I wanted to share this breakdown of all the different types of financial advisors. I know that even for me, as someone working in financial services, I was overwhelmed by all the different titles and jargon - planners, money managers, coaches, reps, agents, etc. My conclusion is that there are so many titles out there and lines are for sure blurred. Turns out, pretty much anyone can call themselves a financial advisor. There are no specific qualifications to being a “financial advisor.”
Here’s a comprehensive breakdown of the world of financial advising for individuals and families, but keep in mind that there are tons of nuances. I separated these services into those that offer investment advice and those that don’t.
Let’s dive in a little deeper to each type of advisor.
Financial coaches help their clients understand the fundamentals of finances and don’t recommend investments. They tend to take a more hands-on approach and may focus on topics such as your relationship with money, coming up with a strategy for taking control of your money, help you get your finances in order, teach you the basics of budgeting, and help you save and pay down debt.
Financial planners help you put together a plan for your future. The process usually involves evaluating your current financial situation, identifying your goals, and then developing recommendations. I tend to think of financial planners as less hands-on than financial coaches. Note: Financial planning is often included in investment management services. Some financial planners are also licensed to recommend investments.
Independent advisors include independent advisor representatives (IARs) and financial advisors who are representatives of independent broker dealers. They can offer both financial planning and investment management services. The important thing here is that independent advisors are not bound to any family of funds, investment products, or services. Good Capital falls under this category so I may be a bit biased 😉.
Registered representatives of large wirehouses (e.g., Bank of America Merrill Lynch, Morgan Stanley Smith Barney, UBS, Wells Fargo) and regional firms (e.g., Raymond James, Ameriprise, Janney Montgomery Scott) similar to independent advisors, also offer both financial planning and investment management services. The advantage to working with these advisors is that they may have access to more resources and are able to offer more complex services. The downside is that they may often be told what products to sell, what stocks to recommend, and are more restricted in how they can conduct business. As with any type of financial advisor, it’s important to note how they are getting compensated, whether based on fees or commission. Often when advisors work on commission they are incentivized to sell you products that may or may not align with your best interests.
Robo/online advisors provide financial and investment advice based on mathematical rules or algorithms. Most often they only offer investment management, are usually less expensive, and are unable to offer customized advice.
Private wealth management, private bank, and family offices offer an array of services for high net worth individuals and families. The minimum account sizes and services can vary.
Insurance agents for companies such as New York Life, Northwestern Mutual, Guardian, Primerica, and MassMutual often refer to themselves as financial advisors. In many cases they have not been educated in personal finance and retirement strategies beyond insurance. No licenses or certifications are required to call oneself a financial expert or advisor. Insurance agents are only required to provide their clients with “suitable” financial products, rather than those recommended based on their individual circumstances.
All that being said, here are 5 important things to consider when choosing a financial professional to work with:
Be clear on what your goals are and what you’re looking for in a financial advisor.
Focus on the services provided as well as the individual person you’ll be working with.
Look for fee-only advisors. They are compensated only by the fees they directly charge to clients and not by commissions earned from a sale of a financial product.
It’s important for your financial advisor to be a fiduciary. This means that they are legally obligated to always put your interests first.
If you only pay attention to one certification, ask whether your potential advisor is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner. The CFP is one of the most rigorous of all the financial certifications and requires months of study.
Ultimately, finding the right financial professional for you depends on what you’re looking for and what you personally need. If you’re unsure if someone is a good fit for you, just ask! A quality advisor should be open to sharing with you their business philosophy, how they choose investments, what their process looks like, and how they’re paid. Whomever you decide to work with should be transparent and willing to talk about these things openly.
