What a Financial Advisor Does

A financial advisor is a professional who helps individuals and businesses manage their money and plan for their financial future. They provide expert guidance on a wide range of topics, from investing and retirement planning to debt management and insurance. Their primary role is to help you make informed decisions to achieve your financial goals.

What a Financial Advisor Does

Financial advisors offer a variety of services, which can be tailored to a client’s specific needs. Their core responsibilities typically include:

• Financial Planning: Creating a comprehensive roadmap to help you achieve long-term goals like buying a home, paying for college, or retiring comfortably.
• Investment Management: Helping you build and manage an investment portfolio. This includes selecting the right mix of stocks, bonds, and other assets to match your risk tolerance and goals.
• Retirement Planning: Guiding you on how much you need to save for retirement and advising on retirement accounts like 401(k)s and IRAs.
• Debt Management: Providing strategies to help you pay off debt more efficiently, whether it’s a mortgage, student loans, or credit card debt.
• Insurance Planning: Recommending the right types of insurance (life, disability, long-term care) to protect you and your family from financial hardship.
• Estate Planning: Working with legal professionals to help you plan for the transfer of your assets after you pass away.

Types of Financial Advisors

Not all financial advisors are the same. Their business models, payment structures, and legal obligations can vary.

• Fee-Only Advisors: These advisors are paid directly by their clients, typically as a flat fee, a retainer, or an hourly rate. They do not earn commissions from selling financial products, which many people see as a way to reduce conflicts of interest.
• Commission-Based Advisors: These advisors earn a commission on the financial products they sell, such as insurance policies or mutual funds. The advice they offer may be influenced by the commission they can earn.
• Fee-Based Advisors: This is a hybrid model where the advisor earns both a fee from the client and commissions on the products they sell.

It’s important to ask a potential advisor how they are compensated to understand any potential conflicts of interest.

Why You Might Need a Financial Advisor

While you can manage your own finances, a financial advisor can be a valuable partner for several reasons:

• Expertise: They have a deep understanding of complex financial markets, tax laws, and investment strategies.
• Objectivity: They can help you make rational financial decisions, free from the emotional biases that often influence money management.
• Time-Saving: They can handle the day-to-day tasks of managing investments and tracking your progress, freeing up your time.

A financial advisor can be especially helpful during major life events, such as getting married, having a child, starting a business, or approaching retirement.

How to Choose a Financial Advisor

1. Know what you need. A one-time plan, ongoing investment management and retirement advice are different services with different costs.
2. Ask whether they are a fiduciary. A fiduciary is legally required to act in your best interest. In the United States, registered investment advisers have a fiduciary duty, while some brokers follow a different standard. Rules differ by country.
3. Check credentials. Look for recognized qualifications such as the CFP (Certified Financial Planner) designation and confirm them with the issuing body.
4. Verify registration. Look up the advisor with your financial regulator. In the US, tools such as the SEC’s adviser search and FINRA BrokerCheck show registration and any disciplinary history.
5. Understand the fees. Ask for the full cost in writing, including advisory fees, fund costs and any commissions.
6. Interview more than one advisor. Compare how they explain things and whether they listen.

Questions to Ask in the First Meeting

• How are you paid, and do you earn more if I buy certain products?
• Are you a fiduciary at all times when working with me?
• What is your experience with clients in situations like mine?
• How often will we meet, and how will you report on my progress?
• What happens if I want to stop working with you?

Warning Signs

• Guarantees of high returns or “risk-free” investments.
• Pressure to decide quickly.
• Unwillingness to explain fees or put them in writing.
• Advisors who are not registered or cannot be verified.
• Requests to move money to an account in their own name.

Advisor, Robo-Advisor or Doing It Yourself?

A human advisor is useful when your situation is complex, such as business ownership, inheritance, taxes in several countries or large life changes. Robo-advisors are automated services that build portfolios at lower cost and suit simple, long-term investing. Doing it yourself costs the least but takes time and discipline. Many people use a mix, for example managing everyday investing themselves and paying for advice at major milestones.

Learn the Basics First

Even if you hire an advisor, a basic understanding of finance helps you ask better questions. Start with our overview of what finance is, and try the Compound Interest Calculator and Loan Calculator to see how your numbers behave.

Important Note

This article is general information, not personal financial advice. Laws, taxes and products differ by country, so speak with a licensed professional about your own situation.