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What Is a Financial Advisor and How to Choose One

Sept. 3, 2019
Advisors, Financial Planning, Investing, Retirement Planning
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Financial advisors?help people decide how to manage their money and reach their financial goals.?But financial planning isn’t one-size-fits-all, and there are several types of financial advisors.?Let’s figure out which is the best for you.

What is a financial advisor or financial planner?

The term financial advisor can apply to a wide variety of people or to digital services called robo-advisors.?This umbrella term can also include financial consultants, which is just another word for financial advisor, and financial planners,?who have a special designation for qualification. All these types of advisors help you manage your money, in various ways:

Robo-advisors:?A digital service offering simplified, low-cost?investment management. You answer questions online, then computer algorithms?build an investment portfolio according to your goals and risk tolerance. Robo-advisors monitor and?regularly rebalance your?investment mix, offering portfolio management at a lower cost.?(Sound right for your needs??See our top picks for best robo-advisors.)

Online financial planning services:?This is the next step up from a robo-advisor: An online financial planning service that offers virtual access to human advisors.

A basic online service might offer the same automated investment management you’d get from a robo-advisor, plus the ability to consult with a team of financial advisors when you have questions. More comprehensive services roughly mirror traditional financial planners — you’ll be matched with a dedicated human financial advisor who will manage your investments and work with you to create a holistic financial plan.?Facet Weath?and Personal Capital are examples of services in this space.

Traditional financial planners, financial consultants and financial advisors: Broad terms for professionals in the financial services industry,?covering a variety of specialists, including:

  • Certified financial planner: 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.
  • Broker or stockbroker: Buys and sells financial products on behalf of clients in exchange for a fee, commission or both. Must pass exams and register with the U.S. Securities and Exchange Commission.
  • 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.
  • Wealth managers: Wealth management services typically concentrate on high net worth clients and provide holistic financial management.

In addition, the same person can have more than one of these titles. For instance, a?CFP may also be a registered investment advisor.

How to choose a financial advisor

Consider three factors when choosing a personal financial advisor so you get the advice you?want —?and don’t pay?too much or pay for things you don’t need:

1. Figure out what services you want

If you simply want help choosing and managing investments,?a robo-advisor is?a streamlined, cost-efficient choice. It’s also?good for those just starting out, because robo-advisors typically have low or no account minimums.

If you have a complicated financial situation?or want holistic advice on topics like estate planning, insurance needs, etc., you might want to choose an online financial planning service or a human financial advisor in your area.?If you don’t mind meeting with your advisor virtually, you may save money?with an online service. These services also typically have lower?account minimum requirements than a human advisor might.

Keep in mind that you can start with a robo-advisor or online service, then reassess your planning needs as your financial situation changes or grows more complex.

2. Consider?what cost level works for you

It’s important to understand a financial advisor’s?costs and fees?before you commit to services. Generally speaking, there are three cost levels you’re likely to encounter:

  • Robo-advisors often charge an annual fee that is a percentage of your account balance with the service. Robo-advisor fees frequently start at 0.25% of the assets they manage for you, with many top providers charging 0.50% or less. On a $50,000 account balance, 0.25% works out to $125 a year.
  • Online financial planning services that offer more comprehensive financial planning?and access to dedicated?CFPs will charge more than robo-advisors, but less than traditional financial advisors.?Online services?typically charge either a flat subscription fee, a percentage of your assets or both. For example, Personal Capital charges 0.89% of assets under management per year. Facet Wealth charges an annual fee that ranges from $480 to $5,000 a year, depending on the complexity of your financial situation. That flat fee includes portfolio management.
  • Traditional human advisors also often charge a percentage of the amount managed,?with a median fee of 1%, although it can range higher for small accounts and lower for large ones. Others may?charge a flat fee, an hourly rate or a retainer.?Some?require at least $250,000 in investable assets to get started.

3. Check out qualifications and standards

It’s important to always?check out the record of the company or person you’re considering, by looking up the firm’s Form ADV. Among other things, this form will outline how the?firm or advisor charges?for its service?(and what the specific fees are),?conflicts of interest and any past disciplinary actions.

We also have a list of?10 questions you should ask a financial advisor?— including whether they hold to?a fiduciary standard, which requires that they act in your best interest.

Recommended financial advisors

Now that you understand what a financial advisor is and we’ve gone over the options, you might be looking for specific recommendations for advisors. Below are some of our picks for the best robo-advisors and online financial planning services:

SoFi Automated Investing

Why we like SoFi:

SoFi charges no management fee and offers unlimited access to a team of CFPs.

? Read our full review
Management fee: 0%

Account minimum: $0

Promotion: Free career coaching, plus loan discounts with qualifying deposits.

Why we like Wealthfront:

Wealthfront is strictly digital, with powerful financial planning tools and a low management fee.

? Read our full review
Management fee: 0.25%

Account minimum: $500

Promotion: $5,000 managed free for NerdWallet readers.
Online financial planning services
Facet Wealth

Why we like Facet Wealth:

Facet Wealth offers dedicated CFPs and charges a flat fee based on how much financial advice you require. Investment management is included.

? Read our full review
Management fee: $480 to $5,000 per year.

Account minimum: $0

Personal Capital

Why we like Personal Capital:

Personal Capital offers dedicated CFPs and charges a percentage of assets under management.

? Read our full review
Management fee: 0.89%

Account minimum: $100,000

Promotion: 2 free months of financial advisory services for NerdWallet readers.

Compare more advisors

You can view our full list of recommended robo-advisors here.

More resources

Want more information? Check out?these articles:

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