If you’re looking for financial help, you’ve likely thought about working with a financial adviser — a person who, in the broadest terms, helps someone with their money. In this article, we’ll dive into what the term means, how they work with you, and how to choose the right one.
What is a financial adviser?
The term financial adviser is a broad one that encompasses many different professionals who help people with their money. “The term isn’t regulated, meaning anyone can call themselves a financial adviser,” says Alana Benson, investing spokesperson at NerdWallet.
But some financial advisers undergo extensive additional training and meet experience requirements. (Looking for a new financial adviser? This tool can match you to an adviser who meets your needs. ) Among them are:
Certified financial planners (CFPs)
CFPs must complete required coursework, hold a bachelor’s degree or higher, pass the CFP exam, have 6,000 hours of relevant work experience and agree to high ethical and professional standards.
Chartered financial consultants (ChFCs)
To hold this designation, advisers are required to complete college-level coursework and must master financial planning topics like estate planning, insurance planning, retirement planning and more. ChFCs must also complete ongoing education courses every couple years.
Chartered financial analysts (CFAs)
To earn a CFA, professionals have to pass 3 exams, have a bachelor’s degree and a minimum of 4 years of professional experience.
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What does a financial adviser do?
What a financial adviser does will vary both individually and from firm to firm. “Some advisers are restricted to only providing investment advice, while others will cover anything with a dollar sign. It’s best to ask what type of advice the adviser will give before beginning a relationship with them,” says certified financial planner Judson Meinhart at Modera Wealth Management.
Some of the topics an adviser might be able to help you with include:
Retirement planning
A planner can make recommendations on how much to save for retirement and what types of accounts should be funded, “in addition to providing advice on safe withdrawal rates and producing income from a portfolio in retirement,” says Meinhart.
See also: 13 must-dos for your preretirement checklist
How to invest for retirement is another area they may cover. “They should determine how you should be invested to balance your tolerance for the stock market going up and down and making sure your investments keep up with your increased spending over time. They should assist you with decisions like when to take Social Security, how much to withdraw from which account, how to balance spending versus legacy goals , what to do with your primary residence, get you comfortable with spending money, or dialing back your spending as needed, ” says Hutchins.
Budgeting
An adviser should also assist with determining your cash flow goals and needs, which means defining how much you need to have every month to cover your fixed overhead and how much you want to spend on your discretionary lifestyle.
For his part, certified financial planner James Daniel at The Advisory Firm says, “An adviser will give general information regarding how you’re tracking toward your goal and various savings vehicles you could utilize, and a financial planner will give specific details on what you need to do to achieve your retirement goal based on the lifestyle you envision.” (Financial advisers often oversee an investment portfolio, while a financial planner focuses on the big picture of one’s financial goals).
Investments
First and foremost, an adviser should assess your comfort level with risk, financial goals and past investing experience, and then may help you with selecting investments that are appropriate for your life and goals.
“They should organize how your accounts are currently invested, broken out by taxable, pre-tax and after tax. They should assess what you are currently paying in fees for the investments you have and they should evaluate individual stocks and whether you have a solid thesis for buying them and owning them in the future,” says Hutchins.
A financial adviser can also help determine the proper amount of money you should have invested between stocks, bonds, cash, private business, real estate and more. And they can help you determine if your investment strategy matches your cash flow needs, so that you’re not investing money you need in the near future and that you’re not sitting on so much cash that your future spending goals will not be achieved if you have no investment growth.
Tax planning
The goal of tax planning is to reduce tax liability in the current year, and also over the course of your retirement. “In the short term, tax planning means analyzing which accounts to withdraw from to meet your needs. Do you withdraw from an IRA and pay taxes or the Roth and pay no taxes?, says financial planner Matt Hylland at Arnold & Mote Wealth Management.
“Tax planning also means ensuring your income does not meet or exceed certain thresholds if it can be avoided. Medicare charges an additional premium (IRMAA) based on your income and going just $1 over the income brackets for IRMAA can trigger thousands of dollars in added Medicare premiums, so tax planning for someone on Medicare might mean managing withdrawals from different types of accounts to ensure they remain below a certain target income,” says Hylland.
Financial advisers have unique insights to tax planning because they have a good sense of your entire financial situation. “Your tax preparer might not know that you have $1 million in your IRA and the RMDs on that account will push you into a very high tax rate in 10 years,” says Hylland.
Still, having a CPA who can focus on giving you tax advice, plan and file your taxes, audit your finances and streamline your bookkeeping is certainly helpful for many. Certified public accountant (CPAs) must take and pass the Uniform CPA Exam in addition to holding an accounting degree from a college or university. To become a CPA, professional experience is also required.
Estate planning
A financial adviser should help you define and communicate your goals, and may help you work with a trusts and estates attorney to make concrete plans.
“Collaborate with an attorney as needed to ensure your estate documents reflect your actual wishes and minimize areas of conflict of ambiguity. A financial adviser should be a liaison with future generations or beneficiaries to ensure everyone is on the same page with your estate wishes,” says certified financial planner Terrance Hutchins at Logos Financial Group.
Health and long-term care planning
An adviser should help you understand your health and family history and determine if you have a caregiving plan. They can help you select the right type of Medicare or health insurance plan based on your goals and objectives and introduce you to pre-vetted contacts who can assist you with purchasing long term care or Medicare supplement plans.
Inheritance
It’s important to plan for how much you want to leave behind to beneficiaries and where it should come from.
A particular piece of inheritance that has become more complicated recently are the new requirements to draw down on inherited retirement accounts in 10 years.
“If you inherited a traditional IRA, the withdrawals are taxable, so you likely don’t want to wait 10 years and then withdraw the entire account since that could result in a huge tax bill. A financial adviser can help create a plan to withdraw the account over time with the best tax consequences for you,” says Hylland.
Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.
Financial adviser vs. financial planner
A financial planner is a type of financial adviser, but a financial adviser is not always a financial planner. Financial planners create long-term strategies to help people meet their financial goals, while the financial adviser title encompasses the work of brokers, money managers, bankers and more and involves managing investments, buying or selling stocks or creating comprehensive tax plans.
“Financial planners focus on offering general financial guidance in addition to services like investment manager, and financial planner can also be used as shorthand for a certified financial planner, which is the most rigorous certification in the field,” says Benson.
Rather than focusing on the title of adviser versus planner, certified financial planner Derieck Hodges says, “ask the financial professional to describe what they do. A financial planner typically would construct cohesive strategies like cash management, debt management, insurance planning, investment advice, tax planning and estate planning before giving advice on those subjects.” Some financial advisers do comprehensive planning, while others operate as subject-matter experts.
Financial adviser vs. wealth manager
Differentiating between a financial adviser and a wealth manager is often blurred, but “a wealth manager is traditionally more focused strictly on your investments and trying to maximize the return you receive based on your investing objectives,” says Hutchins.
Financial adviser vs. robo-adviser
Robo-advisers use computer algorithms to create and manage investment portfolios based on someone’s goals, for a minimum fee.
“Robo-advisers are online services providing limited financial or retirement planning and asset management without the involvement or responsibilities of human beings,” says Maurice.
See also: ‘Should I even bother?’ I pay $3K a year for my financial adviser. Is that worth it?
A big benefit of working with a robo-adviser is that it’s more cost effective than working with a human adviser.
“The negative is that it tends to be a very basic cookie cutter platform and the lack of personalized advice and human contact makes it less appropriate for wealthier people with more complex issues,” says certified financial planner Joe Favorito at Landmark Wealth Management.
How to choose a financial adviser
If you opt to work with a financial adviser, it’s a good idea to look for a fiduciary, because they have a legal obligation to work in your best interest and generally can’t recommend products or services just because they’ll receive a financial kickback for doing so, says Benson.
Additionally, look for someone who gives clear answers to questions like, are you legally held to a fiduciary standard of care? How are you compensated? What do you base your investment recommendations upon? “Almost as important, do you like the person? What is the likeability factor and the human connection? Personal finance is, you know, personal,” says certified financial planner Elliot Dole at Buckingham Strategic Wealth.
Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.
What is a fiduciary and why is it important?
Simply put, a fiduciary is someone who puts their client’s best interests above their own. “A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests,” says certified financial planner David Maurice at Worthwhile Wealth.
How much does a financial adviser cost?
The cost of a financial adviser varies depending on factors like where you live, what type of services you’re engaging in and how complicated your finances are. There are several fee structures that advisers operate under and each one has its own range of cost, from hourly payments to flat-fee planning agreements and those where an adviser earns a percentage based on assets under management (AUM).
See also: ‘It’s time to negotiate.’ How to get the best financial adviser — for way less money
Commission-Only
Keep in mind that fiduciaries are required to act in their clients’ best interests and an adviser paid by commission is often not a fiduciary,and will generally receive a percentage of the money their client spends on an insurance product or deposit into an investment. The more you spend or invest, the more they will make, and if they’re encouraged by sales goals, it’s likely they’re more self-serving than looking out for you.
Fee-only
Fee-only advisers tend to be fiduciaries as they’re only being paid by the client and aren’t earning commissions on pushing certain products usually. “A fee-only adviser will be compensated based on a flat, agreed-upon amount whether that is paid one time or via subscription arrangement. They could also be paid based upon a percentage of the assets they manage (AUM) or advise you on, so the larger your account value grows, the more they will be compensated,” says Hutchins.
As for the amount you can expect to pay, Daniel says, “A flat fee for a financial plan could cost $1,500 to $5,000, an annual retainer can run between $1,500 to $10,000 and assets under management is about 1%.”
Commissions and fees (fee-based)
This fee structure is a blend of product sales like insurance products and annuities and a planning or investment management fee. “Under this model, clients pay fee-based financial advisers a fee-for-service directly and commissions from the sale of insurance products, annuities, or other investment vehicles. It’s a hybrid between the different models. This structure contains the risk of an adviser offering a client products and solutions that may not be in their best interest as the adviser’s compensation is tied to the sale of a product,” says certified financial planner Julia Lilly at Ryerson Financial.
When to choose a financial adviser
“It’s typically time to hire a financial adviser when the cost of doing it yourself is greater than what you’ll pay them. This isn’t strictly dollar terms, either. Your time, effort, energy and peace of mind all have a cost. So do missed opportunities, so if you believe that having some help along the way is worth the cost, then make the hire,” says certified financial planner Matt Bacon at Carmichael Hill & Associates.
For his part, Meinhart says you should likely consider working with an adviser if your financial circumstances have become complex to the point where you need professional advice. “This is often the case for business owners, highly compensated individuals, or those nearing retirement who will be faced with a number of questions around Social Security, Medicare and portfolio distributions in retirement,” says Meinhart.
You may also want a professional partner to help manage day-to-day investment and financial planning decisions if your time is better spent elsewhere. “This is especially relevant to entrepreneurs and retirees who want to enjoy life in retirement,” says Meinhart.
Benson says, “Financial advisers can be helpful if your financial life is expanding, if you’ve recently gotten married, had a child, are trying to pay off debt , buy a house or save for retirement , a financial adviser can help you stay organized and hone in on your financial priorities.”
Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.
How to find a financial adviser
To find a financial adviser, ask friends, family and coworkers for word of mouth recommendations. If you strike out there or want more information about a professional someone shares, you can follow that up with some digital homework and look up an adviser’s regulatory and disciplinary actions using FINRA’s BrokerCheck website.
You can also do a deep dive into someone’s specialties, fee structure and location by using free tools offered by the National Association of Personal Financial Advisors (NAPFA), Garrett Planning Network, XY Planning Network and the CFP Board. (Looking for a new financial adviser? This tool can match you to an adviser who meets your needs. )
What questions should I ask a financial advisor before hiring?
“Always ask how an adviser gets paid and understand the fees, costs, commissions or whatever name is used. If your financial adviser is a fiduciary, they should disclose to you their conflicts of interest,” says certified financial planner Bill Kan at Candent Capital.
Other questions to ask include: How often do you usually meet with clients? Can I reach out anytime with financial questions? Do you create an initial comprehensive financial plan, and if so, what’s included? Who else will I be working with? Who is your typical client and do I fit the profile? What’s your experience and credentials?
Looking for a new financial adviser? This tool can match you to an adviser who meets your needs.