Financial Advisor

What Is a Financial Advisor?

A financial advisor is a professional who helps people make decisions about their personal finances, such as investing, saving for retirement, tax planning, insurance, and managing debt. Advisors may work independently, for a firm, or inside a bank or brokerage. Some offer broad financial planning that covers all areas of a client's money, while others focus on a narrower task such as investment management.

Advisors are paid in several ways. Some charge a flat or hourly fee for planning advice. Some charge a percentage of the assets they manage, usually billed on a recurring basis. Others earn a commission when they sell a specific product, such as an insurance policy or a mutual fund with a sales charge. Each method can create different incentives, so understanding how an advisor is paid is an important part of evaluating the relationship.

Types of Financial Advisors

Job titles in this field vary, and they do not all carry the same obligations. A registered investment adviser is a firm or individual registered with the U.S. Securities and Exchange Commission or a state regulator. Under the Investment Advisers Act of 1940, these advisers owe their clients a fiduciary duty, which generally requires putting the client's interests first and disclosing conflicts of interest.

A broker-dealer representative buys and sells securities for clients and has historically been held to a different standard. Rules for this category have been updated over time, which is one reason the distinction matters. Some advisors also hold professional credentials, such as the Certified Financial Planner (CFP) designation, which requires coursework, an exam, professional experience, and ongoing ethics requirements.

Why It Matters to Investors

Hiring an advisor is a personal decision that depends on how complex a person's finances are, how much time they want to spend managing them, and how comfortable they are making decisions alone. Before working with an advisor, investors can ask a few basic questions:

• How are you paid, and do you earn anything from the products you recommend?
• Are you a fiduciary at all times for the services you provide?
• What services are included, and what do they cost?
• Does your background include any disciplinary history, which can be checked through public regulatory databases?

An advisor cannot guarantee investment returns. All investments carry risk, including the possibility of losing money, and an advisor's fees reduce the net returns an investor keeps.