Choosing a financial advisor can be a daunting task, especially with the wide range of professionals who fall under the umbrella term "financial advisor." From certified financial planners (CFPs) to stockbrokers, insurance agents, and financial consultants, the options can seem endless. But it's essential to understand that the services provided and the way they are compensated can differ significantly among these professionals. In this article, we will explore the different types of financial advisors available, the services they offer, and how they are compensated.
An RIA is a professional who is registered with the Securities and Exchange Commission (SEC) or state securities authorities and provides investment advice to clients. RIAs are required to register with the SEC or state securities authorities if they have at least $100 million in assets under management, or if they are acting as an investment adviser to a registered investment company. RIAs are subject to a fiduciary duty, which means they are required to act in the best interests of their clients. RIAs may charge a fee based on a percentage of the assets they manage for their clients.
A CFP is a professional who has completed a specific course of study and passed an exam to earn the CFP designation. They are trained to provide comprehensive financial planning advice, which may include advice on topics such as budgeting, saving and investing, tax planning, retirement planning, and estate planning. CFPs are required to adhere to a code of ethics and to complete ongoing continuing education requirements. The cost of working with a CFP will vary depending on the individual advisor, but many charge an hourly fee or a percentage of the assets they manage for their clients. The CFP designation is granted by the Certified Financial Planner Board of Standards, Inc.
A fee-only planner is a financial advisor who is paid only by the client, rather than receiving commissions or other forms of compensation from the sale of financial products. This means that their advice is not influenced by any potential financial gain from recommending certain products or investments. Fee-only planners may charge an hourly fee, a flat fee, or a percentage of the assets they manage for their clients.
A financial consultant is a professional who provides advice and guidance on financial matters to businesses or individuals. They may have expertise in a particular area, such as risk management or retirement planning, or they may have a more general knowledge of financial matters. Financial consultants may be self-employed or work for a consulting firm. They may charge an hourly fee or a flat fee for their services.
A stockbroker is a professional who buys and sells securities on behalf of clients. They may provide advice on investments, but their primary function is executing trades. Stockbrokers may be paid on a commission basis, which means they receive a percentage of the value of the securities they trade for their clients. Some stockbrokers may also be registered representatives of a brokerage firm, which means they are regulated by the Financial Industry Regulatory Authority (FINRA).
A wealth manager is a professional who provides comprehensive financial planning and investment management services to high net worth individuals. Wealth managers take a holistic approach to managing their clients' finances, considering all aspects of their financial lives, including investments, taxes, estate planning, and more. Wealth managers may charge a percentage of the assets they manage for their clients.
Technically speaking, a robo advisor is a type of financial advisor that uses computer algorithms to provide automated investment advice and portfolio management services. They often have a lower minimum investment requirement and lower fees compared to traditional financial advisors, and they can be accessed online or through a mobile app. However, they may not be able to provide the same level of personalized service as a human advisor, and they may not be able to provide advice on non-investment related financial topics.
With so many options to choose from, it's important to consider the services, cost, and accreditations of the financial professional you are considering working with. Some professionals, like CFPs and RIAs, are required to adhere to certain standards and follow a fiduciary duty, while others may not be held to the same level of accountability. It's also important to consider your own financial needs and goals, and choose a professional who can help you meet those objectives. It may be helpful to shop around and speak with multiple professionals before making a decision.