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Investment Advisor

If you need help making investment decisions and managing your portfolio, you may want to seek the advice of an investment advisor. Investment advisors are basically financial advisors that, for a fee, provide guidance and management for your investment portfolio. These individuals are often labelled as either an “advisor” or an “adviser.” But don’t worry – these terms are completely interchangeable. Read on to learn more about what investment advisors are, what standards they’re held to, how much they charge and more.

What Is an Investment Advisor?

An investment advisor works with you to determine the best investments for your portfolio. To do this, they must get a complete understanding of your financial situation, investment goals and risk tolerance. Investment advisors will assess your existing portfolio and recommend an investment strategy based on your goals. With your authorization, they’ll purchase investments on your behalf.

Investment advisors will tell you what types of securities to invest in, like stocks or mutual funds. They will also advise you on the risks associated with each type of investment and your expected rate of return. In addition, they will let you know what types of taxable income your investments will generate and how to make your investments as tax efficient as possible.

If you have a specific investment need, an advisor can likely help you with that as well. Say, for example, you want to write options on company stock or create a bond ladder for retirement. Specialized investment advisors can provide focused advice on topics like these without needing to assess your entire investment portfolio.

Registered Investment Advisors (RIAs)

A registered investment advisor, or RIA, is an investment advisor that’s registered with the U.S. Securities and Exchange Commission (SEC). They are held to a fiduciary standard, meaning they are legally required to put their clients’ best interests first. When advisors register their license, they must fill out Form ADV. You can request this paperwork or view it on the SEC’s online database to get a complete listing of any firm’s information, fees, preferred investing strategies and more.

Investment advisors who are not fiduciaries tend to be commission-based. This means that they will get paid based on the financial products you buy through them. If your advisor isn’t as transparent as they should be, they might be making investments that benefit their pockets more than yours. Be careful when working with a non-RIA advisor, and ask for explanations for their suggested investments.

How Much Does an Investment Advisor Cost?

Investment Advisor

Investment advisors charge their fees in several different ways, so it’s important you understand their fee structure. Be sure to ask your advisor to explain how they make money before engaging their services. If you want to research an advisor’s fees on your own, simply take a look through their official Form ADV.

Some advisors charge fees based on a percentage of the value of your managed investments. Generally speaking, the larger the portfolio, the lower your annual fee will be. These percentages tend to range from 0.20% to 2.00% of your assets under management (AUM). In other instances, investment advisors will charge an hourly rate or a flat fee. Some advisors also work on commissions they earn from selling financial products like insurance.

Depending on the specifics of an advisor’s fees, they may adhere to either a “fee-only” or “fee-based” fee schedule. Here’s how these structures differ:

  • Fee-only – Advisors who are fee-only earn compensation solely from what they charge clients for their services. Again, these generally come in the form of asset-based fees, fixed fees and hourly fees.
  • Fee-based – On the other hand, customers of fee-based advisors may run into commissions for trades, insurance products and other third-party costs. This, however, is in addition to the standard fixed, hourly and asset-based fees you’ll incur at any advisory firm.

When Should I Work With an Investment Advisor?

Investment Advisor

The best investment advisors are those who make the same decisions their clients would have made if they had the advisor’s level of experience and enough time to dedicate to research. Investment advisors are experts in understanding securities, like stocks, bonds and exchange-traded funds (ETFs). Their job is to analyze market movements and find the best investment options for each client’s unique goals.

If you have a medium-sized portfolio and are seeking long-term investment growth, it may be worth taking advantage of an investment advisor’s expertise. An investment advisor can also be useful if you’re working to save enough for retirement. Advisors take your goals into consideration and use their knowledge of the markets to make the best recommendations for you.

Bottom Line

If you are seeking an expert’s advice on investing in stocks, bonds or other securities and you want long-term or retirement wealth-building, you should consider working with an investment advisor. An investment advisor will take your goals, risk-tolerance and time horizon into account and use their expertise to suggest the best investments for you.

Tips for Saving for Retirement

  • As is mentioned above, an investment advisor can be a great resource if you’re working to save for retirement. SmartAsset’s free financial advisor matching tool makes it easier to find an advisor who suits your needs.  First, you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in-person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
  • Plan ahead as much as possible. For example, if you work with an investment advisor far enough in advance you can build your portfolio over the long term and enjoy investment growth over time.
  • Invest in a retirement plan. While the stock market can be a great way to round out your savings plan, take advantage of tax-deferred options as well. Especially if you get an employer match, the value of your 401(k) can balloon over time, thanks to compound interest.

Photo credit: ©iStock.com/gradyreese, ©iStock.com/agrobacter, ©iStock.com/shapecharge

Danielle Klimashousky Danielle Klimashousky is a freelance writer who covers a variety of personal finance topics for SmartAsset. She is an expert on topics including credit cards and home buying. Danielle has a BA in English from Wesleyan University.
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