Financial Advisor

Financial Advisor

If you’re reading this article, you may be on the fence about whether hiring a financial advisor makes sense for you. Today, more than ever, tools to help individuals manage their finances are readily accessible; there are plenty of free retirement calculators, portfolio analyzers and personal finance apps. There are also so-called “robo-advisors” — programs that use artificial intelligence to help you plan your financial future — or you might just ask Alexa. We’ve come a long way.

What is a financial advisor?

A financial advisor is a broad term encompassing many financial professionals. Generally speaking, it describes individuals who advise customers on their finances.

Some financial advisors solely work with clients to build and manage their investment portfolios. Others take a more holistic approach by advising clients on every area of their finances, from their budget to retirement plans.

“Advisors can help you identify and prioritize your financial and life goals, develop a plan or strategy to achieve those goals, and help ensure that you stay on track to meet those goals as conditions change and evolve,” says Mike Foy, senior director and head of wealth intelligence at J.D. Power.

It’s important to note there’s little regulation around who can call themselves a financial advisor. While many financial professionals—including certified financial planners and registered investment advisors — must meet certain criteria and pass exams to receive designations, anyone could theoretically call themselves a financial advisor.

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Need financial guidance? Here are 4 types of financial advisors

Finding a financial professional can be confusing. You may hear terms like financial advisor, certified financial planner, and chartered financial consultant, but how do you know which one you need?
Or do you even need a financial advisor? Suppose you understand the basics of investing and the investment types available to you, and you’re comfortable with your goals and risk tolerance. In that case, you might be better off handling your finances.But if you decide to seek financial help, remember that financial professionals have different specialities—and different cost structures. Before seeking a financial advisor, reflect on your financial circumstances and goals. Knowing which type of financial advice you need will help you determine the type of advisor you should hire.There are four main categories. Although their roles have similarities, there are distinct regulatory differences in the advice they provide.

1. Certified Financial Planner (CFP)

This is one of the most common designations for financial advisors. Having a CFP means the financial advisor is a fiduciary, so they must act in their client’s best interest. Financial professionals who become CFPs must take courses on financial planning, studying topics such as investment planning, estate planning, retirement planning, and ethics. Before financial advisors can take the coursework, they must have a bachelor’s degree from an accredited university or college as well as professional work experience. The CFP test is a board-level exam administered by the College of Financial Planning, an accredited college.

Investors they serve: People who need individually tailored investment advice, financial planning services, or (in some cases) brokerage services (buying and selling of financial instruments like stocks and bonds).

2. Chartered Financial Consultant (ChFC)

This designation is offered by the American College of Financial Services, an accredited college. Although ChFCs are similar to CFPs—including the requirement to act as a fiduciary in client dealings—there are some significant differences. In addition to the basic coursework about financial planning, ChFCs also study topics such as special-needs planning or behavioural finance. ChFCs also must pass a comprehensive exam. ChFCs are bound to the American College of Financial Services ethics code, and the school enforces the ethics standard. It’s not uncommon for financial advisors to hold both certifications (CFP and ChFC).

Investors they serve: People who need a financial advisor focusing on insurance might want to consult a ChFC. But a ChFC is also trained in subjects like tax and retirement planning, special needs advising, and wealth management.

3. Registered Investment Adviser (RIA)

RIAs are independent fiduciary financial advisors who give financial planning advice and help individuals manage their assets. Many RIAs also are CFPs and ChFCs. If an RIA doesn’t have those designations, they must pass the Series 65 exam on Uniform Investment Adviser Law, which covers topics such as federal securities law. The test is administered by the Financial Industry Regulatory Authority (FINRA), a third-party organization that enforces rules for registered brokers and broker-dealer firms. Because they give investment advice, RIAs also must register with the Securities and Exchange Commission (SEC) or their state regulator. You can research an RIA’s background and experience at FINRA’s BrokerCheck website.

Investors they serve: RIAs provide individually tailored investment advice, and some manage investment portfolios. They’re less likely to help with overall financial planning.

4. Broker-Dealer

Broker-dealers buy and sell securities for individuals or their accounts. Although “broker-dealer” is a compound term, brokers and dealers are two different entities. A broker executes orders for clients. Full-service brokerages work with individuals on a financial plan in addition to trading. Discount brokerages just execute trades. Brokers must pass the Series 7 exam, the General Securities Representative Qualification Examination, which tests a broker’s knowledge regarding sales of stocks, bonds, and some insurance products (e.g., annuities). Broker-dealers are also registered with the SEC and FINRA. You can research broker-dealers and a firm’s background and experience at FINRA’s BrokerCheck website.

Investors they serve: People making trades. Some provide financial consulting, too.

When to consider other types of financial advisors

There are other types of financial professionals you may want to consider, depending on your needs.

Robo-advisors offer digital financial advice through an automated investment platform using artificial intelligence and limited human interaction. To use a robo-advisor, an investor fills out a questionnaire about their financial circumstances and goals, and the platform chooses a model portfolio based on their responses. Robo-advisor accounts are often easy to open, are available to people with small amounts of money to invest, and have low fees compared to using a human advisor.

Financial coaches work with people on their relationship with money and financial goals. They can help people set saving and spending priorities and give clients a better picture of their overall money situation. Financial coaches are sometimes called financial fitness coaches. They offer advice but aren’t licensed to sell securities, and they’re not likely to be fiduciaries. It’s a relatively new field, so check a coach’s credentials. The Association for Financial Counseling and Planning Education accredits these advisors, and the association is certified through the National Commission for Certifying Agencies.

The bottom line

There are many confusing terms regarding financial professionals, so make sure you understand your financial circumstances and goals before seeking advice. Aside from financial advisors, other professionals may influence your money journey. Among them are tax advisors, estate-planning lawyers, and insurance agents who sell products such as annuities. They all can help, but you have to pay for their advice, too.

Here are five problems many consumers face that can be alleviated by hiring a pro.


1. Information overload

Information can empower us to make educated decisions, but it can also overwhelm us, causing “analysis paralysis.” A quick internet search on whether to fund a Roth IRA yielded conflicting advice such as “you need a Roth IRA” and “reasons to skip the Roth.” What’s a saver to do?

While it’s wonderful that so much information is readily available; the bad news is that having information doesn’t always equal understanding. Information is a good thing if it gets us to thoroughly think through a decision, but if it causes us to procrastinate indefinitely for fear of making the wrong decision, then what is accomplished?

Part of a financial advisor’s job is to help you sort through a variety of information sources, tune out the noise and make the best decision based on your finances and your personal goals.

2. Too many choices

In the U.S., there are more than 10,000 mutual funds and exchange-traded funds (ETFs) for investors to pick from. Choosing a fund from this vast universe of choices is like going to the food store and seeing ten different brands of milk, or trying to select one loaf of bread from an overflowing bakery: It takes time, and ultimately you may just settle on one with packaging that catches your eye. Is that the best way to invest?

If you have the time and enjoy picking out funds, that’s one thing, but if you don’t — that’s a sign it’s time to call a professional. Financial advisors usually have lists of go-to investments that they’ve already done research and due diligence on; these investments may meet certain criteria, such as having low expenses or being consistent top performers. Helping you sort through the financial supermarket of choices is one reason to hire an advisor.

3. Too little time

If necessary, we could all learn to cut our hair, mow the lawn, or change the oil in the car — but who has the time? Not to mention: Where is your time best spent? Retirees may have more time to read the newspaper, research stocks, or discuss changes in tax law with their accountant than a busy corporate lawyer. That busy lawyer might appreciate a financial advisor’s help in keeping up with changes in the markets and the law, and when that expertise is needed, place one call or send an email to their advisor.

Each of us has to weigh how best to spend our time. If a financial advisor frees up your time so you can concentrate on making more money at work or spending more time with your family, then that may be advice worth paying for.

4. Lack of expertise

There’s a reason a general practice physician may refer you to a gastroenterologist if you have acute pain in your abdomen: The specialist has a particular expertise that you need. The same goes for financial advisors who work in a special niche. Some financial advisors specialize in times of transition, like selling a business or planning for a divorce, while others focus on an industry, such as working with dentists or schoolteachers.

Each of these advisors has developed unique expertise in their field, usually from years of experience working with clients who have similar needs. For example, a financial advisor may know the ins and outs of your state’s pension plan, and its effects on claiming strategies for Social Security, which might help you in retirement planning. If you have a unique situation, a specialized advisor may prove extremely helpful.

5. Personal biases

Managing your own money has its advantages and disadvantages. You’re keeping costs down, which is a good thing; you may also enjoy picking stocks on your own.

But each of us has our own biases, and you need to be aware that yours exists. Reflect on how much they impact your decisions. For example, if you got burnt in the technology-stock bubble of 2000, you might have vowed never to touch tech stocks again. If so, you’d have missed out on the years of growth that tech stocks experienced after the crash. An advisor can help you recognize biases you may be overlooking.

You might make rash emotional decisions, too. It’s a known phenomenon that we humans feel the sting of losing money more sharply than we enjoy the euphoria of making money. Some investors can’t stomach the ups and downs of the stock market. Part of what a financial advisor does is to hold your hand through those tough times in the market and help you make logical and rational decisions, rather than hitting the panic button and reacting in a knee-jerk fashion that could come back to haunt you.

What’s right for you?

Hiring a financial advisor is not for everyone. If you are the type that enjoys personal financial planning, has the time to do it, and has the emotional intelligence to recognize your own biases, then perhaps you’re OK on your own. But if you’d rather spend your time elsewhere, or you require the specific expertise of a professional, then it may be worth considering.

It’s not an all-or-nothing decision, either; you can still manage your own money, and have an advisor help with the overall picture, or hire an advisor to manage a separate portion of your money.

A caveat: If you’re in debt and looking for help, a financial advisor is probably not right for you. Consider instead finding a non-profit debt or credit counsellor.

To find the right advisor, start by asking family, friends, and professionals (like your accountant, or the attorney who did your wills) for a few names of potential experts to interview.

Ideally, you’d want someone who is experienced and seems trustworthy. You can check candidates’ backgrounds on BrokerCheck, which maintains an industrywide database of financial advisors who are also brokers. You can also request a copy of the advisor’s Form ADV, which is a brochure registered with the Securities and Exchange Commission (SEC); it outlines the advisor’s experience, fee schedule, credentials, and disciplinary history (if any).

Oftentimes, hiring a financial advisor will save you more money than it costs, in the long run. Figure out how you can best utilize the services a planner has to offer.

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