What is a financial advisor and what do they do?

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While many individuals are familiar with financial advisors and may eventually engage one, the question remains: what exactly do financial advisors do? Financial advisors offer advice and guidance on a range of financial matters that individuals may encounter throughout their lives, including investments, retirement planning, insurance, and taxes.

Here’s what you need to know about financial advisors, including the advantages and disadvantages of utilizing their services and when it might be appropriate to hire one.

What is a financial advisor?

A financial advisor is someone who assists in managing various aspects of an individual’s financial life. While financial advisors are commonly associated with retirement planning, they can also be involved in general investment management, budgeting, insurance, taxes, estate planning, and more.

Financial advisors typically charge a fee, often a percentage of the client’s assets, in exchange for their services.

What do financial advisors do?

Financial advisors can assist clients with various aspects of their financial lives, although the services provided may vary among advisors and firms.

Here are some common areas where financial advisors offer guidance:

• Goal planning: Advisors typically inquire about clients’ short- and long-term financial goals and develop a financial plan tailored to achieving those goals while considering each client’s unique circumstances.
• Budgeting: Whether clients are just starting out or are more established, advisors can help create an overall budget and identify ways to increase savings if necessary.
• Investments: Advisors provide advice on investment portfolios, assess asset allocation, answer questions, and recommend investment products such as mutual funds and ETFs.
• Retirement planning: Most financial advisors can assist with retirement planning, guiding clients through choices like employer-sponsored 401(k) plans and traditional or Roth IRAs.
• Taxes: Advisors can offer guidance considering current and future tax implications.
• Insurance: Advisors can help clients determine the suitability of life insurance or annuity products, but it’s important to understand any commissions involved in the products recommended.
• Estate planning: Financial advisors can assist in navigating the estate planning process, making it easier for heirs when the time comes.

Pros and cons of financial advisors

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

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

Pros

• Construct a financial plan – Collaboration with a financial advisor can help build a comprehensive financial strategy that provides clarity for the future, based on individual needs and risk tolerance.
• Relieve the burden of financial management – By working with an advisor, clients can focus on enjoyable activities without the stress of managing finances constantly.
• Assistance during market downturns – Advisors can help clients stay on track during market declines, emphasizing long-term goals over short-term market fluctuations.
• Potential for better results – A good advisor may help clients achieve superior results compared to managing finances independently, justifying the advisor’s fee.

Cons

• High or unclear fees – Financial advisor fees can be significant, often around 1% or more of total assets, with additional fees like commissions for certain investment products. It’s essential to understand an advisor’s compensation structure before engagement.
• Trust concerns – Entrusting one’s financial affairs to another can raise trust issues. While no one will care about finances as much as the individual, a good advisor will manage money with care and diligence.
• Compatibility issues – Not every advisor may be the right fit, and it’s okay to seek a different advisor if the current relationship isn’t meeting expectations. Different skills or personal comfort levels may necessitate a change.
• High initial investment – Some advisors may require substantial assets before taking on clients, while others may work with individuals early in their careers. Meeting minimum asset requirements can be a barrier for some individuals.

Types of financial advisors

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

When to get a financial advisor

Financial advisors can be beneficial at various stages of life, particularly in certain situations.

Individuals who feel overwhelmed or uncertain about managing their finances may benefit from engaging a financial advisor early. Working with an advisor can bring clarity and confidence to a financial plan, easing the stress of feeling lost.

Clients with complex financial situations, such as a high net worth or intricate investment portfolios, are more likely to benefit from the expertise of a financial advisor. The more complex the financial landscape, the more valuable advisor guidance becomes.

For those who prefer not to actively manage investments or have limited savings, robo-advisors can automate the investment process based on risk tolerance and goals at a lower cost than traditional advisors.

Bankrate offers a financial advisor matching tool to connect clients with advisors in minutes for those seeking financial planning assistance.

How to choose a financial advisor

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

• Ensure the advisor is a fiduciary, prioritizing clients’ interests over their own or their firm’s, avoiding conflicts of interest in recommending investments.
• Understanding the advisor’s compensation structure is crucial. Some charge a percentage of assets under management, while others may have hourly rates. Inquiring about compensation helps clarify the advisor-client relationship.
• Check the advisor’s credentials, such as the CFP designation or CFA charter, indicating their expertise and commitment to ethical behavior. These credentials can help narrow down potential advisors for further consideration.

How to find a financial advisor

Finding the right financial advisor can be challenging due to the abundance of options available. Recommendations from friends and family can be a valuable starting point, providing insights into advisor experiences without the marketing noise.

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

Bottom line

Financial advisors offer valuable assistance in managing various financial aspects, but it’s essential to weigh the pros and cons before engaging one. For individuals seeking clarity in financial planning or dealing with complex financial situations, working with a fiduciary advisor transparent about compensation and credentials can be beneficial. Seek recommendations from trusted sources or use online directories to find a reputable advisor aligned with your financial goals.

— Bankrate’s Rachel Christian contributed to an update of this story.