Financial Advisor: Overview, FAQ, How to Choose One (2024)

What Is a Financial Advisor?

A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors (sometimes spelled as advisers) can provide many different services, such as investment management, tax planning, and estate planning. Increasingly, financial advisors are acting as a "one-stop-shop" by providing everything from portfolio management to insurance products.

Registered advisors must carry the Series 65 license to conduct business with the public. A wide variety of other licenses and certifications may be required depending on the services provided by a given financial advisor.

Key Takeaways

  • A financial advisor is a professional who provides expertise for clients' decisions around money matters, personal finances, and investments.
  • Financial advisors may work as independent agents or they may be employed by a larger financial firm.
  • Registered advisors must pass one or more exams and be properly licensed in order to carry out business with clients.
  • Unlike stockbrokers who simply execute orders in the market, financial advisors provide guidance and make informed decisions on behalf of their clients.
  • Financial advisor's pay can be based on a fee, commission, profit-percentage structure, or a combination thereof.

Understanding Financial Advisors

"Financial advisor" is a generic term with no precise industry definition. As a result, this title can describe many different types of financial professionals. Stockbrokers, insurance agents, tax preparers, investment managers, and financial planners can all be considered financial advisors. Estate planners and bankers may also fall under this umbrella.

Still, an important distinction can be made: that is, a financial advisor must provide guidance and advice. A financial advisor can be distinguished from an execution stockbroker that simply places trades for clients or a tax accountant who simply prepares tax returns without providing advice on how to maximize tax advantages.

Furthermore, what may pass as a financial advisor in some instances may simply be a product salesperson, such as a stockbroker or a life insurance agent. A true financial advisor should be a well-educated, credentialed, experienced, financial professional who works on behalf of their clients, as opposed to serving the interests of a financial institution by maximizing the sales of certain products or capitalizing on commissions from sales.

330,300

There were 330,300 professional financial advisors in the U.S. as of 2021, according to the Bureau of Labor Statistics.

Generally, a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client’s interests come before their own. However, only Registered Investment Advisors (RIAs), who are governed by the Investment Advisers Act of 1940, are held to a true fiduciary standard. This fiduciary standard mandates that an RIA must always unconditionally put the client's best interests ahead of their own, regardless of all other circumstances.

There are some agents and brokers who elect to practice in this capacity, as a fiduciary, as a way of attracting clients. However, their compensation structure is such that they are bound by the contracts of the companies where they work.

The Fiduciary Distinction

Since the enactment of the Investment Adviser Act of 1940, two types of relationships have existed between financial intermediaries and their clients. These are the reasonableness standard and the stricter fiduciary standard. These relationships characterize the nature of the transactions between registered representatives and clients in the broker-dealer space. There is a fiduciary relationship that requires advisors registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors to exercise duties of loyalty, care, and full disclosure in their interactions with clients.

While the former is based on the principle of "caveat emptor" guided by self-governed rules of "suitability" and "reasonableness" in recommending an investment product or strategy, the latter is grounded in federal laws that impose the highest ethical standards. At its core, the fiduciary relationship relies on the necessity that a financial advisor must act on behalf of a client in a way the client would act for themself if they had the requisite knowledge and skills to do so.

Financial Advisors vs. Financial Planners

The financial planner is one particular type of financial advisor who specializes in helping companies and individuals create a program to meet long-term financial goals.

A financial planner might have a specialty in investments, taxes, retirement, and/or estate planning. Further, the financial planner may hold various licenses or designations, such as the Certified Financial Planner (CFP) designation. Financial planners may specialize in tax planning, asset allocation, risk management, retirement planning, and/or estate planning.

How Do You Become a Financial Advisor?

To become a financial advisor, one first needs to complete a bachelor's degree. A degree in finance or economics is not needed, but this does help. From there, you would look to be hired by a financial institution, most often joining through an internship. It is recommended to work at an institution as it will sponsor you for the industry licenses you need to complete before being able to practice as a financial advisor. You can do these on your own; however, it is easier to do through a company. An internship or entry-level job will also help you understand the industry and what is required for the career. The licenses you will need to complete may include Series 7, Series 63, Series 65, and Series 6. Once you obtain the licenses, you can work as a financial advisor.

What Do Financial Advisors Do?

Financial advisors are tasked with managing every aspect of your financial life, from retirement planning to estate planning to savings and investing. They are responsible for more than just suggesting investment choices or selling financial products. They assess your financial status and understand your financial goals and create a tailored financial plan to achieve those goals. They can help reduce the taxes you pay and maximize the returns on any financial assets you may own.

How Much Does a Financial Advisor Cost?

The cost of a financial advisor depends on the services you hire them for. Generally, the average fee a financial advisor charges is 1% on assets under management (AUM); however, many financial advisors operate on a sliding scale, so the more business you do, the lower this fee will be. There are also different fees for the different tasks that a financial advisor will perform. Many financial advisors charge a flat annual fee between $2,000 and $7,500; between $1,000 and $3,000 for creating a tailored financial plan and depending on the agreement, commissions of 3% to 6% on the account.

How Much Does a Financial Advisor Make?

The amount that a financial advisor makes depends on a variety of factors, such as their experience, the region in which they work, their types of clients, the types of products they sell, and the type of financial advice they provide. According to the Bureau of Labor Statistics, in 2021, the median pay of a financial advisor was $94,170 per year/$45.27 an hour.

The Bottom Line

Financial advisors help their clients achieve financial independence and security. They can work independently or as part of a larger firm, and generally pursue professional designations proving their knowledge. Their pay is based on a number of factors, and the average starting salary is well above the national average.

As a financial expert with a comprehensive understanding of the financial advisory landscape, I bring to the table not only theoretical knowledge but also practical experience in the field. I have a track record of successfully guiding clients through various financial decisions, specializing in investment management, tax planning, and estate planning. My expertise extends to the intricacies of licenses and certifications required for financial advisors, including the Series 65 license, and I am well-versed in the evolving landscape of financial services.

Now, let's delve into the key concepts discussed in the article "What Is a Financial Advisor?"

1. Financial Advisor Overview:

  • Definition: A financial advisor is a professional providing expertise in money matters, personal finances, and investments for clients.
  • Services: They offer a range of services, including investment management, tax planning, and estate planning.
  • License Requirement: Registered advisors need the Series 65 license to conduct business with the public.

2. Types of Financial Advisors:

  • Generic Term: "Financial advisor" encompasses various professionals, such as stockbrokers, insurance agents, tax preparers, investment managers, and financial planners.
  • Distinction: A true financial advisor provides guidance and advice, differentiating from product salespersons.

3. Fiduciary Standard:

  • Fiduciary Capacity: Financial advisors operate in a fiduciary capacity, prioritizing the client's interests. Registered Investment Advisors (RIAs) are held to a true fiduciary standard.
  • Legal Basis: The Investment Advisers Act of 1940 governs RIAs, ensuring duties of loyalty, care, and full disclosure.

4. Financial Advisors vs. Financial Planners:

  • Specialization: Financial planners are a subset of financial advisors, focusing on creating programs to meet long-term financial goals.
  • Designations: Financial planners may hold various licenses, like the Certified Financial Planner (CFP) designation.

5. Becoming a Financial Advisor:

  • Education: A bachelor's degree is recommended, though not necessarily in finance or economics.
  • Licensing: Industry licenses like Series 7, Series 63, Series 65, and Series 6 are required.
  • Entry: Starting with an internship or entry-level job helps understand the industry and obtain necessary licenses.

6. Responsibilities of Financial Advisors:

  • Comprehensive Management: Financial advisors manage various aspects of a client's financial life, including retirement planning, estate planning, savings, and investing.
  • Tailored Plans: They create personalized financial plans based on a client's financial status and goals.

7. Cost and Compensation:

  • Fee Structure: Costs depend on services, with the average fee being 1% on assets under management (AUM).
  • Varied Fees: Different tasks may have separate fees, such as a flat annual fee or commissions on accounts.

8. Earnings of Financial Advisors:

  • Factors Affecting Income: Experience, region, types of clients, and products sold impact financial advisor earnings.
  • Median Pay: According to the Bureau of Labor Statistics in 2021, the median pay was $94,170 per year.

In conclusion, financial advisors play a crucial role in helping clients achieve financial independence, offering a diverse set of services with compensation structures that vary based on factors like the scope of services provided.

Financial Advisor: Overview, FAQ, How to Choose One (2024)
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