A financial advisor helps you build wealth and achieve financial independence. Even if you have the expertise to do this without guidance, an advisor can streamline your wealth journey with a comprehensive plan and consistent implementation.
Because, let’s face it: Life presents many distractions that can lure you into regrettable financial decisions. A neighbor’s hot stock tips or a braggy friend’s showy lifestyle, for example, can push you into spending or investing where you shouldn’t.
A good advisor helps you avoid those financial detours — usually by showing you what’s possible financially if you stick to your plan.
There are different types of advisors who can help and two big value-adds they can provide that’ll help you achieve financial independence.
What Does a Financial Advisor Do?
Financial advisors plan and implement wealth strategies. In practice, this can mean something slightly different for every situation. Why? Because every household has its own set of obstacles to financial freedom.
You might need to trim your spending, save consistently, follow a steady investment plan, or pay down debt, for example. The right advisor can identify your top financial obstacle and set a plan to overcome it.
Note, however, that some advisors specialize in one or two areas of personal finance. You’d retain a specialist if you already know where you need the guidance.
Otherwise, you might need an advisor who is ready to work through a wider range of personal finance challenges. You’ll see below how to use an advisor’s title and certifications to differentiate between specialists and generalists.
Roles and Responsibilities of Financial Advisors
Your advisor’s exact responsibilities and deliverables should depend on your situation. You might get help with investment planning, tax planning, estate planning, or budgeting. Whatever the deliverable is, your advisor’s process should include these steps:
Fact-finding: Your advisor gathers basic information about you, your finances, and your financial goals. Understanding: Your advisor clarifies any ambiguities, either about your situation or what you want to accomplish and why. Evaluation: Your advisor should be open with you about how realistic your goals are and the actions needed to reach those goals. Risk Assessment: Risk management is a primary component of any financial plan. High credit card balances, for example, could be an existing risk that you’ll need to address. Planning: The plan is the primary outcome of the advisor relationship. It might be the design of an investment portfolio, an outline of how to divide up contributions across taxable and tax-advantaged accounts, a recommendation on insurance, or all the above. Optional implementation. Advisors often help implement their recommendations by executing the purchase and sale of financial assets, monitoring financial performance, and adjusting the strategy as needed.
Types of Financial Advisors
There are different types of financial advisors, and you can expect slightly different services and cost structures from each.
A robo-advisor is an automated investment platform. Usually, you’ll complete a questionnaire and the platform uses your responses to recommend one of its portfolios. The portfolio will invest in a mix of assets, stocks and bonds included. The mix should be appropriate for your investment timeline and your age.
Behind the scenes, an algorithm manages your risk over time by adjusting that asset mix and rebalancing your account.
Robo-advisors are low-cost and convenient. The drawbacks are:
You may have limited access to a financial professional for questions and clarifications. The automated rules may not address the nuances of your financial situation. Robo-advisors primarily help you invest. Any other services may be self-service resources, such as budgeting tools.
A la carte financial advisors
Many financial advisors will offer their services a la carte — meaning you could retain an advisor for a one-time or short-term consultation.
This is a cost-efficient solution relative to an ongoing advisor relationship. You pay once and receive a defined set of services. Usually, you’ll meet with the advisor to share information, ask questions, and get feedback on your goals. The advisor then reviews your finances and creates a financial plan.
Implementing that plan would be your responsibility, along with monitoring results and rebalancing your investments.
The traditional advisor/advisee relationship is ongoing. Your advisor creates the plan, implements it, monitors your performance, and makes new recommendations as needed.
You’ll pay more over time for this relationship than the cost of a one-time consultation or a robo-advisor. In return, you get a higher level of service plus regular access to your financial professional.
Financial Advisor Certifications and Designations
Advisors can carry several titles such as Certified Financial Planner, Registered Investment Advisor, Investment Advisor Representative, wealth manager, and stockbroker. These titles tell you how the advisor is licensed and, generally, the scope of that advisor’s services.
Certified Financial Planners or CFPs
Anyone can adopt the title “financial planner.” But only financial professionals certified by the Certified Financial Planner Board of Standards, Inc., can call themselves CFPs.
The CFP certification process is extensive. CFPs must have at least two years of planning experience and they must fulfill coursework requirements, including continuing education. They also must pass the CFP exam, which tests their planning skills against real-life scenarios. And, importantly, CFPs commit to a code of ethics and agree to serve clients in a fiduciary capacity.
When your advisor has fiduciary duty, she or he must act ethically and in your best interest. If there is a conflict between your needs and the advisor’s, fiduciary duty requires the advisor to put your needs first. This is the highest standard of conduct defined by law.
CFP training and certification covers multiple disciplines within personal finance: general financial planning, retirement planning, and estate planning, as well as tax and insurance strategies.
Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs)
RIA is a designation for firms that are registered either with their state’s regulatory agency or the US Securities and Exchange Commission (SEC). Generally, firms that manage $100 million or more in assets register with the SEC, and smaller firms register with their state.
Investment Advisor Representatives are the financial professionals who work for the Registered Investment Advisor. Like Certified Financial Planners, Investment Advisor Representatives typically provide guidance in several areas of personal finance — including investing, retirement planning, estate planning, and tax planning. Also, they are held to the fiduciary standard of conduct.
Wealth advisors specialize in high-net-worth clients. Many provide high-touch, hands-on service in all areas of personal finance. Some may even request legal permission to make financial decisions on your behalf.
You’d agree to that arrangement only if you trust the advisor completely and you’d benefit in some way. For example, if you travel internationally, you may not always be reachable. In this scenario, an advisor who has power of attorney can move more quickly on investment decisions.
Note that there is no licensing or accreditation required for wealth advisors. Planners can optionally obtain a Certified Private Wealth Advisor (CPWA) designation, offered by the Investments and Wealth Institute.
Stockbrokers primarily work with investments. They make stock recommendations, offer investment strategies, and execute stock or mutual fund trades for their clients. Some stockbrokers also sell insurance and other financial products.
You’re less likely to find a stockbroker who will help you budget your household expenses or create a debt paydown plan.
Stockbrokers are governed by the Financial Industry Regulatory Authority (FINRA). The core licensing hurdle is passing two exams, the Series 7, or General Securities Representative exam, and the Security Industry Essentials (SIE) exam. Combined, the two tests cover a range of financial terms, concepts, and securities regulations.
Most stockbrokers will earn additional licenses, as required by their state and the broker-dealer firms they represent.
Stockbrokers are held to a “best interest” standard of conduct by the SEC. This means stockbrokers must act in the client’s best interest when making financial recommendations.
Other Advisor Designations and Certifications
Many advisors carry multiple designations and certifications. In addition to those already mentioned, you might also see these on an advisor’s business card:
Certified financial fiduciary (CFF): The National Association of Certified Financial Fiduciaries administers the CFF designation. Candidates meet educational and experience requirements, pass an exam, and agree to uphold the CFF code of conduct. Chartered financial consultant (ChFC): The American College administers the ChFC designation, which is similar to the CFP title. ChFCs meet experience, education, and expertise requirements in a broad range of personal finance topics. Personal financial specialist (PFS): Licensed certified public accountants (CPAs) can obtain the PFS designation from the American Institute of Certified Public Accountants. PFS designees pass extensive coursework in estate planning, investing, and insurance. Chartered life underwriter (CLU): The American College also administers the CLU designation. It’s commonly held by professionals who specialize in life insurance and estate planning. Retirement income certified professional (RICP): This is another designation from the American College. The required training involves coursework in retirement income planning.
What Investment Return Can I Expect from My Advisor?
The acronyms an advisor carries can show an impressive commitment to education, but they don’t answer the big question often asked about advisors: At the end of the day, what kind of investment return will they deliver?
Investment return may be your top financial concern, especially if you’ve retained the advisor specifically to grow your net worth.
You can’t predict exactly what your advisor will accomplish, because the market itself is unpredictable. What you can do is use the market as a benchmark. You should adjust your expectations according to your advisor’s recommended strategy.
Say a prospective advisor recommends a conservative strategy because of your age or aversion to risk. In that scenario, you can expect below-market, but more predictable results. The advisor who offers an aggressive strategy may deliver market-level or market-beating results — but that will come with higher volatility.
From one year to the next, the stock market can be up or down. Fortunately, those highs and lows level out over the long-term to an annual average of 6% to 7%, net of inflation.
An Advisor’s Value Beyond Investment Returns
Investment performance is a high-profile piece of an advisor’s service offering. But risk management, while a less interesting topic, is equally important to the success of your financial plan.
This is one reason why many advisors offer such a wide range of services. Several of those services fall under the umbrella of risk management. Estate plans, tax shelters, and life insurance, for example, can all be methods of managing risk.
Effective advisors are savvy investors as well as strategic risk managers. To sum up what advisors do, it’s this: They help you generate wealth through various types of investing. They also know when and how to protect that wealth through risk management.
If that sounds like what you need, check out our wealth advisor directory to find a financial advisor near you.