If you’ve been thinking about hiring a financial advisor, you’ve probably asked yourself this question. And while you think may you know the answer, we’re just going to tell you: you don’t. Because it’s a trick question.
There is no standard industry definition for “financial advisor.” It’s not a role that’s licensed or regulated, either. That’s because it’s actually a term invented by the financial industry as a catch-all category.
The title of financial advisor is one that any professional who sells financial products, offers investment advice, builds financial plans, or sells insurance could use to market themselves.
Ok… So, Who Are Financial Advisors?
Many people call themselves financial advisors. But the majority actually fall into one of these categories:
1. Registered Investment Advisers
Investment Advisors are licensed and regulated by the SEC and/or the states where they do business. They offer investment advice, manage investment portfolios, and are, in some cases, paid directly by clients. (See What is a Fee-only Financial Advisor?)
2. Investment Brokers & Broker-dealers
Brokers are licensed and regulated by the Financial Industry Regulatory Authority (FINRA). They work for broker-dealers and earn commissions for selling investment and insurance products to clients. (See Brokers vs. Advisors)
3. Certified Financial Planners
Financial planners create financial plans to define and address issues such as cash flows, debt management, investing, insurance, and estate and succession planning.
Since there are no industry regulations governing financial planners, anyone can say that they offer financial planning services. However, most are also licensed as investment advisers and/or brokers.
4. Other Financial Services Professionals
Other financial professionals — such as insurance agents and those who provide accounting services or tax-preparation services — sometimes also provide financial planning and investment management to broaden their scope of services.
While all of these individuals can call themselves financial advisors, our standards are a bit higher here at Zoe Financial. We believe that investment advisers who have a financial planning-centric services offer the best service model for most investors… so this article will focus on what they do and the value they offer.
We’ll also compare human financial advisors to their fast-growing counterpart in the virtual world: the robo-advisor.
What A Human Financial Advisor Does
A human financial advisor — or, more specifically, an investment adviser — provides investment advice. This may range from researching and recommending investment options for a 401(k) plan to managing investment portfolios for clients. She may also provide financial planning services.
When managing your portfolio, the investment adviser will start by interviewing you to identify specific investment goals. For example, for a goal such as retirement, she’ll help you figure out how much money you’ll need when you retire, at what age you’ll need to start using this money, and how much investment risk you’re comfortable taking.
From this information, the adviser will recommend an asset allocation strategy that divides your money among stocks, bonds, and cash (or stock and bond funds). She’ll then recommend a diversified mix of investment options that have passed her rigorous investment research criteria.
If you agree with her recommendations, she’ll invest the money on your behalf. She will also monitor and report its performance, and recommend changes if necessary. She’ll be available to answer your questions and address your concerns, especially during periods of market turbulence.
If investment adviser is registered with the SEC and they are a “fee-only” advisor, they are legally required to act in your best interests. This is in contrast to a less stringent “suitability” requirement for brokers. That means your adviser will do her best to protect your portfolio against excessive risks, as well as strive to keep investment expenses and her own fees reasonable.
What A Hybrid Financial Advisor Does
Many financial advisors are licensed as both investment advisers and brokers. These dually-registered, or hybrid, advisors have the flexibility to serve clients with different needs.
For example, some clients they can serve in a fiduciary capacity, managing investment portfolios and receiving fee-only compensation. For other clients, hybrid advisors may serve solely as brokers, earning commissions from products they sell. This is useful in situations where clients are just looking for insurance, or only want alternative investments like hedge funds, which these advisors generally can’t use with their fee-only clients.
What A Robo-Advisor Does
You’ve probably heard a lot about so-called robo-advisors lately. But contrary to what the name implies, they’re actually neither robots nor financial advisors: they’re computer programs that automate investing for clients.
The processes that robo-advisors use are very similar to those used by investment advisers. You fill out an online questionnaire asking questions about your financial goals, timeframe, and risk tolerance. The robo-advisor then takes this information and uses proprietary algorithms to recommend an asset allocation model just for you, populated with stock and bond mutual funds as well as ETFs available on its investment platform.
If you agree to the strategy, the robo-advisor invests your money and manages it on your behalf.
The main benefit of robo-advisors is that their fees for managing your assets are usually less than those of investment advisers. They also have lower investment minimums than investment advisers.
The tradeoff is that there’s little opportunity for personal interaction. You can’t call a robo-advisor for reassurance when the market drops 10% in a day, nor will the robo-advisor know if your situation has changed. A robo-advisor can’t provide quality, “high touch” financial planning services. And a robo-advisor is not a fiduciary, although the investment management firm that provides the robo-advisors is required to act in a fiduciary capacity for investors.
Which Financial Advisor Should You Choose?
The financial advisor you decide to go with really depends on what you’re trying to achieve. But first, you should decide if you need one in the first place.
If all you’re looking for is someone to do your taxes and provide oversight for your small business, a certified public accountant might be enough. If you want to outsource the management of a small pool of assets as inexpensively as possible, a robo-advisor might be a good choice.
But if you want your money managed by someone who knows your specific situation, and is always there to answer your questions or address your concerns, an investment adviser might be the best choice.
Need help finding a “fee-only” investment adviser? Zoe Financial’s curated network can help you identify the right one, who works with clients that share your specific financial needs and challenges.