What is a financial advisor and what do they do?

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While many individuals are familiar with financial advisors and may engage one at some point in their lives, the specific role of financial advisors may not be clear. Financial advisors offer advice and direction on various financial matters that individuals may encounter throughout their lives, such as investments, retirement planning, insurance, and taxes.

Here is a comprehensive overview of financial advisors, including the advantages and disadvantages of utilizing their services, and when it may be appropriate to consider hiring one.

What is a financial advisor?

A financial advisor is a professional who assists individuals in managing different aspects of their financial lives. While retirement planning is a common association with financial advisors, they can also provide guidance on general investment management, budgeting, insurance, taxes, and estate planning.

Financial advisors typically charge a fee, often based on a percentage of assets, in exchange for their services.

What do financial advisors do?

Financial advisors can assist individuals with various aspects of their financial lives, although the services offered may vary among advisors or firms.

Here are some common areas in which financial advisors provide guidance:

• Goal planning: Advisors typically begin by discussing clients’ short- and long-term financial goals. A financial plan is then developed to help achieve these goals while considering each client’s unique circumstances.
• Budgeting: Whether starting out on the financial journey or already established, advisors can help create an overall budget and identify ways to increase savings if needed.
• Investments: Advisors offer advice on investment portfolios, assess asset allocation, answer questions, and recommend investment products like mutual funds and ETFs.
• Retirement planning: Most financial advisors can assist with retirement planning, a significant long-term financial goal for many. They can help navigate employer 401(k) plans and provide guidance on choices such as traditional or Roth IRAs.
• Taxes: Advisors can provide guidance considering current and future tax implications.
• Insurance: Advisors can help determine the suitability of life insurance or annuity products, but it’s important to understand any commissions the advisor may receive on the products they recommend.
• Estate planning: Advisors can guide individuals through the estate planning process to facilitate the transition for heirs when the time comes.

Pros and cons of financial advisors

While financial advisors can offer valuable assistance, there are also drawbacks to consider.

Here are some advantages and disadvantages of working with financial advisors.

Pros

• Construct a financial plan – Collaborating with a financial advisor can help establish an overall financial strategy tailored to your needs, providing clarity for your financial future.
• Relieve the burden of financial management – By working with an advisor, you can free up time for activities you enjoy and not worry about managing finances beyond periodic reviews.
• Support during market downturns – Advisors can help clients stay committed to their financial plans during market fluctuations, emphasizing long-term goals over short-term market timing.
• Potential for better results – A skilled advisor may help achieve superior outcomes compared to self-management, justifying their fee through improved performance.

Cons

• High or unclear fees – Financial advisor fees can be significant, often around 1% or more of total assets, with additional charges like commissions on certain investment products. It’s essential to understand the fee structure before engaging an advisor.
• Trust issues – Entrusting your financial affairs to someone else can raise trust concerns. While no one will care about your finances as much as you do, a reputable advisor will manage your money responsibly.
• Compatibility – Not all advisors may be suitable for every individual. If the advisor-client relationship isn’t meeting expectations, don’t hesitate to seek a more suitable advisor with the necessary skills or better rapport.
• Minimum investment requirements – Some advisors may require substantial assets before taking on clients. While some may work with early-career individuals, others may demand assets totaling $1 million or more.

Types of financial advisors

The term “financial advisor” encompasses various roles in the financial industry. Here are some categories that fall under financial advising:

When to get a financial advisor

Financial advisors can be beneficial at various stages of life, particularly in specific circumstances.

If you feel overwhelmed or uncertain about managing your finances, it may be wise to engage a financial advisor sooner rather than later. Working with an advisor can provide clarity and confidence in your financial plan, alleviating stress associated with feeling lost.

Individuals with higher net worths may have more complex financial situations, such as a concentrated portfolio in company stock or stock options as part of compensation. The intricacies of your financial life may indicate the need for a financial advisor.

For individuals who prefer not to focus on investments or managing portfolios but have limited savings, robo-advisors can automate investment processes based on risk tolerance and goals at a lower cost than traditional advisors.

For assistance with financial planning, Bankrate offers a financial advisor matching tool to connect clients with advisors efficiently.

How to choose a financial advisor

Selecting a financial advisor can be challenging, but certain factors can guide your decision-making process.

• Ensure the advisor is a fiduciary, prioritizing your interests over their own or their firm’s. A fiduciary will recommend investments based on your needs, not commissions.
• Understand the advisor’s fee structure, whether based on total assets or hourly rates. Clear understanding of compensation is crucial when evaluating potential advisors.
• Check the advisor’s credentials, such as CFP designation or CFA charterholder status, demonstrating expertise, ethical behavior, and commitment to professional standards.

How to find a financial advisor

Finding the right financial advisor can be a daunting task, given the multitude of options available. Differentiating between advisors can be challenging.

Seek recommendations from family and friends who have experience with financial advisors to gain insight into their satisfaction. Personal referrals can offer valuable information without the marketing noise from advisory firms.

Utilize resources like the CFP Board website or the CFA member directory to verify an advisor’s credentials.

Bottom line

Financial advisors play a crucial role in guiding individuals through various financial aspects, but it’s essential to weigh the pros and cons before engaging one. If you feel overwhelmed or have a complex financial situation, working with an advisor can provide clarity and confidence in your financial plan. Selecting a fiduciary advisor with transparent compensation and credentials is key. Seek recommendations from trusted sources or leverage online directories to find a reputable advisor who can help you achieve your financial goals.

— This article was updated with contributions from Bankrate’s Rachel Christian.