What Is a Financial Advisor and Do I Need One?

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Considering that as little as 1% of the U.S. population uses a financial advisor, there’s understandably some mystery about what financial advisors do.

In this article, I’ll explain the types of services that financial advisors offer, how much it costs to hire one, how to find and evaluate a financial advisor and whether you should instead consider investing on your own or through a robo-advisor.


Table of Contents


What Is a Financial Advisor?

Many people can’t fully answer the question, “What is a financial advisor?” Even if you don’t plan to hire one in the near future, it’s helpful to understand what they are and what they aren’t.

Financial advisors come from a variety of backgrounds and qualifications. Some specialize, while others are generalists. But pay attention to the second word in “financial advisor.” Whatever their background, these are people who provide professional advice. A financial advisor is someone who assists you with financial planning and helps manage your money.

A good financial advisor will take the time to understand where you are now (debts, assets) and where you want to go (goals) before creating a plan that’s specific to your needs and desires.

These are not stock-picking wizards who are beating the market by ridiculous sums, although they do often help oversee your investments.

In addition to managing your portfolio, financial advisors can offer the following services:

  • Retirement planning
  • Tax strategy and planning
  • Estate planning
  • Debt management
  • Insurance strategy
  • Charitable giving planning
  • Small business planning
  • Cash flow analysis

Who Should Use a Financial Advisor?

What is a financial advisor, what does a financial advisor do and should I hire a financial advisor are common questions.

During your 20s and 30s, or what’s called the “accumulation phase” of your financial life, money expert Clark Howard recommends that you invest in a target date fund through your employer’s 401(k) plan or through a Roth IRA.

You can also invest in a blend of low-cost index funds that includes a total stock market, an international and a bond fund. Or you can use a robo-advisor.

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Clark says the decision to hire a financial advisor isn’t about how to invest your money. Using robo-advisors and target date funds can build a diversified portfolio that fits your age.

“The main purpose of using a financial advisor is when you’re trying to see if you’re doing things right to meet your long-term financial goals,” Clark says. “They’re talking to you about whether you have your will up to date. Is your planning done well from a tax standpoint? What are you doing in case you are in the 70% that ends up needing assisted living?

“With real financial planning, it’s not really about what investment you’re in. Where the real importance comes with a financial planner is the estate and tax planning and goal-setting.”

Potential Reasons To Hire a Financial Advisor

There’s no “one size fits all” answer when it comes to hiring a financial advisor. Here are a few examples of reasons you may decide to hire an advisor:

  • You lack the knowledge, time or discipline to handle your finances alone.
  • You feel confident about handling your own investments but don’t know as much about things like insurance, taxes and retirement distributions.
  • You’re facing a major life decision or change such as marriage, having a child, buying a house, or selling a business.
  • You just received an inheritance or a large sum of money.
  • If you’re your family’s money manager, you want to make sure that if you die unexpectedly, your survivors will have someone to turn to for financial help.
  • Your finances are disorganized. For example, maybe you need to consolidate old 401(k)s, IRAs, brokerage accounts and bank accounts.
  • You’re considering early retirement or are retiring and starting to take distributions from a 401(k) or IRA.
  • You have a substantial net worth and could benefit from guidance from someone with specialized knowledge of things like tax strategy and estate planning.

How Much Does a Financial Advisor Cost?

As you’d probably guess, the answer is, “It depends.”

Financial advisors can get paid in several different ways:

  1. Hourly. In many cases, financial advisors who charge by the hour have more expensive rates than those who charge a commission or annual fee. But this may be a better option for someone who wants just a one-time consultation.
  2. Commission-based. These advisors may get paid per transaction, and they may earn money from the company behind the products they sell. In other words, they may be financially incentivized to sell you certain products or point you toward making more transactions whether or not that’s the best solution.
  3. Annual management fee. This is a pretty common form of compensation. These financial advisors charge you a percentage of the assets you’re paying them to manage.
  4. Combination of commission plus an annual management fee. Some financial advisors will invoice you in more than one way.

The standard price benchmark is about 1% annually. However, robo-advisors and zero-commission trades from brokerage firms have put some pricing pressure on the financial advising industry. So right now, how much you pay for financial advising services can vary quite a bit.

Some financial advisors charge more than 1% annually, and your all-in cost can also be more than that because of the expense ratio costs of your investments.


Are Financial Advisors Worth the Fees?

If you get an equal return on your own or through a robo-advisor but you pay less in fees, your net result is going to be better. So if you hire a financial advisor, you’re hoping that one or two things will be true:

  1. Your ROI will justify the fees. If you pay 1% more in fees but you get a return that’s 1.5% better, that’s a net positive.
  2. There will be other value. Your ROI may not be the only factor when it comes to your finances. You could also care about saving time, lowering risk and/or providing peace of mind to your family by giving them an outside contact knowledgeable about your finances.

It’s challenging to pinpoint the value of a financial advisor. As you might expect, most of the research comes from companies that sell financial advising services.

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Vanguard released a study in February 2019 that attempted to quantify the impact of a financial advisor. It concluded that financial advisors create an annual net return of +3%. Among the areas that the study concluded were the most impactful were behavioral coaching, asset allocation, spending strategy, expense ratios and rebalancing.

A similar Russell Investments study estimated the impact of a financial advisor to be +3.75%.

A study from AXA considered a pool of investors who used 20 different companies for financial advisory services. It found that people who used an advisor ended up with nearly double the amount of assets in their employer-sponsored retirement funds. AXA’s study concluded that return was due to several factors including investors’ own behavior after hiring an advisor.

So, from a performance standpoint, it’s possible that a good financial advisor can provide sufficient ROI. And the soft benefits of using an advisor may be worth it to you.


How Do I Choose a Financial Advisor?

This is more difficult than thinking through the best robo-advisor or the best stock trading app. There are a few standout companies within those categories that are so thoroughly reviewed, you can get to know them better than your in-laws before you invest.

Choosing a financial advisor also can also be confusing because they sometimes use other titles: wealth manager, financial planner, investment advisor.

Regardless of their titles or rosters of services, the first criterion for choosing a financial advisor is easy: Make sure he or she is a fiduciary. Fiduciaries are required by law to do what’s best for their clients financially even if it isn’t what’s best for them.

It’s important to understand how your choice gets paid. You don’t want an advisor who works on commission and is therefore motivated to put you into certain products that will help get them paid.

In addition to finding someone who is bound by fiduciary duty, consider the services they offer, their credentials, the fees they charge and how well their personality fits you and your family.

Clark Recommends These 3 Options for Financial Advisors

Clark recommends the Garrett Planning Network as a great place to start your search. Just enter your ZIP code, and you’ll get a list of fiduciaries in your area. You can read their bios, which include their areas of expertise, and you can get their contact information.

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“A fiduciary is not automatically going to mean you mesh well with someone. Or that they are a good listener. Or that they’re really good at giving financial advice and a plan. But it gets you most of the way there,” Clark says. “The big problem in financial planning are all the people who are not putting your interests first. And so that’s why using a funnel like Garrett gets you much closer to where you’re going to get good, honest advice.”

If you have at least $50,000 to invest, Clark recommends Vanguard’s Personal Advisor Services. It’s a robo-advisor/financial advisor combination. It charges 0.30% annually, at the most. The price decreases if you deposit more assets for Vanguard to manage. Your money gets invested via a robo-advisor. But you also get unlimited access to a dedicated financial planner who stays with you long term.

Schwab Intelligent Portfolios Premium is another hybrid that requires a $25,000 minimum investment, charges a one-time $300 fee and then $30 per month. It invests your money via a robo-advisor but provides access to Certified Financial Planners. But at Schwab, you don’t get to meet with the same person every time.


Advantages of Financial Advisors

Here are some of the most beneficial things that good financial advisors provide:

  • Behavioral coaching and accountability. Vanguard’s study found that behavioral coaching accounted for 150 basis points of value for a typical client, or 1.5% annually (see the bottom of page 4). The Russell Investments study placed a similar premium on managing behavior and providing accountability. Russell pointed out that the S&P 500 rose 17.6% in just three days in March 2020 just after a COVID-induced sell-off. Some panicked investors missed a huge opportunity. Bad investment decisions often involve emotions, and an impartial, objective advisor can shield your finances from that kind of damage.
  • Optimal tax strategy. A good advisor will make sure you understand the tax implications of your decisions and work to help limit your tax burden.
  • Sound investment strategy. Financial advisors are not the be-all, end-all when it comes to investing. But they should come up with a good plan that accounts for your taxes, mitigates risk and includes proper asset allocation for your age and circumstances.
  • Overall financial planning. This is not something you get from a robo-advisor or when you handle your own investments. It’s also a benefit of having a long-term relationship with a trained professional.
  • Quick adaptation to the unexpected. If you inherit money from a family member, suddenly need to pay for medical care, lose your job or give birth to triplets, financial advisors are well suited to help you adjust your plans.

Disadvantages of Financial Advisors

Here are some of the downsides to investing with a financial advisor:

  • It’s the most expensive way to invest. You’ll almost certainly pay more in fees than you will if you handle your own investments or outsource them to a robo-advisor.
  • Evaluating them can be challenging. Popular brokerages like Fidelity and Robinhood have thousands of ratings, constant media coverage and public scrutiny. It’s relatively easy to uncover the consensus on them, good or bad. It can be trickier to evaluate an advisor.
  • A bad one can be a major headache (or worse). Investing is risky by definition. No investment is 100% foolproof. But if you select a financial advisor who isn’t qualified, is incentivized to point you to products that line their pockets or simply isn’t a good fit from a personality standpoint, it can create a negative dynamic. You don’t have to worry about that if you work with a robo-advisor or on your own.
  • They usually aren’t stock market wizards. Advisors offer many soft benefits that you don’t get on your own or through a robo-advisor. But the idea of this stock-picking wizard who sits at a computer 12 hours a day crunching numbers in proprietary algorithms is mostly a myth. If you use a financial advisor, it shouldn’t be because you expect to crush the market with outsized returns.

Financial Advisor vs. Robo-Advisor

Purely from an investment perspective, it’s hard for a financial advisor to beat one of the best robo-advisors.

A typical financial advisor charges 4-5x more in annual fees than a good robo-advisor. Robo-advisors follow well-optimized, automated long-term investment strategies. That approach may seem boring but it should be stable and successful long-term.

However, investing is almost literally the only thing that most robo-advisors can do. Managing your finances involves much more than just investing.

If you’re young, single and don’t have much money to invest, you may not need a financial advisor. But if your financial life is more complex, it may be necessary to hire an advisor to manage your money holistically.


Financial Advisor vs. Self-Directed Investing

We’ve all overestimated our abilities at some point, whether it was being able to beat our friend on a go-kart track or being able to fix our own car after watching a YouTube video.

When it comes to your finances, the stakes are higher. So if you want to manage everything yourself, make sure you get an honest assessment of your skills, your discipline and the time commitment — perhaps by talking it through with someone other than yourself.

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Keep in mind that investing is only one aspect of your overall financial picture.

It’s possible to handle your own finances and do quite well. But make sure you go in with your eyes wide open to the amount of work and discipline it will take to optimize every financial lever.


Final Thoughts

Your age, income, debt, level of responsibility and net worth are all significant variables when it comes time to evaluate your investment options.

Hopefully I’ve given you a better understanding of what a financial advisor is and the ways they can help you. Be sure to read our stories about who should invest on their own and who should use a robo-advisor so you can make the right choice for you.


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