Financial Advisor

Updated July 31, 2021

A financial advisor is an educated investment professional who helps people and businesses set and meet long-term financial goals. They typically ensure that individuals and businesses are properly insured, saving enough for future needs such as retirement, and will manage the investments of their clients.

There are a few types of financial advisors so it's important to understand the differences and how to choose one based on your needs.

What Is a Financial Advisor?

A financial advisor is a licensed investment professional who helps people set and meet short- and long-term financial goals, especially for retirement.

What Does a Financial Advisor Do?

Financial advisors typically find their own clients through networking and referrals, then meet with these clients to determine their needs and recommend strategies to implement. Financial advisors then oversee the implementation of these strategies and monitor their clients’ accounts.

How Does a Financial Advisor Make Money?

There are three main ways financial advisors make money:

  • Commission-based from insurance and investment products they sell
  • Fee-based, where fees are charged for planning services (commissions from products sold are also possible)
  • Fee-only, where they only provide advice for a fee that’s typically paid quarterly by the client

Common Types of Financial Advisors

There are different types of financial advisors depending on your financial situation.

Investment Advisors

A personal investment advisor is someone paid to provide investment advice and (oftentimes) manage these investments. They are is responsible for analyzing a client’s financial situation and recommending the best course of action to take when it comes to investment options. They help balance asset allocations, diversify holdings, and work to help the client obtain a high rate of return.

They can be paid from a set fee, percentage of assets under management, or fees associated with the investments/insurance products they sell. Also referred to as a portfolio or asset manager, investment advisors help balance asset allocations, diversify holdings, and work to help the client obtain a high rate of return.

Requirements of Investment Advisors

The term "investment advisor" is similar to a financial advisor, meaning they’re both regulated by the SEC (Securities and Exchange Commission).

Insurance-based Advisor

An insurance-based advisor is an advisor who has an eye towards recommending and selling certain insurance products, such as whole life insurance policies and annuities.

Requirements of an Insurance-based Advisor

Insurance-based advisors are typically associated with a broker-dealer, and must apply for membership in a self-regulatory organization (e.g. FINRA) or apply for broker-dealer registration with each state that you plan to do business in.

Wealth Advisors

A wealth advisor manages the portfolios of high net worth individuals and couples. They can also assist in tax and estate planning, health insurance, and charitable giving.

Requirements of Wealth Advisors

Like investment advisors, "wealth advisors" are regulated by the SEC and need to be registered with a broker-dealer or broker.

CFP®

A CFP® is a financial advisor who has passed the Certified Financial Planner™ exam, a common designation for financial advisors.

They meet with clients to review their financial situation and help set up short- and long-term financial plans, based on their clients’ goals.

Requirements of a CFP®

To obtain their certification, a CFP® professional has gone through a CFP® Board Registered training program and 170-question multiple answer exam. They are held to a fiduciary standard, meaning they have to put their clients’ interests ahead of their own. To maintain their designation, a CFP® professional must also obtain a certain number of hours of continuing education each year, sign a code of ethics, have several years of actual planning experience, and hold an undergraduate degree.

Chartered Financial Consultants

A Chartered Financial Consultant is someone who holds the Chartered Financial Consultant (ChFC) designation.

What is the difference between financial advisors and financial consultants? Many times, these two terms are used interchangeably, but financial consultants typically offer more specialized planning, such as for businesses or divorce. Like a CFP, a ChFC also has a fiduciary responsibility.

Requirements of Financial Consultants

A ChFC also has to complete the equivalent of 27 semester credit hours of education, and pass a closed-book exam. In addition, every two years, 30 continuing education credits are required.

Non-Traditional Financial Advisors

There are several types of advisors that don’t fit into the same category above, mainly robo-advisors and financial coaches.

Robo-Advisors

Robo-advisors use computer algorithms to invest a client’s money with virtually no human assistance. They will automatically invest and rebalance portfolios to ensure they’re aligned with a client’s risk tolerance. Robo-advisors can also provide automatic tax-optimization.

Requirement of Robo-Advisors

Although robo-advisors can invest their client’s money without human interference, robo-advisor companies do employ financial advisors. These advisors are typically CFPs and serve clients who want individualized advice to go along with their automatically invested portfolio.

Financial Coaches

Financial coaches typically work with clients on topics such as setting up a budget, paying off debt, and saving money. Oftentimes, financial coaches help clients before they are ready to work with a financial planner.

They meet with clients to analyze their financial situations, determine where the roadblocks to success are, and help them develop a plan to meet their money management goals (e.g. debt-payoff, saving). Please note financial coaches are not regulated and thus, are not allowed to manage money or make recommendations regarding specific investments.

Requirements of Financial Coaches

Financial coaches don’t need to be registered or certified in order to work with clients, however, many choose to pursue certification. There are several certifications to choose from, including a Certified Personal Finance Consultant (CPFC) through Financial Educators Council, as well as an Accredited Financial Counselor or Financial Fitness Coach certification through AFCPE.

Financial Advisor vs. Accountant

While a financial advisor typically helps individuals plan for short- and long-term financial goals, an accountant can help ensure that clients are preparing their taxes correctly. Both can review financial situations and provide recommendations on how to reduce tax liability.

An accountant, however, is trained to file tax returns, set up quarterly estimated returns, and determine the deductions and credits a client is eligible for.

Financial Advisor vs. Financial Analyst

While a financial advisor typically works with individuals and couples, financial analysts tend to work more closely with businesses such as banks, pension funds, and insurance companies. They analyze the performance of investments, economic trends, news, and their clients’ strategies to make recommendations.

When to Use a Financial Advisor

If you feel comfortable taking the DIY approach on your finances, working with an advisor may not be the right choice for you. However, if you are low on time or confused by the complexity of your finances, working with a personal financial advisor for retirement is worth considering.

Here are a few reasons to hire a financial advisor:

  • You’d like to have another individual help assess your financial situation and provide the tools to reach your goals (e.g. retirement)
  • Your financial situation becomes too complex to handle on your own
  • You don’t have the time, inclination, or confidence to DIY

Remember: The best personal financial advisors will listen to your concerns, act as a fiduciary, and will never sell investments/insurance that aren’t in your best interest.

Pros of Using a Financial Advisor

Are personal financial advisors worth the money? That depends on whether you’re the type of person who wants financial guidance. If so, a financial advisor can:

  • Provide another set of eyes on your finances
  • Help you remove the emotion from financial decision making
  • Structure your withdrawals in retirement
  • Structure your savings strategy during your working years
  • Make sure your portfolio is diversified in order to lower your risk

Cons of Using a Financial Advisor

There are trade-offs to using a financial advisor as well – especially if you’re working with the wrong one. Some cons of using a financial advisor may include:

  • Charging you a fee to work together
  • Pressuring you to purchase insurance or investments that aren’t in your best interest
  • Guiding you into high-fee investments (or recommending other costly products)

How to Find a Personal Financial Advisor

You can find a financial advisor in many ways, including recommendations from family and friends, online searches for local advisors, and newspaper/magazine advertisements.

Here are a few places to start searching for financial advisors:

If you don't need a full service financial advisor, check out Vanguard's Personal Advisor Services. You manage your own investments but you'll also have access to chat one on one with an advisor for personalized advice when you need it all for the low fee of 0.3% on portfolios between $50,000 and $5 million. 

How Much Should You Pay a Financial Advisor?

Fees for a financial advisor vary, depending on what type of advisor they are. That said, a typical fee is about 1% of the assets the advisor is managing for you on an annual basis. Keep in mind that many advisors have minimum asset levels for the types of clients they work best with.

If they aren’t fee-based or fee-only, you’ll just pay fees that are wrapped into the investment and insurance products your advisor sells you (which can be expensive).

If you’re paying for a fee-based or fee-only advisor, it’s important to factor in what you can afford. Many advisors offer monthly fees or retainers that are not based on the size of your assets.

Are Financial Advisor Fees Tax-Deductible?

No. The Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct financial advisor fees from 2018 to 2025.

Ask an Expert
All of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Financial Advisor.

Does My Financial Advisor Need a Degree? 

Not necessarily, but in order to sell investments they need some licensure (such as the FINRA Series 7 or 66). In addition, certain credentials, such as Certified Financial Planner™ and Chartered Financial Analyst (CFA) require an undergraduate degree in addition to significant experience and passing an exam. 

Do Financial Advisors Help with Estate Planning? 

Financial advisors can help with the process, but in order to legally have documents completed (such as a will or healthcare directive), you’ll need to work with an attorney. Financial advisors often work with preferred estate planning attorneys who can assist in implementing estate plans

Can a Financial Advisor Do Your Taxes? 

A financial advisor is not able to do your taxes unless they are registered by the IRS as a tax preparer or enrolled agent. 

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a Certified Financial Planner™.

If you have a question about Financial Advisor, then please ask Mark.

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