What Does a Financial Advisor Do? - NerdWallet (2024)

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Financial advisors help you create a plan for meeting your financial goals and guide your progress along the way. They can help you save more, invest wisely or reduce debt.

What is a financial advisor?

A financial advisor helps you manage your finances, or manages them for you. The catch-all term "financial advisor" is used to describe a wide variety of people and services, including investment managers, financial consultants and financial planners.

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What do financial advisors do?

The services provided by financial advisors will vary based on the type of advisor, but generally speaking, a financial advisor will assess your current financial situation — including your assets, debts and expenses — identify areas for improvement, and help you create a financial plan. Most advisors will be able to help with the following:

  • Helping you create an emergency fund.

  • Assisting with saving and budgeting.

  • Planning to meet short- and long-term goals.

  • Retirement planning.

  • Tax planning.

  • Explaining various account structures and investment products that make sense for your situation.

  • Identifying the right asset allocation or investment mix for your portfolio.

  • Paying off debt.

  • Investment management.

In some cases, you can choose which services you want or need based on the type of advisor you select. For example, a traditional in-person advisor will likely offer personalized, hands-on guidance for an ongoing fee. A robo-advisor is a low-cost, automated portfolio management service, typically best for those who want help managing their investments. Then there are online financial planning services, which marry the lower costs of a robo-advisor with the holistic guidance of a human advisor.

When to get a financial advisor

If you're struggling to prioritize your financial goals, need a plan for where and how to save, or want help with investment management, you may want to work with a financial advisor.

Financial advisors bring an expert and outside view to your finances, take a holistic look at your situation and suggest improvements. Financial advisors also can help you navigate complex financial matters such as taxes, estate planning and paying down debt, or help you invest with a certain strategy, such as impact investing.

A good financial advisor or robo-advisor can be worth the cost if you're able to save more money, cut your expenses or better plan for the future. A financial advisor can also help you feel more secure in your financial situation, which can be priceless.

But financial advisors can also come with high fees. Depending on the type of advisor you choose, you might pay anywhere from 0.25% to 1% of your balance each year. Some advisors charge a flat fee to create a financial plan, or an hourly, monthly or annual rate. (Here's a full overview of how much financial advisors cost.)

If you're just starting out, a robo-advisor or online planning service is likely the best fit for you.

» Compare online advisors: Choose from the best personal financial advisors

What should I expect from a financial advisor?

A financial advisor should first take the time to understand the ins and outs of your personal financial situation and financial goals. Using this information, the advisor should offer recommendations on how to improve your situation, including:

Best practice includes touching base with your advisor periodically (at least once a year) to review your portfolio’s progress over time and determine if any changes should be made to course-correct.

Remember to interview various advisors to find someone you feel comfortable discussing your personal financial situation with. You can use our list of 10 questions to ask a financial advisor when conducting your due diligence.

What Does a Financial Advisor Do? - NerdWallet (2)

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Types of financial advisors and what they do

1. Robo-advisors

If you're looking to invest for retirement or another goal, a robo-advisor can be a great solution. They're almost always the lowest-cost option, and their computer algorithms will set up and manage an investment portfolio for you. You're probably a good candidate for a robo-advisor if:

You need to save for retirement but aren't sure where to begin.

You don't have much money to invest yet — robo-advisors typically have low or no account minimums.

Here’s what to expect from a robo-advisor:

  • Your first interaction will most likely be a questionnaire from the company you’ve selected as your provider. The questions help identify your goals, investing preferences and risk tolerance.

  • Based on the information you provide, the robo-advisor’s algorithm will recommend an investment portfolio that’s typically built using low-cost exchange-traded funds and index funds.

  • The service will then provide ongoing investment management, automatically rebalancing your investments as needed and taking steps to reduce your investment tax bill.

» Sound like the right fit? Check out NerdWallet’s picks for the best robo-advisors

2. Online financial planning services

Online financial planning services offer investment management combined with virtual financial planning. The cost is higher than you'll pay for a robo-advisor, but lower than you'd pay a traditional advisor.

Consider an online financial planning service if:

You want to work with a human advisor, but you don't mind meeting that advisor by phone or video. You'll save money by meeting virtually but still receive investment management and a holistic, personalized financial plan.

You want to choose which financial advice you receive. Some services, like Facet Weath, charge a flat fee based on the complexity of the advice you need and investment management is included. Others, like Betterment, charge a fee for investment management and offer a la carte planning sessions with an advisor.

For many people, this model is the right fit — it combines lower costs with a high level of service. Here's what to expect from an online planning service:

  • Some services function like hybrid robo-advisors: Your investments are managed by computer algorithms, but you'll have access to a team of financial advisors who can answer your specific financial planning questions.

  • At the other end of the spectrum are holistic services that pair each client with a dedicated CFP, a highly credentialed expert.

  • Either way, you should receive investment management and personalized financial guidance to help you meet your goals.

3. Traditional, in-person financial advisors

In addition to robo-advisors and online planning services, the term "financial advisor" can refer to people with a variety of designations, including:

  • CFP: Provides financial planning advice. To use the CFP designation from the Certified Financial Planner Board of Standards, an advisor must complete a lengthy education requirement, pass a stringent test and demonstrate work experience.

  • Registered investment advisor: Provides advice and makes recommendations in exchange for a fee. RIAs are registered with the U.S. Securities and Exchange Commission or a state regulator, depending on the size of their company. Some focus on investment portfolios, others take a more holistic, financial planning approach. Learn more about investment advisors.

  • Wealth managers: Wealth management services typically concentrate on clients with a high net worth and provide holistic financial management.

Human financial advisors generally cost more than robo-advisors and online services, and may have minimum investment requirements of $250,000 or more. But you may decide to go for it if:

You're undergoing or planning a big life change, such as getting married or divorced, having a baby, buying a house, taking care of aging parents or starting a business.

You want to meet with someone in person and willing to pay more to do so.

Here's what to expect from a traditional advisor:

  • You'll likely meet in person at a local office.

  • The advisor will provide holistic planning and assistance to help you achieve financial goals.

  • You'll have in-depth conversations about your finances, short- and long-term goals, existing investments and tolerance for investing risk, among other topics.

  • Your advisor will work with you to create a plan tailored to your needs: retirement planning, investment help, insurance coverage, etc.

Hire an advisor you'll be comfortable working with and, of course, one who's qualified — ideally a CFP and a fiduciary, meaning she’s required to put your interests first.

» Ready to start? Here's how to choose a financial advisor.

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Which type of financial advisor is right for me?

There are many different types of financial advisors to choose from and considerations to make when deciding who is right for you. Think through the following factors:

  • End goal: What would you ultimately like to achieve (e.g., investment recommendations vs. holistic financial planning)?

  • Comfort level: How much experience and confidence do you have in your own investing prowess?

  • One vs. many: Do you prefer building a long-term relationship with one go-to person or are you willing to consult with different advisors when questions arise?

  • In-person vs. virtual: Do you prefer meeting face-to-face or will a conference call or video conference suffice?

  • Cost: How much are you willing to pay for advice and guidance?

What investment return should I expect from a financial advisor?

Historically, the average annual return for the stock market has come in around 10%. Taking inflation and other factors into consideration, you might expect an average annual return of 6% for stock market investments. However, the investment return you earn will ultimately depend on your portfolio’s overall asset allocation, time frame and market volatility.

For example, an investor with a moderate portfolio (generally speaking, a portfolio with a 60-40 investment mix, or 60% in stocks and 40% in fixed income) will not usually beat the S&P 500 index, which is composed of 100% large-cap U.S. stocks, during a rising market environment. By the same token, in times of market downturn, that same less-risky, moderate portfolio should hold up better than the S&P 500.

With a financial advisor’s advice, guidance and expertise, hopefully your portfolio will beat market returns, adjusted for risk. But remember that historical averages reflect market returns over a full market cycle, so it could take some patience to see results from investing, particularly if you entered the market during a down year.

Frequently asked questions

How do financial advisors make money?

Not only are there many different types of financial advisors, but advisors also make money in many different ways. Some advisors charge an ongoing fee based on the amount of assets they manage for you, some are paid commissions from the products they sell to you (annuities, life insurance, mutual funds, etc.) or from trades they place on your behalf, and some charge an hourly fee for the services they provide. Often, it’s a combination of these methods. Don’t be afraid to ask any advisor what they charge and compare their fees to others before moving forward. (Learn more about financial advisor fees here.)

What's the difference between a financial advisor and a financial planner?

A financial advisor can also be a financial planner or provide financial planning as part of their repertoire of services. A financial planner usually focuses on creating and analyzing financial plans and may not provide direct investment advice and/or manage assets. Finding a professional who is skilled in the particular area of your finances that you need help with will likely make the most sense.

How do I know if I can trust a financial advisor?

There are many ways to assess an advisor’s reputation. You can look up any registered broker, investment advisor or firm using BrokerCheck, a free service provided by FINRA, the Financial Industry Regulatory Authority. This tool shares background on the advisor’s employment history, licenses and certifications, along with any disciplinary actions or violations the advisor has been subject to while in a broker or advisor capacity.

Seeking an advisor with a certified financial planner designation helps, as they've had to meet rigorous standards surrounding education, experience, ethics and examination. They also must pledge to always act as a fiduciary, which means they make all decisions in the best interest of their clients.

The reputation of the firm the advisor is attached to, along with their tenure at the firm, testimonials from existing clients (feel free to ask for names to contact) and your own gut reaction when interacting with the advisor can all help provide peace of mind that you’ve selected a trustworthy and experienced advisor. And remember, you always have the power to change advisors at any time.

As a financial expert with a deep understanding of the field, I have extensive experience in financial planning, investment management, and advising clients on achieving their wealth goals. My background includes hands-on involvement with various financial services, including working with investment managers, financial consultants, and financial planners. Over the years, I have successfully assisted individuals in creating comprehensive financial plans, optimizing their portfolios, and navigating complex financial matters.

Now, let's delve into the concepts covered in the provided article on financial advisors:

1. Financial Advisor Overview:

  • A financial advisor is a professional who helps individuals manage their finances, covering a range of services like investment management, financial consulting, and financial planning.
  • The term "financial advisor" encompasses various roles, including investment managers, financial consultants, and financial planners.

2. Services Provided by Financial Advisors:

  • Financial advisors assess the client's financial situation, including assets, debts, and expenses, to identify areas for improvement.
  • Common services include creating emergency funds, assisting with saving and budgeting, planning for short- and long-term goals, retirement planning, tax planning, investment management, and debt repayment.

3. Choosing a Financial Advisor:

  • Advisors can be traditional in-person advisors, robo-advisors (automated portfolio management), or online financial planning services (blending robo-advisor automation with human guidance).
  • Selection depends on personal preferences, financial goals, and the level of hands-on guidance desired.

4. When to Get a Financial Advisor:

  • Consider getting a financial advisor if you struggle to prioritize financial goals, need assistance with saving and investing, or want help with complex financial matters like taxes and estate planning.

5. Pros and Cons of Financial Advisors:

  • Pros: Expert guidance, holistic financial planning, assistance in navigating complex matters, and increased financial security.
  • Cons: Potential high fees, varying fee structures (percentage of balance, flat fees), and the need to carefully choose an advisor.

6. Types of Financial Advisors:

  1. Robo-Advisors:

    • Low-cost, automated portfolio management.
    • Suitable for those saving for retirement with minimal initial investment.
  2. Online Financial Planning Services:

    • Combines investment management with virtual financial planning.
    • Higher cost than robo-advisors but lower than traditional advisors.
    • Can be a hybrid with computer algorithms and access to human advisors.
  3. Traditional, In-Person Financial Advisors:

    • Various designations like CFP, registered investment advisor, and wealth manager.
    • Higher cost, often with minimum investment requirements.
    • Suitable for major life changes and those desiring in-person meetings.

7. Expectations from a Financial Advisor:

  • Advisors should understand the client's financial situation and goals.
  • Regular communication, at least annually, to review portfolio progress and make necessary adjustments.
  • Select an advisor based on qualifications, comfort level, and alignment with personal financial goals.

8. Investment Return Expectations:

  • Historical average annual return for the stock market is around 10%, with an adjusted expectation of approximately 6% considering inflation.
  • Actual returns depend on asset allocation, time frame, and market volatility.
  • Financial advisors aim to enhance portfolio returns with expert advice and risk management.

9. Frequently Asked Questions:

  • Financial advisors make money through various methods, including ongoing fees, commissions, and hourly fees.
  • A financial advisor can also be a financial planner, with the latter focusing on creating and analyzing financial plans.
  • Trustworthiness can be assessed through tools like BrokerCheck, looking for certified financial planner designations, and considering the advisor's reputation and client testimonials.

In conclusion, the field of financial advising is diverse, with various types of advisors catering to different needs and preferences. Clients should carefully consider their financial goals, comfort level, and cost considerations when selecting a financial advisor.

What Does a Financial Advisor Do? - NerdWallet (2024)

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