You’re working, earning and growing your financial worth. You might be considering whether you need a financial advisor to make the best money decisions. Although the financial advisor term is bandied about quite a bit, there’s a wide range of certifications and job responsibilities for financial advisors. This article explains what financial advisors do, their qualifications, the differences between various financial advisors, how they are compensated and whether you need a financial advisor or not.
Financial advisors provide a laundry list of services and serve a range of clientele. A financial advisor can create a comprehensive financial plan, answer a simple question about IRA withdrawals and everything in between.
The Initial Interview With a Financial Advisor
Financial advisors typically begin by meeting with you, either in person or via video call. The advisor interviews you to determine your current financial situation and goals. The initial meeting might cover topics such as your salary, your assets, insurance, expected inheritances, other income sources, your debts, liabilities, tax situation and more. Financial advisors work with a range of clients, from those with small amounts of money to those with millions of dollars.
A good financial advisor gets to know you as a person along with your future goals. The advisor explores your family situation by asking questions like, “Are you married?” and “Do you have children?” The savvy guide helps tease out your goals with questions like “Are you seeking to save for a down payment for a home?,” “Are you looking to buy a second home?” and “Do you want to fund your children’s college educations or are you hoping to travel the world?”
How Do Financial Advisors Get Paid?
Financial advisors should explain their fee structure to you. Ask, if the advisor doesn’t mention this important topic. There are a variety of compensation methods for financial advisors. Here’s a breakdown:
- Financial advisors can get paid a percent of your assets under management (AUM) for managing your money.
- Financial advisors can get paid by commission. In this case, when an advisor sells you a financial product, he or she receives a specific percentage payout for the sale.
- Financial advisors can get paid hourly. If you have a few questions and want to consult with a professional, you’ll pay an hourly fee for answers.
- Financial advisors get paid with a fee-for-service model. If you want a basic financial plan, you might pay a fee to have the financial advisor create that plan for you.
- Some financial consultants who work for large brokerage firms, such as Charles Schwab, Fidelity and TD Ameritrade, offer basic financial advice and are paid by a salary by their employer. Typically, these financial pros handle more superficial financial concerns.
What Are Financial Advisors’ Qualifications and Credentials?
This is where the financial advisory field gets complicated. There aren’t one or two credentials for a financial advisor. In fact, there are many financial advisory credentials. Here is a breakdown of the various financial advisor distinctions:
Financial advisors who sell investment or insurance products need to be licensed. If personal financial advisors directly buy or sell stocks, bonds, insurance products or gives financial advice, they’ll need specific licenses related to the products. The Financial Industry Regulatory Authority (FINRA) oversees security sales requirements.
The most popular securities sales licenses include Series 6 and Series 7 designations. A Series 6 license allows a financial advisor to sell investment products such as mutual funds, variable annuities, unit investment trusts and some insurance products. The Series 7 license or General Securities license (GS) allows an advisor to sell most types of securities from common and preferred stocks, bonds, options, packaged investment products and more. Series 7 holders can’t sell futures, real estate or life insurance.
Beyond the securities sales licenses are two of the most popular financial advisory designations – CFP® (certified financial planner) and CFA (chartered financial analyst). A CFP is licensed by the CFP board in a process that involves completing academic coursework, passing the certification examination, completing work experience and more. A CFA® is a high-level investment management designation and includes three levels of study and examination. A CFA® professional provides advanced investment analysis and portfolio management.
Beyond these “gold standard” financial advisor certifications are titles such as certified fund specialist (CFS), chartered financial consultant (ChFC), chartered investment counselor (CIC), certified investment management analyst (CIMA), certified public accountant (CPA), personal financial specialist (PFS) and more.
Each of these designations requires varying levels of education and experience.
Financial Advisor Job Responsibilities
Lumping all financial advisor job duties together is like suggesting that an anesthesiologist and dermatologist perform the same work because they’re both doctors. Financial planners might focus on one aspect of of your financial picture or be generalists.
Here are examples of financial advisor duties:
- Financial planning
- Insurance planning
- Risk management
- Employee benefits planning
- Tax planning
- Retirement planning
- Investment selection and management
- Real estate planning
- Debt management
- Emergency funds management
- Legacy planning
- Small business planning
Most financial advisors meet with you to discuss your financial goals. The scope of this conversation could cover investing only or expand to tax and insurance needs. An important duty of your financial advisor is education. Your money pro will help you understand investment options, returns and risks. Many advisors help you plan for specific life events such as having a child, saving for retirement, college and more.
After you’ve selected your financial advisor, he or she will help you implement your plan, suggest types of accounts and investments to best meet your future plans. Expect to receive regular updates on your financial situation. Your advisor will provide regular statements of account value and phone calls to discuss your goals and investment market conditions.
Where and How Does a Financial Advisor Work?
Your advisor might work in a solo office as part of a larger network, such as Ameriprise or Edward Jones. He might be employed by Vanguard, Morgan Stanley or another large brokerage house or bank. Other financial advisors are individual practitioners without affiliation with an overriding network.
Typically, your money is held in custody by an independent agent. For example, an individual financial advisor might use Schwab or Fidelity as custodians for your assets.
Your financial advisor might have specialized computer software that creates your investment portfolios. In fact, many advisors today use digital investment advisors or robo-advisors to set up and rebalance their client’s assets.
Do You Need a Financial Advisor?
Whether you need a financial advisor depends upon the size of your financial assets and your comfort with money management topics. If you have an inheritance or have recently come into a large sum of money, then a financial advisor could help answer your financial questions and organize your money management.
On the other end of the spectrum, if you’re just starting out and desire basic money guidance, you might benefit from a conversation or two with a financial advisor. Before deciding whether to visit a financial planner or not, clarify your financial questions.
When choosing a financial advisor, find out if the individual is governed by the fiduciary or suitability standard. A fiduciary is required to put your interests first, when suggesting investments. The suitability standard simply means that there is a reasonable basis for the investment recommendation.
A matching service like SmartAdvisor can help you determine whether you need a financial advisor, what you should look for in one and even find a financial advisor close by that meets your needs. The matching tool asks a series of questions to get at your financial needs and goals. It then provides names of up to three financial advisors (who are fiduciaries) who meet those needs. This cuts down on the research you need to do on your own. You can then read profiles on the advisors, meet with them and choose the person you most want to work with on your finances.
Alternatives to Human Financial Advisors
If you’re seeking financial advice you might consider employing one of the digital investment advisors. The broad field of robo-advisors spans platforms with access to financial advisors and investment management such as Personal Capital and Betterment.
If you’re comfortable with an all-digital platform, Wealthfront is another robo-advisor option. Additionally, Fidelity, Wells Fargo, Schwab, Vanguard, TD Ameritrade and other large brokerage companies also offer varying combinations of digital and human financial advisors.
The Bottom Line
You can find a financial advisor to help with any aspect of your financial life. From answering a few basic money questions at your local Charles Schwab store to signing up for a wealth manager at you bank, you can hire a financial pro to meet your needs. Even though your financial advisor has a certification or two, it’s your responsibility to understand the fees, background, services and experience of your money manager.
In short, when asking “What do financial advisors do?” the answer is, almost anything related to your current and future money plans.
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