What is a financial advisor and what do they do?

A financial advisor is a professional — or a team of them — who assists clients with important financial decisions. Financial advisors help you set both short-term and long-term financial goals, then guide you on the path to meeting them. Advisors may manage your investments or provide advice on money-related decisions like tax or retirement planning, while crafting a plan for growing wealth and managing risks.

Perhaps most importantly, financial advisors act as educators and partners. They’ll know your financial situation and objectives inside and out. Then, they'll help formulate your unique savings and investing plan, in addition to determining a budget if needed. Essentially your financial advisor will guide you to smarter money choices, and walk the path to success with you. Typically, financial advisors fall into one of two classifications:

• Fiduciary Financial Advisors. These types of advisors have a legal obligation to put your best interests first. That means they should only recommend the best products and services for you, regardless of any external incentives like commissions. An advisor can become a fiduciary in several ways — such as an investment advisor regulated by the SEC or through state licensing. To ensure a fiduciary is legitimate, you can use the SEC’s Adviser Search Tool, National Association of Certified Financial Fiduciaries, National Association of Personal Financial Advisors (NAPFA) or Fee-Only Network.

• Non-Fiduciary Financial Advisors. Alternatively, these advisors typically recommend products that they feel are “suitable” for you — even if a cheaper or better-performing alternative exists. Choosing a non-fiduciary advisor doesn’t mean that your advisor won’t prioritize your interests, but you should understand the standard these advisors are held to.

Financial advisors may provide a vast range of solutions or specialize in a particular niche like investment management, tax planning, estate planning, or insurance. No matter your desired goals, you can find an advisor to help you achieve them. 

With so many types and titles floating around, we’ll break down the essential services to consider here.

Financial advisors who offer investment services cover a lot of ground. They provide age-appropriate advice that’s aligned with your financial goals regarding strategies, products, adjustments, and the best brokers. Some handle your portfolios themselves, while others hand you the reins and steer from the sidelines. Importantly, they can also provide emotional support in choppy markets to keep you calm and on course.

Generally, financial advisors can untangle complicated tax situations and try to minimize the taxes you pay. Some financial advisors, such as certified public accountants (CPAs), prepare tax returns and offer advice on reducing tax liabilities, while tax attorneys practice tax law and strategize. Certified financial planners (CFPs) typically offer tax services in their broader package. Tactics may include finding more deductions, recommending tax-advantaged investment accounts, or structuring favorable business entities.

Wealth management advisors primarily help their clients optimize a comprehensive financial strategy. They may strategize on investments, assist with estate and tax planning, mitigate financial risks, and advise on tax loss harvesting and insurance. By working with a larger platform — sometimes within a bank — wealth managers may offer access to exclusive financial products.

Estate planning involves preparing strategies to control assets throughout life and distribute them after death. Your financial advisor may work with an estate attorney to prepare wills or trusts. They can also manage term life insurance, oversee charitable contributions, and minimize inheritance tax burdens.

You’ve probably heard that you have to spend money to make money, but not all spending is effective, especially if it’s excessive debt. If you carry an uncomfortable amount of debt, a financial advisor can help you get back on track. Services may include consolidating debt, sticking with a debt management plan, or building a long-term budget.

It’s no secret that your health can get more critical (and expensive) to maintain as you age into retirement. Fortunately, financial advisors can act as qualified insurance agents who assist you in choosing the right health and long-term insurance plans. And, of course, they’ll design strategies to buff your finances so you can continue to afford proper healthcare down the road.

Whether you’ve already received an inheritance or expect to later, financial advisors can help you keep your head on straight. Naturally, minimizing your taxes is a common service. But advisors can also guide you toward smart investments and keep you from draining your funds too quickly.

Certified financial planners (CFPs) hold one of the most demanding finance-related certifications available. To become a CFP, you must have several years of related experience, pass a rigorous exam, and follow the strict ethical code enforced by the CFP Board of Standards.

CFPs tend to have the experience and knowledge necessary to help with a wide range of financial situations. They’re also held to fiduciary standards, so they’re required to act in your best interests — not their own.

But what does a financial planner do? Typical CFP services include budgeting, retirement and investment planning, debt management services, and tax optimization.

Whether you are starting to grow wealth or already have a healthy nest egg, working with a CFP can help focus your financial management strategy. Plus, having a fiduciary on your side offers extra peace of mind that your finances are in good hands.

Now that you understand what financial advisors do, you may be wondering if you personally need a financial advisor. What if your finances are no more complex than a savings account and a 401(k)?

Perhaps surprisingly, if you have the means to work with a financial advisor — even if you only have one savings account and a 401(k) — you should. Financial advisors can help you focus on actively growing your wealth faster and more efficiently. Even better, you don’t have to spend extra time figuring out how to make wise investments or strategize for tax season.

Making sound financial decisions can feel overwhelming in a world of sophisticated investment products and unfamiliar strategies. By handing the reins to a professional, such as one of the certified and highly experienced financial advisors at FinanceHQ, you can delegate the complicated parts of building wealth so that you can stay focused on your personal goals and success.

If you decide to work with a financial advisor, your next question would probably be: what is the fee for a financial advisor? As it turns out, this isn’t a simple question to answer.

Broadly speaking, financial advisors may assess a fee for each service, charge by the hour, or base the fee on the number of assets managed. The exact structure depends on the type of advisor, the individual advisor’s preferences, and how you structure the relationship. Here are some fees you should be aware of:

• Asset Under Management (AUM) Fees. Advisors who charge by AUM charge a percentage of the assets they handle for you. AUM fees generally range from 0.25% to 0.50% for automated (robo) advisors and up to 1-2% for advisors who offer separately managed accounts.

• Flat Annual Fees. Flat annual fees — also known as retainers — are as simple as they sound: an advisor charges an annual rate to perform financial services. These fees generally range between $2,000 to $7,000 per year.

• Hourly Fees. An advisor’s hourly fees may vary by location, services provided, and their designation — such as a CPA or tax attorney. Painting in broad strokes, you can expect to pay $200 to $400 per hour.

• Per-Plan Fees. Some advisors charge by service or plan. For instance, to set up a budget, design a debt management plan, or overhaul your entire financial life. Per-plan fees can reach $1,000 to $3,000.

• Commissions. Non-fiduciary advisors may levy commissions instead of — or in addition — to other fees. Commissions vary from 1% to 6% depending on the product. It’s important to note that commission-based advisors may primarily sell investment and insurance products.

Since the costs to hire a financial advisor vary, it’s usually wise to shop around before making your selection. Remember: neither the cheapest nor the most expensive advisor is guaranteed to be the best choice. Generally, the best choice is the advisor who offers comprehensive services with your best interest in mind.

Whether a financial advisor makes sense for your situation depends on your knowledge level, goals, and needs. If you have the time and patience to give your finances the attention they deserve, you can — though paying an advisor frees up more time to chase other goals. Even if you want to handle your finances, you may be unsure how to manage investments, grow your wealth, or address your tax situation.

If you’d like to take advantage of expertise from an experienced professional, a financial advisor often makes sense. Your financial advisor can:

• Educate you on professional management strategies and best practices

• Prepare a healthy budget that balances your goals and desires

• Provide an unbiased opinion on financial matters

• Point out financial pathways you may be unaware of

• Take a holistic approach to everything from budgeting to investing

• Set you up for long-term financial success

As for when you should choose a financial advisor — that also depends on you. Some people like to build a relationship with an advisor early and grow together long-term. Others prefer to wait and bring in an advisor for particularly sticky situations.

You may prefer an in-between: using an advisor to handle more complicated situations, such as dealing with tax laws, while doing your own budgeting or insurance shopping.

Before you choose a financial advisor, consider the following questions:

• Do you need help managing your money?

• Do you struggle with making or sticking to a budget?

• Is your financial situation too complex for trial and error?

• Is it difficult to make objective decisions about your money?

• Do you need help with taxes?

• Are you nearing retirement?

• Do you feel like you’re leaving money on the table with your current strategy?

• Are you uncomfortable with your current financial situation?

• Are you considering starting, buying, or selling a business?

If you answer “yes” to even a handful of these questions, you might need a financial advisor.

Remember: financial advisors are your partner in developing a more solid financial foundation. A little expert knowledge can not only help you answer your questions but prepare your finances for long-term success.

Considering your financial future can be a daunting task, but the first step to financial success starts with soul searching and research. Explore your needs and desires, as well as what options are available to help you achieve your goals faster. Finding a financial advisor could be the ticket to optimizing your financial health.

Now that you know what a financial advisor is and what they do, you’re ready to take the next step on your journey. FinanceHQ is here to connect you with a financial advisor that suits your needs and goals. With a carefully selected advisor at your side, you can grow your wealth, plan for the future, and enjoy peace of mind that you’re in good financial hands.