What Exactly Is a Financial Advisor?

The term financial advisor is generally a catchall phrase for financial professionals filling a number of different roles and performing a number of different tasks. Generally speaking, a financial advisor provides financial advice and guidance to clients tailored to their situation and goals. This can include estate planning, managing investment portfolios and drawing down assets during retirement. If working with a financial advisor is something that interests you, make sure you understand what your financial advisors are doing for you and how they can help your finances.

What Exactly Does a Financial Advisor Do?

A financial advisor is a financial professional who helps clients with topics related to their personal finances. While financial advisors are generally thought of in terms of working for individuals, many financial advisors also provide services to institutional clients like pension plans, charitable organizations, municipal governments and corporations. Some even advise other financial advisors. For the purpose of this article, though, we will focus on what financial advisors do for individuals.

Financial advisors help clients with money issues and planning. The exact services they provide will depend on their specialty and training. Broadly speaking, there are two kinds of financial advisory services: financial planning and asset management. Some advisors do only one of these while others do both.

Financial planning refers to things that involve the future, like retirement, your children’s college fund, buying a home and more. Some of the most prominently offered services in this area of financial advising include tax planning, retirement planning, estate planning, insurance planning and more. Many of these offerings are typically combined into a single financial plan, that accounts for your current assets, future plans, investments and any other applicable finances.

Asset management, sometimes referred to as investment management, is the area where an advisor will take care of your investments for you. These usually align with clients’ financial plans, and it involves building an investment strategy for your portfolio. These strategies are often customized to your specific needs and risk profile, but some firms also use model portfolios and other set options.

Types of Financial Advisors

There are a number of more specific financial professionals you’ll find under the financial advisor umbrella. Here are the three most common roles that individuals under the financial advisor umbrella play:

Registered Investment Advisor (RIA): RIAs are registered with a state or federal agency to give investment advice. They can help with buying and selling securities and other investment practices. RIAs are bound by fiduciary duty.
Financial Planner: Financial planners are more general advisor who helps with the creation of a holistic plan for your finances. They can help with areas like retirement planning, education funding and budgeting.
Wealth Manager: Wealth managers tend to be for those with more assets, especially high-net-worth individuals. These professionals help with areas like risk management, capital gains and estate planning.

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Services Offered by Financial Advisors

One service that many financial advisor provide is financial planning. Financial planning generally refers to the non-investing aspects of wealth planning. This can mean a lot of different things but some of the services you can expect include:

Tax Planning: Help you minimize your tax payments and possibly to actually file your taxes.
Estate Planning: Help you leave your estate in good shape and with minimal taxation to your family when you die.
Retirement Planning: Ensure you’ve saved enough to retire comfortably when you’re ready.
Philanthropic Planning: Help you give back in a tax-efficient way.
Insurance Planning: Make sure you’re adequately covered and get the best option for your situation.
Budgeting: Make sure you know what you should be spending and saving each month.

As noted earlier, financial advisors are not required to get specific degrees to call themselves financial advisors. That said, many do get specialized training to be certified in topics like accounting, investing and life insurance. Some of the most common certifications are: certified financial planner (CFP), certified public accountant (CPA), chartered financial analyst (CFA) and chartered life underwriter (CLU).

How Financial Advisors Manage Your Assets

Asset management, on the other hand, is when financial advisors help you with your investments and manage how your money is working for you. There are two basic types of asset management: discretionary and non-discretionary.

Discretionary asset management means that your financial advisor has complete control over your money and will make investment decisions for you. Non-discretionary asset management means your advisor has to get your approval before making any trade or investment decisions.

Each advisor who does asset management will also have a unique investing style. Some will focus on mutual fund investments and index investing. Others will be all about bonds. Some will make stock picks, while others specialize in Treasurys. If you are choosing an asset manager, make sure you know their style and that you agree with their investing strategies.

How to Choose a Financial Advisor

Financial planning covers more than investing, here's what else it can include.

Working with a financial advisor can be beneficial to people in many different financial situations. As we covered above, financial advisors can help you with a wide range of tasks, from strategically investing your assets to creating a financial plan to keep you on track to achieve your long-term goals.

Once you’ve decided you want to work with one, you have to find a financial advisor who meets your needs. This is sometimes easier said than done. Consider using your network to get recommendations. Your family and friends may have an advisor they know and trust, or a firm they like. If you’re already a client of a major bank, you could consider using that bank’s advisory arm. Alternatively, you can use SmartAsset’s free financial advisor matching tool.

As you evaluate your options, it’s important to do your research and ask questions. Make sure you know what services your advisor offers and understand how he or she makes money before deciding to move forward so that you can determine if it’s a good fit for your appetite for risk and overall financial goals.

How Financial Advisors Make Money

There are two types of fee structures that financial advisors generally use. Fee-only financial advisors exclusively make money from the fees they charge for financial advisory services. Investment advisors most commonly charge a fee based on a percentage of assets under management.

Other common types of fees include fixed fees, where you pay a single predetermined fee for the services you are receiving, and hourly fees, where you’re charged based on the time your advisor spends on your account.

Fee-based advisors also charge asset-based fees or work on a flat fee or hourly basis. Additionally, they may act as insurance agents or representatives of broker-dealers and collect sales commissions or brokerage fees from third parties. This arrangement can present potential conflicts of interest. If you’re concerned about this, you may be better off working with a fee-only advisor.

How to Know When You Need a Financial Advisor

Not everyone needs a financial advisor all the time. The question is whether your financial decisions have become complex enough, or consequential enough, that professional guidance could be worth the cost.

Retirement is one of the clearest moments when an advisor can add value. Decisions about when to claim Social Security, how to draw from taxable accounts, IRAs and Roth accounts, how to manage taxes and how to cover healthcare costs all affect one another. A withdrawal strategy that looks reasonable in one year can create higher taxes or lower flexibility later.

A financial windfall is another common trigger. An inheritance, business sale, legal settlement or equity compensation payout can create immediate decisions about taxes, investing and estate planning. Without a plan, it can be easy to move too quickly, hold too much cash, take on too much risk or create a tax bill that could have been managed more carefully.

Divorce can also make professional guidance valuable. Dividing retirement accounts, updating beneficiaries, reassessing insurance and rebuilding a long-term plan can be difficult while legal and emotional decisions are happening at the same time. An advisor can help translate the settlement into a workable financial path after the divorce is final.

Business owners often face planning needs that go beyond a standard household budget or investment account. Retirement plan design, tax planning, succession planning, cash-flow management and the eventual sale or transfer of the business all connect personal and business finances. Those decisions usually benefit from coordinated advice.

Concentrated stock is another reason to seek help. If much of your wealth is tied to one company, selling too quickly can create a large tax bill, while holding too long can expose you to unnecessary risk. An advisor can help build a plan to reduce concentration gradually and tax-efficiently.

An advisor may be less necessary when your situation is simple. If you are early in your career, have steady income, limited debt, no dependents and a basic investment plan, low-cost funds and consistent saving may be enough.

One signal that you may need an advisor is when a decision feels both important and hard to reverse. When taxes, retirement income, estate planning, insurance or major life changes start overlapping, professional guidance may help you avoid costly mistakes and make decisions with more confidence.

Bottom Line

Financial advisor fees generally come in two types, know the difference before you sign on.

A financial advisor is a professional who helps individuals and organizations manage various aspects of their finances. Depending on their qualifications and business model, a financial advisor may provide financial planning, investment management or both. Advisors also may specialize in areas such as retirement planning, tax strategies, estate planning or insurance. Because the term “financial advisor” is broad rather than a specific professional designation, it’s important to understand the services an advisor offers, how they are compensated and whether they have a fiduciary obligation before deciding to work with them.

“A financial advisor does more than manage investments. Many also help clients make informed decisions about taxes, retirement, estate planning and other financial issues that affect their long-term goals,” said Brandon Renfro, CFP®, RICP, EA.

Brandon Renfro, CFP®, RICP, EA provided the quote used in this article. Please note that Brandon is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips for Finding a Financial Advisor

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When you talk to the advisors, ask them if they are fiduciaries. This means they put their clients’ interests before their own and their firm’s. If they aren’t fiduciaries, they must only make suitable recommendations.