Understanding Types Of Financial Advisors
If you’ve been thinking about what type of financial advisor you should hire, you’ve likely encountered mountains of confusing information. Especially when it comes to whether an advisor is a fiduciary or not! And while you think may you know the answer, we’re just going to tell you: you don’t-because it’s a trick question.
There is no standard industry definition for a financial advisor. It’s not a role that’s licensed or regulated, either. That’s because it’s actually a term invented by the financial industry as a catch-all category. The title of financial advisor is one that any professional who sells financial products, offers investment advice, builds financial plans, or sells insurance could use to market themselves.
OK... So, What Types Of Financial Advisors Are There?
Many people call themselves financial advisors, but the majority actually fall into one of these types of advisors:
Investment advisors are licensed and regulated by the SEC and/or the states in which they do business. They offer investment advice, manage investment portfolios, and are, in some cases, paid directly by clients. (See What is a Fee-only Financial Advisor?)
Brokers are licensed and regulated by the Financial Industry Regulatory Authority (FINRA). They work for broker-dealers and earn commissions for selling investment and insurance products to clients. (For more info have a look at our blog Brokers vs. Advisors)
Financial planners create financial plans to define and address issues such as cash flows, debt management, investing, insurance, and estate and succession planning.
Since there are no industry regulations governing financial planners, anyone can say that they offer financial planning services. However, most financial planners also have an investment adviser and or brokers’ license.
While all of these individuals can call themselves financial advisors, our standards are higher. We believe that investment advisers who have a financial planning-centric practice offer the best service model for most investors.
In addition, other financial professionals, like insurance agents and those who provide accounting or tax-preparation services, sometimes provide financial planning and investment management to broaden their scope of services.
We’ll also compare human financial advisors to their fast-growing counterpart in the virtual world: The robo-advisor.
Human Advisor VS. Robo-Advisor
A human financial advisor or, more specifically, an investment advisor provides investment advice. This may range from researching and recommending investment options for a 401(k) plan to managing investment portfolios for clients. They may also provide financial planning services.
The process of managing your portfolio starts with a conversation to identify your specific investment goals. When it comes to retirement, for example, they’ll help you figure out how much money you’ll need when you retire, at what age you’ll need to start using this money, and how much investment risk you’re comfortable taking. From this information, the advisor will recommend an asset allocation strategy that divides your money among stocks, bonds, and cash (or stock and bond funds). They’ll then recommend a diversified mix of investment options that have passed their rigorous investment research criteria. If you agree with their recommendations, they’ll invest the money on your behalf. They will also monitor and report its performance and recommend changes if necessary. They’ll be available to answer your questions and address your concerns, especially during periods of market turbulence.
If an investment advisor is registered with the SEC, and they are a fee-only advisor, they are legally required to act in your best interests. This is in contrast to a less stringent suitability requirement for brokers. That means your adviser will do their best to protect your portfolio against excessive risk, as well as strive to keep investment expenses and their own fees reasonable.
Many financial advisors have both an investment adviser and broker license. These dually-registered, or hybrid, advisors have the flexibility to serve clients with different needs.
For example, they can serve some clients in a fiduciary capacity, managing investment portfolios, and receiving fee-only compensation. For other clients, they may act solely as brokers, earning commissions from the products they sell. This is useful in situations where clients are just looking for insurance, or only want alternative investments like hedge funds.
A human financial advisor or, more specifically, an investment advisor provides investment advice. This may range from researching and recommending investment options for a 401(k) plan to managing investment portfolios for clients. They may also provide financial planning services.
The process of managing your portfolio starts with a conversation to identify your specific investment goals. When it comes to retirement, for example, they’ll help you figure out how much money you’ll need when you retire, at what age you’ll need to start using this money, and how much investment risk you’re comfortable taking. From this information, the advisor will recommend an asset allocation strategy that divides your money among stocks, bonds, and cash (or stock and bond funds). They’ll then recommend a diversified mix of investment options that have passed their rigorous investment research criteria. If you agree with their recommendations, they’ll invest the money on your behalf. They will also monitor and report its performance, and recommend changes if necessary. They’ll be available to answer your questions and address your concerns, especially during periods of market turbulence.
If an investment advisor is registered with the SEC, and they are a fee-only advisor, they are legally required to act in your best interests. This is in contrast to a less stringent suitability requirement for brokers. That means your adviser will do their best to protect your portfolio against excessive risk, as well as strive to keep investment expenses and their own fees reasonable.
Which Financial Advisor Should You Choose?
The financial advisor you decide to go with really depends on what you’re trying to achieve.
If all you’re looking for is someone to do your taxes and provide oversight for your small business, a certified public accountant might be enough. If you want to outsource the management of a small pool of assets as inexpensively as possible, a Robo-advisor might be a good choice. But if you want your money managed by someone who knows your specific situation and is always there to answer your questions or address your concerns, an investment advisor is what you need.
That’s where we come in. Finding the right advisor is tough! Zoe Financial’s curated network can help you identify the right one who works with clients that share your specific financial needs and challenges.
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Real financial planning should pay off today, and in 10 years' time.