What Is a Financial Advisor & Do You Need One?

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If you’ve been putting off getting a financial life, maybe it’s time to speed date a couple of financial professionals to help you get a solid wealth-building plan in place.

What Is a Financial Advisor?
A financial advisor is a professional who helps people manage their finances including their savings, investments, and setting goals. It’s important to understand the different types of financial advisors and vet them before entrusting them with such a major aspect of your life.

While you can manage your money on your own, many things can slip through the cracks, especially if you’re busy. According to The National Association of Personal Financial Advisors’ consumer survey, 74% of Americans wish they could get “do-over” when it comes to their financial planning.

Creating a comprehensive roadmap to manage your finances with the support of an expert can ensure you reach your money goals. This is where a financial advisor comes in. Financial advisors assist individuals or their families with budgeting, investing, and saving, which are all essential for your fiscal health. 

In this guide, we’ll go over what a financial advisor is, what they do, types of advisors, and selecting the right one for you. Read on to learn if working with a financial advisor could benefit you, or use the links below to navigate the post. 

What Is a Financial Advisor?

A financial advisor is a professional who can help you make informed choices regarding your money, whether that’s general financial wellness, monthly budgeting, or retirement planning. They’ll also work to keep you accountable every step of the way to ensure you reach your financial goals and are managing your money appropriately. 

Keep in mind that a financial advisor won’t always tell you what to do with your money. Instead, they’ll provide you with support based on their expertise, experience, training, and knowledge to guide you toward the best outcome. 

What Does a Financial Advisor Do?

Simply put: a financial advisor knows how to help you get a financial plan in place to meet your life goals. Whether your life goal is to retire at 55 or have enough money to send your child to college, a financial advisor can create a strategy based on your unique finances and needs. 

Other ways they can support you include::

  • Organize your finances (budgeting, planning, saving, investing)
  • Plan for life changes (from starting a family to retiring)
  • Project the results of your savings and investments to see if you’re on track
  • Make wise investment decisions to build your wealth over time
  • Help you protect the assets you’ve built through risk management

Convinced you could use some help in navigating your financial life?

That’s great. But, unfortunately, you need to be diligent in finding a financial professional who operates under the principle of doing the right thing for you—not them. Acting as a fiduciary means that a financial professional is legally required to act in their client’s best interest.

So, it comes down to you doing your homework and vetting the financial professional you choose to hire. Ultimately, the financial advisor you work with depends on your specific financial situation. After all, you don’t want to waste time or money on an advisor that won’t help you get closer to your financial goals. 

Types of Financial Professionals

There are quite a few types of financial advisors you can hire, including:

  • Certified Financial Planner
  • NAPFA-Registered Financial Advisor
  • Qualified Financial Planner
  • Registered Investment Adviser
  • Certified Public Accountant,
  • Personal Finance Specialist. 

Note: A Chartered Financial Consultant (ChFC) offers the same financial planning services as a CFP. The difference is that ChFCs receive their certification through The American College of Financial Services. These two professional groups compete with each other for market share.

We’ll go over some of these credentials to help you find a financial planner (or advisor) you can trust with your hard-earned nest egg:

Certified Financial Planner (CFP)

A Certified Financial Planner (CFP) is accredited by the CFP Board that governs them professionally. To become certified, a candidate must:

  1. Complete the university-level education requirement
  2. Pass the CFP certification exam an understanding of financial planning and how it’s applied in real life situations.
  3. Meet the experience requirement of 6,000 hours of professional financial planning.
  4. Pass fitness standards (adhere to a code of ethics, rules of conduct, practice standards, and undergo a background check).
  5. Receive authorization to use the CFP professional mark.
  6. Complete ongoing continuing education requirements.

NAPFA-Registered Financial Advisor

The National Association of Personal Financial Advisors (NAPFA) is a professional organization for fee-only financial advisors. To become a member, an applicant must:

  • Have a Bachelor’s degree from an accredited institution
  • Have a CFP certification
  • Sign the NAPFA Fiduciary Oath
  • Earn 60 continuing education credits every two years
  • Demonstrate a comprehensive approach to financial planning by submitting a sample financial plan or participating in a peer review dialogue

All NAPFA members sign an oath to act as a fiduciary for their clients, meaning they’re committed to working in good faith and the best interest of their clients. 

To find a fee-only advisor, search NAPFA’s online member database.

Qualified Financial Planner (QFP)

A Qualified Financial Planner (QFP) holds a higher level financial planning degree than a CFP, for example. A candidate seeking to become a QFP must have three years (or more) of professional experience as a financial planner and hold one (or more) of these credentials:

  • Chartered Financial Consultant (ChFC)
  • Certified Financial Planner (CFP)
  • Master of Science with a Financial Planning concentration (MS)
  • Master of Science in Financial Services with a Financial Planning concentration (MSFS)
  • Personal Financial Specialist (PFS)

You can refer to the International Association of Qualified Financial Planners to verify the credentials of a QFP or find a QFP.

Registered Investment Adviser (RIA)

A Registered Investment Adviser (RIA) is an individual (or company) paid to provide advice about securities to their clients. Their official job title is spelled adviser (not advisor)—now you know if you’re trying to find one online. Registered Investment Advisers are also known as:

  • Asset Managers
  • Investment Counselors
  • Investment Managers
  • Portfolio Managers
  • Wealth Managers

RIAs are regulated by the Securities Exchange Commission (SEC) if they manage $110 million or more of client assets—state regulators have jurisdiction over advisers who manage up to $100 million. 

Before you choose to invest, it’s a good idea to check that your preferred adviser is legit by using FINRA BrokerCheck or the SEC’s Investment Adviser Public Disclosure Database. If you don’t find the adviser’s (or their firm’s) name listed, investigate further before using their services.

Certified Public Accountant (CPA) & Personal Financial Specialist (PFS)

Sometimes, the tax consequences of a financial decision determine what you should do with your money. So, it’s worthwhile to have a CPA on your wealth-building team. Some CPAs are also certified by their governing professional board (AICPA) to assess your overall financial situation and provide advice on budgeting, planning, saving, and investing. 

Your CPA will have the PFS credentials added to their name to show that they are a certified Personal Financial Specialist if this is the case.

Do You Need a Financial Advisor? 

 As of 2020, only 29% of Americans had a financial advisor. A financial advisor can provide several benefits, such as helping you plan for significant expenses and manage your money according to your ambitions, but do you need one? Well, the answer depends on several factors, including:

  • Financial goals—What are you hoping to achieve when working with a financial advisor? Are you attempting to purchase a house in the next few months or trying to invest in the stock market? Whatever your goals are, it’s best to discuss them honestly with potential advisors and ensure they have the necessary experience to help you.
  • Affordability—Not only do you have to pay a financial advisor for their services, but you also have to save a portion of your income to grow your wealth. From hourly fees to flat rates, there are several ways to compensate an advisor for the work they provide. So, think carefully about how much you can afford. 
  • Financial situation—Some experts recommend hiring a financial professional when your financial situation changes significantly or will change in the near future, such as when you inherit a large sum of money or you’re having a baby. Others may recommend a financial advisor when you need to take care of complex issues, such as tax discrepancies or debt. 

What Type of Financial Advisor Should You Choose?

If you’ve decided that working with a financial advisor is the best money move for your wallet, the next step is narrowing down the type of professional to hire. 

There are various types of advisors—ranging from human professionals to robo-advisors—that can be a potential match for your specific needs and situation. In fact, according to the U.S. Bureau of Labor Statistics, there are over 200,000 personal financial advisors. Hopefully, that means that the best financial advisor is out there for you. 

Consider a Hybrid Approach of Robo-Advice vs. Human Advice

If you’re still on the fence about whom to hire, consider doing a beauty contest; after all, data doesn’t lie. A beauty contest is where you take part of the money that you wish to invest in stocks and bonds and invest it based on the advice of an automated investment service (robo-advisor) that uses an algorithm to trade funds. 

You take the other part of your investment dollars and invest it based on the advice of a human professional. After a period of time, compare the results (your gains and losses) vs. the cost (fee structure). See what works best rather than wondering if you made a good decision.

Keep in mind that while robo-advisors are generally less expensive than their human counterparts, you won’t be able to have a face-to-face conversation with them about more complex matters. This includes tax issues, stock worries, debt resolution, and so on. 

One possible option is working with a hybrid advisor that pairs technology and human elements to achieve your financial goals. A combo approach allows you to have the best of both worlds: 

  • Efficiency
  • Flexibility
  • Guidance
  • Accessibility 

How Much Does a Financial Advisor Cost?

How much you pay for professional financial services will vary from advisor to advisor due to several factors. This includes:

  • Services needed—Some financial goals require much more guidance from an advisor than others. Typically, the more support and personal finance tips an advisor provides, the more you’ll have to pay. 
  • Advisor’s credentials and experience—Many times, an advisor with little experience will charge less than one with many years of knowledge.

The best way to find a personal financial advisor within your budget is to conduct diligent research and compare services.

What Types of Fee Structures Should I Expect?

Financial professionals are typically paid using one (or more) of these fee structures:

  • Hourly feeSome financial advisors will charge you by the hour for their services. This may be useful for short-term money goals or those who can’t afford a monthly rate. How much you pay hourly will depend on the advisor’s location and experience. 
  • Flat feeAdvisors that charge a flat fee for their services are paid regardless of the hours worked. Fee-only advisors boast the advantage of their compensation structure to their clients since they get paid for financial advice, not for selling investment products.
  • CommissionFinancial professionals who will earn money based on the investment products they sell you. Commission-based relationships mainly focus on landing the sale, but that’s not always the case.
  • PercentageSome financial advisors will request a percentage of the value of the assets they manage for you in return for their services. For example, if they have a 2% annual fee and the account is worth $60,000, you would pay them $1,200.
  • Combination of fees and commissionsDuring your search for a financial advisor, you may come across one that earns a commission and is fee-based. 

Be sure to understand the costs associated with the financial advice you receive. If an advisor (or planner) cannot clearly explain what you’ll pay for their services, that’s a red flag. Get their fee structure in writing and mull your options over before committing. 

If they ever try to rush you into making a quick decision, walk out. There is no reason to do so as timing the market is not a suitable investment strategy for most people. It takes time to do good planning. Clear your schedule to do your due diligence and vet prospective advisors.

How to Choose a Financial Advisor

Interviewing a financial advisor is not that different from what you would do before going on a first date, from checking out their website and social media profiles. If you can’t find a clear message about who they are, what services they do (and don’t) offer, and what they charge for their services, don’t schedule an initial appointment. 

If you find a financial advisor that seems like a suitable match, it’s a good idea to meet with them first. Here are a few recommendations that can help you decide if a financial professional is right for you:

  • Prepare your checklist of interview questions
  • Clarify the services you need (goal setting, cash management and budgeting, tax planning, investment review and planning, estate planning, insurance needs, education funding, retirement planning, etc.)
  • Clarify compensation for those services
  • Ask for references and check them
  • Verify their credentials 

Besides a quick search on the internet, you’ll also want to work with your network. Talk to people you trust to see who they use for financial advice and ask them for a referral.

Use Mint to Help You To Help You Stick to Your Financial Goals

Seeking support from a financial advisor can be a productive and fruitful endeavor that may allow you to live comfortably and achieve optimal financial health. However, you must first decide if working with a financial advisor is the right decision for you by assessing your specific money needs and budget. Finding an appropriate advisor to help you reach your money goals will also require time and effort. 

Whether you move forward with a financial advisor or not, the free Mint app is a valuable resource that can serve as an online advisor of sorts to help you create financial plans, stick to your goals, monitor investments, and save toward a more stable financial future. 

Sources

Association of International Certified Professional Accountants | FINRA | Statista | The American College of Financial Services | The National Association of Personal Financial Advisors 1, 2, 3 | U.S. Bureau of Labor Statistics