advisors. Coaches can help with keeping you on track with your financial plan.
- Debt Counselors: Debt counselors offer in-person consultations to help you manage your debt or negotiate a better payment plan. They are typically found at nonprofit organizations, but their services are not necessarily free.
Robo-advisors are automated investment platforms that you can access from a website or a mobile app, making them quick and easy to start. They are designed to replicate the job of a flesh-and-blood investment advisor by performing the following services:
- Analyzing a client’s risk tolerance
- Collecting information on a client’s investment goals
- Translating the results into a diversified portfolio
Keep in Mind
Robo-advisors typically charge much less than traditional financial advisors, and thus may be more cost-effective for many. However, they may have more limited investment options.
Two of the more popular robo-advisors are Fidelity Go and Vanguard Digital Advisor.
Fidelity was a pioneer in low-cost stock trading, and it has expanded its reputation to the robo-advisor world.
Highlights of the Fidelity Go platform include the following:
- Portfolios under $10,000 are managed for free.
- Those with $10,000 to $49,999 to invest pay $3 per month.
- Customers with at least $50,000 in assets face an annual fee of 0.35% of assets.
- There’s no minimum to open an account.
Vanguard Digital Advisor
Vanguard has always strived to lower the cost of investments for customers. It has built its reputation on its well-known lineup of high-performing, no-load mutual funds. Vanguard Digital Advisor is the firm’s foray into the robo-advisor world and is structured as follows:
- Client funds of at least $3,000 are invested across an array of Vanguard exchange-traded funds.
- Advisory fees are just 0.15% of assets, or $15 annually on a $10,000 portfolio.
- Clients can access tools to help plan for emergencies, allocate excess cash and manage debt.
Online Financial Planning Services
Other financial planning services offer hybrid models that incorporate aspects of both a robo-advisor and a traditional human advisor. Three popular choices in this category are Betterment, Facet Wealth and Vanguard.
Betterment was one of the original robo-advisors but has expanded its offerings to include access to personal financial advisors. Traditional robo-advisory services cost 0.25% annually.
- Unlimited access to certified financial planners comes with $100,000 in assets and a 0.40% annual fee.
Facet Wealth uses a blend of traditional asset management and modern technological features to offer a unique advisory product:
- Clients are paired with a dedicated certified financial planner.
- CFP meetings are conducted via phone or videoconference.
- Comprehensive financial planning is offered.
- Fees are not asset-based but service-based, typically running between $1,200 and $6,000 annually.
Vanguard Personal Advisor Services
Vanguard Personal Advisor Services (different from the Digital Advisor service) connects investors with real-life financial advisors for an annual fee, as follows:
- Most investor assets are managed for a 0.30% annual fee.
- Clients with more than $5 million to invest face lower fees.
- Accounts of $25 million and above cost just 0.05% annually.
- Vanguard requires a $50,000 minimum investment to participate.
How Much Does a Financial Advisor Cost?
Financial advice comes in many forms and at many prices. Some brokerage houses now let you trade stocks and ETFs commission-free, although you won’t get any advice along the way.
Robo-advisors often charge as little as 0.25% annually, in some cases managing funds for free. Full-service brokerage firms typically levy the heaviest fees, with asset management fees sometimes reaching as much as 2.5% percent annually.
Other advisors may charge fixed fees of a few hundred or thousand dollars per year to create and/or manage financial plans. There are so many ways you can pay for your financial advisor, and such a broad range of total costs, it’s imperative that you ask your financial advisor how much they charge.
How Do You Know You Can Trust a Financial Advisor?
Trust is something that is developed over time. If you’re looking for a new financial advisor, however, you won’t likely have time to develop a bond of trust before you hire one. The best way to build trust in this scenario is to ask your financial advisor direct questions.
You may be trusting this person with your retirement funds, the money for your kids’ education, or your down payment for a new home, so don’t be shy in finding out information, particularly in the following areas:
Ask The Advisor
- Education and experience
- Find out your advisor’s educational background and service time in the industry.
- Investment philosophy
- Ask how the advisor plans to approach your financial situation.
- References and reviews
- See if the advisor has any third-party endorsements.
- Professional certifications
- Planners with advanced certifications have shown dedication to their profession. An advisor who has qualified to be a CFP, for example, must master a wide range of financial topics, pass an exam consisting of two three-hour sessions, and meet ethics requirements developed by the Certified Financial Planner Board of Standards.
- BrokerCheck record
- BrokerCheck is maintained by the Financial Industry Regulatory Authority and provides licensing, regulatory, disciplinary and employment histories for registered advisors.
All of these indicators, coupled with your own personal impression of an advisor and how they answer your questions, can help you determine if you can trust a particular advisor.
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Last updated: Apr. 23, 2021