A Definitive Guide to Every Type of Financial Advisor
Why it’s crucial to work with a fiduciary
How financial advisors get paid
How to choose the right advisor
Hiring a financial advisor is a smart investment for a variety of reasons: the right professional can map your financial future, create a plan that will keep you on track to reaching your money goals and help you avoid costly money mistakes.
When it comes to choosing the right expert, there’s a lot to consider. For starters, there are a bunch of different types of financial advisors out there — it’s a fairly generic term that can refer to a variety of services and individuals. You may have heard titles such as, investment manager, wealth manager, certified financial planner, financial coach, financial consultant, etc.
It’s important to understand that titles don’t necessarily mean anything. Just because someone puts “financial advisor” on their business card doesn’t always mean they have any specific training or credentials.
Before hiring anyone to manage your money, it’s crucial to do your homework, check out their background and experience, and vet their credentials. But more on that later. Let’s start by going over the most common types of financial advisors.
The main types of financial advisors
Again, the term “financial advisor” is a broad one, and it’s important to understand that they’re not all held to the same standards. Here are four main types of advisors and how they differ from each other.
1. Registered investment advisor
A registered investment advisor (RIA) is an individual or a company who provides you with individually tailored investment advice and can also manage your investment portfolio directly.
RIAs are held to a fiduciary standard, meaning they are legally required to act in your best interest, and must meet certain professional qualifications, including passing the Series 65 (Uniform Investment Advisor Law) exam. The test, which is administered by the Financial Industry Regulatory Authority (FINRA), covers federal securities laws and topics around investment advice.
They also have to register as investment advisors, either at the federal level with the Securities and Exchange Commission (SEC) or at the state level with a state securities regulator. Who an advisor registers with depends on the amount of money they’re managing. If they’re managing $110 million or more in client assets, they’re required to file with the SEC. Those managing smaller amounts of assets have to register with their respective states.
To verify that an investment advisor is properly registered, use BrokerCheck, a site run by FINRA. You can type in the name of the advisor or firm you’re considering and it’ll tell you everything you need to know about their background, including their education, work and business history and licenses held and in what states.
A broker’s main responsibility is buying and selling stocks, bonds, mutual funds and other investment products for you. To become licensed to sell securities, brokers are required to register with FINRA, pass specific tests and be licensed by your state securities regulator.
The products they’re allowed to sell you depend on the licenses they have. Common licenses held by brokers include the Series 6, which allows them to sell mutual funds and variable annuities (not stocks and bonds), and the Series 7, which allows them to sell a broader variety of securities, including stocks, bonds and options.
Important information about licensed brokers and advisors is available to the public at BrokerCheck. You can type in the name of the advisor or firm you’re considering and it’ll tell you everything you need to know about their background, including their education, work and business history and licenses held and in what states. The site also provides whether or not an advisor has any “disclosure events” on their record. (A disclosure event is an ethics complaint or a criminal prosecution.)
Under rules implemented by the SEC in 2019, brokers must now act in your best interest when working with your money (before, they only had to follow a “suitability standard” and provide you with suitable advice). Still, brokers are sales-oriented and often earn commissions — meaning, they get a chunk of money each time they buy or sell an investment for you — which can create a conflict of interest (since they’re incentivized to execute certain trades).
Keep in mind that many professionals are dually registered — as both a broker and an investment advisor. It can be tricky to know this, as brokers and investment advisors both often use the title “financial advisor.”
To find out if your prospective advisor is an RIA or a broker (or both), look them up on BrokerCheck. If they’re a broker or dually registered, make sure you understand exactly how they get paid and when they earn commissions before hiring them.
3. Certified financial planner (CFP) professional
These are professionals who have completed specific education, training and exams to earn a CFP certification, which is considered the gold standard of financial planning. They have to renew their certification every two years, which requires ongoing education and staying up to date on financial matters. Like RIAs, they’re held to a fiduciary standard.
A CFP can help you reach your money goals by constructing a comprehensive financial plan and can advise you on taxes, retirement planning, estate planning, insurance and more.
To verify an individual’s CFP certification and background, search an individual on The CFP Board of Standards site. It’ll also identify individuals who are not currently certified but were at one time.
Robo-advisors, which use technology to build and manage an investment portfolio that’s right for you, are the simplest (and most affordable) type of financial advisor out there.
The way it works is, you go online and answer a series of questions about things like your time horizon, financial goals and risk tolerance. Using an algorithm, the robo-advisor will build a diversified portfolio of low-cost funds fit for your situation based on the information you provided and unpredictable forces like market volatility and asset class performance. Robo-advisors will also automatically rebalance your portfolio for you when necessary.
Robo-advisors are simple, hands-off and affordable. Keep in mind that, with a robo-advisor, you’re mostly getting investment advice — you’re not getting a comprehensive financial plan from a human advisor.
Other types of advisors
Here are some other types of financial advisors:
- Financial consultant. This is a general title that anyone can use, but some financial consultants may be chartered financial consultants, or a ChFC. Like CFP professionals, they earn a distinguished certification in financial planning after completing extensive coursework and are held to the fiduciary duty.
- Wealth manager. Wealth managers and advisors tend to work with high net worth individuals and offer holistic financial planning and investment advice. To work with a wealth manager, you typically have to have millions of dollars of investable assets.
- Financial coach. A financial coach is a very basic version of a financial advisor — they won’t provide investment recommendations or help manage your portfolio, but they can offer advice about saving money, budgeting and other personal finance basics.
Why it’s crucial to work with a fiduciary
No matter what type of financial advisor you work with, you want to make sure they’re a fiduciary. The fiduciary duty is a legal requirement and means that your advisor must put your interest first and disclose potential conflicts of interest.
You don’t want an advisor who recommends an investment to you because he or she would get a higher commission from it. You want an advisor who is focused on what is best for you and who is completely transparent.
To be sure you’re working with a fiduciary, ask your prospective advisor straight up: “Are you a fiduciary? Are you legally required to act in my best interest?”
You should also ask how they get paid. You can tell a lot about an advisor by understanding how they earn money. If they’re a “fee-only” advisor, that means they’re paid directly by you and cannot earn commissions, meaning they’re not incentivized to sell you certain products. They only collect fees — either an AUM (assets under management) fee, a flat fee or an hourly fee.
Before hiring any advisor, you’ll want to have them explain in detail exactly how they’re compensated. You can also ask them to put it in writing.
How financial advisors get paid
There are several ways advisors can be paid for giving financial advice — and it oftentimes depends on the type of advisor you’re working with.
Here are three of the most common ways advisors get paid:
- Commission-based. With commission-based advice, your advisor will earn a fee each time they buy or sell an investment for you, which can be anywhere from 1-6% of your investment. Think of these “advisors” (who tend to be brokers) more like salespeople for investment and insurance brokerages.
- Fee-based. These advisors charge fees but can also earn commissions based on your investment selections. For example, they may charge an annual fee equal to 1% of the assets under management (AUM) and earn commissions if they recommend certain products to you.
- Fee only. A fee-only advisor doesn’t earn commissions. They get paid by charging an AUM fee or a flat fee (or both).
If you’re working with a robo-advisor, like Betterment or Wealthfront, you’re going to pay a lot less than you would for a traditional, human advisor. Expect annual management fees between 0.25% and 0.50% on your invested balance, though some don’t charge a fee at all, like Sofi.
Traditional advisors, on the other hand, tend to charge AUM fees around 1%, though they can also charge flat fees or hourly fees.
The price discrepancy can be explained by what you’re getting from each service. Robo-advisors, the simplest type of financial advisor out there, primarily help with your investments. It’s a good option if you just need help choosing and managing your investments and don’t want to spend too much money.
A traditional financial advisor is going to provide you more than just automated portfolio management — they’ll create a comprehensive and individually tailored financial plan for you, and can advise you on everything personal finance-related, from how to create a budget and plan for retirement to what type of insurance to buy. You’re paying more, but getting face-to-face, personalized advice from a professional.
Read more about how financial advisors get paid and how much it costs to work with one HERE.
How to choose the right advisor
Finding the right fit all boils down to what you need and want. If you’re a new investor and need help getting started, a robo-advisor might be enough for now.
Check out our top-recommended robo-advisors.
If you want advice beyond investing — say you’re planning to have a family and don’t know how to prioritize short-term expenses with long-term goals, or maybe you have questions about picking employee benefits or tax planning or estate planning — you’ll probably want to work with a certified financial planner or a registered investment advisor.
The type of advisor you settle on also depends on your budget and net worth. If you don’t have a ton of assets, you may not qualify to work with a traditional financial advisor, but could afford to work with a “virtual advisor.” This is similar to working with a traditional advisor, but all of your meetings are done virtually (by phone or video conference). If you don’t mind meeting with your advisor online, look into Facet Wealth, which sets clients up to work with CFPs virtually and doesn’t require an account minimum.
If you go the traditional advisor route, you’ll want to find a great professional who you can trust. This will take time and research. Start by trying to get a referral from a friend, colleague, acquaintance or an accountant or attorney if you have one. You’ll want to ask questions like why they like their advisor, how long they’ve worked together, how often they meet and how they pay their advisor.
If you can’t get a referral, do your own research. Start by looking up advisors in your area using the resources below:
- The Financial Planning Association. The FPA’s website allows you to search by zip code for an advisor who has qualified as a certified financial planner.
- The National Association of Personal Financial Advisors. This site allows you to search by zip code for financial planners who operate on a fee-only basis.
- The Certified Financial Planner Board of Standards. The site lets you search for CFPs in your area.