Types of Financial Advisors: How to Choose The Right One
A rose by any other name may smell just as sweet, but a financial advisor by any other name? They may offer completely different services. The term “financial advisor” itself does not require any specific training, credentials, or certification, but many industry professionals earn designations depending on their specialty.
So how do you know which type of financial advisor you need, how you can be sure they know what they’re doing, and what’s the difference between a financial planner, broker, wealth manager, and all the other titles they might go by? Let’s break it down.
What Does a Financial Advisor Do?
We often use the term “financial advisor” as a catch-all for portfolio managers, brokers, investment advisors, financial planners, and finance professionals who offer advice, financial planning, and other services that help you better understand and grow your money.
That means financial advisors do many things, including:
- Managing investment portfolios
- Budget and debt management
- Selling insurance
- Retirement planning
- Tax planning
- Estate planning
- Business planning
There could be some crossover between financial professionals, as well. For example, a Certified Public Accountant (CPA) who does your taxes may also be an investment advisor.
When looking for a financial advisor, you might find yourself drowning in an alphabet soup of acronyms and initialisms. Here’s what some of the most common ones mean:
- RIA: Registered investment advisor
- IAR: Investment advisor representative (RIAs employ IARs!)
- CFP: Certified financial planner
- CFA: Chartered financial analyst
- ChFC: Chartered financial consultant
- CPA: Certified public accountant
In all of these cases, the advisor has earned a special certification or is held to various government standards through the U.S. Securities Exchange Commission (SEC). When hiring a financial advisor, look for designations like these—and prioritize fiduciary financial advisors.
Fiduciary Financial Advisors
Fiduciary financial advisors have a legal obligation to put your best interests first. Registered investment advisors and certified financial planners, for example, are fiduciaries and are thus bound to offer advice and recommend products best suited to you, regardless of how it affects their bottom line.
How do you know if a financial advisor is a fiduciary? Those who are will typically advertise it—it’s a badge of honor in the industry.
Even so, it’s important to double-check. You can look up advisors on BrokerCheck by the Financial Industry Regulatory Authority (FINRA) or the SEC’s Investment Adviser Public Disclosure website. Both resources allow you to verify whether a firm or an individual is registered to sell securities and provide investment advice.
Types of Financial Advisors
When selecting a financial advisor, you should choose someone who specializes in the services you need. You might hire one type of advisor if you need help creating a monthly budget and a completely different one to manage your portfolio or help you prepare for retirement.
The list of financial advisors below is not exhaustive, but it can give you an idea of the different financial professionals you might encounter when looking for an advisor.
Investment advisors are what most people think of when we talk about financial advisors. These investment advisors can, well, advise you on investments to make and can manage your assets directly, if you’d prefer. You might call on an investment advisor if you want to diversify your portfolio with an alternative asset like gold or other investment types like stocks and ETFs.
Investment advisory firms that are registered with the SEC are called registered investment advisors—and the human advisors who work there are investment advisor representatives.
All RIAs have a fiduciary responsibility to keep your best interests in mind when making investments, but you should still vet any RIA by checking their status and whether the advisor has any formal complaints filed against them.
Financial planners can help with a wide range of needs that you might encounter throughout your life. For instance, they might help create a college fund for your kids or advise you on estate and retirement planning. Some financial planners may even offer investment advice or help you manage your portfolio.
It’s important to note that anyone can call themselves a financial planner. The title is entirely unregulated and thus requires no formal training. To ensure your financial planner is a fiduciary and has the necessary skills and experience to help plan your financial future, look for a certified financial planner (CFP).
CFPs must hold a bachelor’s degree from an accredited college or university, complete an additional two-part education requirement (about 12 to 18 months), and take—and pass—the CFP exam. CFPs must also complete 6,000 hours of professional experience (or 4,000 hours of apprenticeship experience) before earning the certification.
And most importantly, CFPs are bound to an ethics requirement to act as a fiduciaries to their clients.
Some financial advisors are portfolio managers (they may also go by investment manager or asset manager) and simply manage your portfolio so you can be hands-off. If they offer financial advice and planning services, they should be registered as an investment advisor, meaning you can—once again—vet their credentials on BrokerCheck and/or the Independent Adviser Public Disclosure website.
If you want to make investment transactions, like buying and selling stocks, you have to use a broker that is officially authorized to complete these transactions. A broker can be an individual or a firm. A broker can also be an online broker, which is a trading platform that lets individuals buy and sell stocks.
Brokers traditionally earn commissions when they buy and sell securities on your behalf. Often, your investment advisor, financial planner, or portfolio manager may be a broker or associated with a brokerage, so you won’t need to work with a broker directly if you have a professional managing your investments.
Wealth managers, sometimes called wealth planners or wealth advisors, specifically work with wealthy individuals on a range of financial needs, including investments, estate planning, tax planning, retirement planning, and charitable giving. Some wealth managers can even help clients at or nearing retirement age with health insurance options.
As with other advisors, you should vet a wealth manager’s credentials online. Choosing a fiduciary wealth manager is in your best interest.
Investment advisors and portfolio managers commonly use programs with complex algorithms to make decisions for their clients’ investments. Such programs are now available to everyday investors, and they’re called robo-advisors.
Robo-advisors allow you to input some basic information, like your appetite for risk and the types of investments you’d like to make, and then the program will take care of the investments for you. There’s no human involved—and thus no advice to receive—so the financial advisor fees tend to be lower.
Some online brokers with robo-advisors allow you to talk with a human professional if you need advice, usually for a fee.
Beyond the types of financial advisors above, you might run into advisors using titles like retirement planning specialist, financial coach, estate planner, financial consultant, and financial therapist (and there are plenty more titles beyond these!).
Which Financial Advisor Is Right For You?
With so many types of financial advisors, how can you determine the right one for you? We’ve put together some basic tips for selecting the right advisor for your needs:
- Always choose a fiduciary: To ensure your advisor has your best interests in mind, prioritize finding a fiduciary financial advisor. Advisors with actual credentials are your best bet.
- Think about your needs: Make sure you understand what you want out of a financial advisor before you start looking. Do you need help with health care in retirement? Do you want someone to manage your portfolio? Are you thinking about estate planning, or are you in the early stages of planning for retirement? Maybe you just need someone to help you build a monthly budget? Once you know what you need, you can narrow down your search.
- Ask lots of questions: Choosing a financial advisor is a big decision. Don’t go with the first person you talk to. Instead, meet with a few advisors and talk through their fees (for example, are they commission or fee-based?), process, investment philosophy, and experience. Vet them thoroughly and ask specific questions.
Financial advisors go by many different titles. Some are highly regulated; others aren’t regulated at all. Some manage investments, others build budgets, and some can help with tax and retirement planning.
When choosing an advisor, it’s important to consider your needs, ask the right questions, be conscious of their fee structure, choose a fiduciary, and, ultimately, go with the person you feel you can trust with your finances.