A financial advisor offers expert financial advice to clients in exchange for compensation. These professionals may provide a variety of services—from investment management and tax planning to estate planning. Increasingly, financial advisors act as one-stop-shops, delivering comprehensive financial services that range from portfolio management to insurance products.
Registered advisors must carry the Series 65 license to operate while additional licenses and certifications may be required depending on the specific services they offer.
Key Takeaways
- Financial advisors provide expertise on money matters, personal finances, and investments.
- They can operate independently or under a larger financial firm.
- Proper licensing is necessary and involves passing rigorous exams.
- Financial advisors differ from stockbrokers by offering guidance, not merely executing trades.
- Compensation can be fee-based, commission-based, or a blend of both.
Understanding Financial Advisors
The term “financial advisor” is a broad descriptor that can encompass many different types of financial professionals, from stockbrokers and insurance agents to tax preparers and financial planners. Even estate planners and bankers may fit under this wide umbrella.
However, a vital distinction exists between mere product salespeople and true financial advisors who provide informed and valuable guidance. A genuine financial advisor should be well-educated, properly credentialed, and experienced in functioning in a fiduciary capacity, prioritizing the client’s interests above all else.
By the Numbers
As of 2021, there were approximately 330,300 professional financial advisors in the U.S., according to the Bureau of Labor Statistics.
Professionals in this field usually operate as independent practitioners, often functioning in a fiduciary role where their clients’ interests come first. However, only Registered Investment Advisors (RIAs), governed by the Investment Advisers Act of 1940, are held to a stringent fiduciary standard.
While some agents and brokers choose to operate in this fiduciary capacity, their compensation models can sometimes present conflicts of interest. It’s essential for clients to ensure that their advisors prioritize their interests and not those of their employers.
The Fiduciary Distinction
The Investment Adviser Act of 1940 created two types of advisory relationships: the reasonableness standard and the stricter fiduciary standard. The fiduciary relationship obliges advisors registered with the Securities and Exchange Commission (SEC) to adhere to high ethical standards concerning loyalty, care, and full disclosure.
The fundamental principle of fiduciary duty is that advisors must act in the best interests of their clients, aligning their advice with what a client would choose had they the required knowledge.
Financial Advisors vs. Financial Planners
A financial planner is a specialized type of financial advisor focusing on long-term financial goals. Financial planners may specialize in various areas such as investments, tax planning, retirement, and estate planning. They often hold credentials like the Certified Financial Planner (CFP) designation.
Becoming a Financial Advisor
To pursue a career as a financial advisor, a bachelor’s degree is typically required, though it doesn’t necessarily have to be in finance or economics. Following this, many aspiring advisors begin working at financial institutions, often through internships, where they’re sponsored for the necessary industry licenses, such as Series 7, Series 63, Series 65, and Series 6.
Responsibilities of Financial Advisors
Financial advisors are responsible for managing every aspect of a client’s financial life. This includes planning for retirement, estate planning, and investing, and also ensuring clients maximize tax benefits and returns on investments.
Cost of Hiring a Financial Advisor
The cost varies depending on the services provided. Typically, financial advisors charge around 1% of assets under management, although this can decrease with higher amounts managed. Flat annual fees can range between $2,000 and $7,500. Advisors may also charge fees for specific plans or commission-based fees for transactions.
Financial Advisor Income
Earnings depend on various factors like client base, experience, and geographical location. According to the Bureau of Labor Statistics, the median annual pay for financial advisors in 2021 was $94,170.
The Bottom Line
Financial advisors play a critical role in helping clients achieve financial stability and growth. They serve as valuable resources during annual financial reviews and help clients stay on track towards their financial goals. Whether working independently or within a larger firm, a dedicated and well-compensated financial advisor can significantly contribute to one’s financial well-being.
Related Terms: financial planner, investment manager, stockbroker, Certified Financial Planner, Registered Investment Advisor.
References
- Financial Industry Regulatory Authority. “Qualification Exams”.
- North American Securities Administrators Association. “Series 65 Exam Content Outline”.
- U.S. Bureau of Labor Statistics. “How to Become a Personal Financial Advisor”.
- U.S. Bureau of Labor Statistics. “What Personal Financial Advisors Do”.
- U.S. Bureau of Labor Statistics. “Personal Financial Advisors: Summary”.
- U.S. Securities and Exchange Commission. “General Information on the Regulation of Investment Advisers”.
- Financial Industry Regulatory Authority. “Financial Planners”.
- Personal Capital. “How Much Does a Financial Advisor Cost?”
