Before you hire one, know how they work

Quick Summary

  • Financial advisors or planners counsel people on wealth management and other personal money matters.
  • Financial advisors can just draw up plans, or they can recommend specific investment products and vehicles.
  • While a good financial plan can be an investment, some advisors drive up costs, by recommending frequent turnover of assets or steering clients into more expensive (high-fee) investments.
  • Always make sure your financial advisor abides by fiduciary standards—obligated to act in your best interests always.


Getting educated about your retirement and wealth-management options is a necessary part of planning for your financial future.  Having a foundation of knowledge and getting started is important, but let’s be honest. You don’t have the time to be a financial expert. You don’t want to be a financial expert. You would rather have an easy plan you can execute without having to constantly worry about changes in legislation or investments. Enter the financial advisor.A financial advisor and their client pointing at documents.

What Is a Financial Advisor?

Financial advisors, also known as financial planners, are professionals who help their clients tackle some of the tough issues relating to wealth management and personal money matters.  They can put together an entire retirement savings plan with a timeline or simply answer a question about whole life insurance.

Here’s a snapshot of a few things a planner can do:

  • meet with you to assess your current financial situation and goals
  • develop a comprehensive plan that addresses major areas of concern (retirement, college planning, insurance, avoiding estate tax, and so on)
  • coach you as difficult financial issues arise in your
  • invest funds for you/set up investment accounts
  • find financial vehicles for you, like insurance policies or mortgages

While the financial advisor field is largely unregulated—anyone can hang out a sign advertising financial advice or planning, no license required—there are those who have industry credentials. The best-known of these are Certified Financial Planners or CFPs.

A Certified Financial Planner is often not only knowledgeable about investment accounts, but other things that could impact your finances, from taxes to insurance. Achieving the CFP designation requires a college degree, three full-time years of qualifying work experience, hundreds of hours of training and studying, and passing a comprehensive test administered by the Certified Financial Planner Board of Standards, Inc., a private organization. They must also undergo continuing education, to make sure they stay up to date with laws, regulations, and products in the investment fields, and re-certify every two years.

Risks of Managing Alone

Still, with all of the information available to you in books, print media, and the multitude of websites dedicated to personal finance, do you really need a financial advisor?

Well, how much free time do you have right now? Simply mustering up the time to compare Roth IRA providers and filling out the necessary information to open a Roth IRA probably took you several weeks. Now that you have opened the account you need to stay on top of a wide range of information:

  • changes in tax laws or other legislation that could affect your financial affairs
  • changes in mutual fund options at your brokerage firm (perhaps one of your funds closes and you need to decide where to put the money)
  • changes in the amount of money you can contribute each year to a retirement account
  • changes in the sorts of financial products out there or the introduction of new products

Not to mention that you also need to develop a long-term financial plan that includes considerations for retirement, paying off your house, funding the kids’ college education, estate planning, and a timeline for when you can actually retire. Going it alone is a possibility, but to do it right you’ll need to spend a lot of time keeping up to date on all the changes in the investing, insurance and risk areas of life.

Important: A financial advisor/planner is not automatically the same as a Registered Investment Advisor, a professional who advises individuals on investments and actively manages their portfolios, receiving a percentage of the assets’ worth in compensation.

How a Financial Advisor Can Help

Financial advisors can be great when you are confused, emotional or simply ignorant of various wealth-management topics. Add in the fact that a majority of people can’t see far enough into the future to imagine their retirement, much less plan for it, professional advice can be very handy. A qualified advisor will ask you a lot of questions—some of them uncomfortable!—in order to get the full picture of where you want to take your life.

Once all of the details are in hand, he or she can put together a plan and offer you advice on investments, retirement planning, estate planning, tax liability, and your kids’ college education. The breadth of the advisor’s knowledge can make a lot of your difficult decisions easier.

Some financial planners go further, actively helping you buy insurance products (policies, annuities) and to invest in financial products, like mutual funds or CDs. They tend not to be able to trade actual securities, like stocks or bonds, themselves, but they can act as your liaison with a broker or money manager who does. They can also work with a trust and estates lawyer or accountant on your behalf.

How a Financial Advisor Can Hurt

As great as a good financial advisor can be, they’re not all good. An incompetent (or, worse, dishonest) advisor can cost you a lot of money. Here’s a snapshot of how:

  • Churning your investments: getting you to buy and sell more than necessary in order to generate higher commissions for themselves.
  • Expensive investments: Pointing you to mutual funds with high expense ratios when a similar low-cost index fund or an Exchange Traded Fund (ETF) would be a better choice.
  • Bad planning: A well-intentioned advisor who puts together a sketchy or holes-ridden financial plan is not helping you at all. Of course, plans do need to be flexible, given changes in the economy, interest rates—and of course, the curveballs that life can throw at you personally (loss of a job, long-term illness, etc.). But you need to start out with a detailed blueprint and clear course of action.
  • Not responding: Even an unbiased advisor is useless if he or she never returns your calls/emails or is MIA when your need arises. Timing can be of the essence with many financial and investment scenarios, and you must feel confident your advisor will respond to you promptly.

To avoid these problems, first make sure your advisor has a fiduciary duty to you (CFPs do, as part of their credentialing process). Fiduciary duty means your advisor is legally obligated to put your needs above his/her own and always act in your best interests, offering you an unbiased view and opinion. In a financial planning context, that means they can’t steer you toward investments that are expensive for you (through expense ratios and sales charges) just because they’re more profitable for them (thanks to commissions). They must also fully explain any recommendations to you, and disclose any potential conflicts of interest—like, “XYZ mutual fund company pays me a commission if I put clients into their funds.”

Being a fiduciary also means that they respect your financial goals and risk tolerance, advise you accordingly, and recommend appropriate action. A planner can’t guarantee investment performance—that the stock mutual fund he puts you in will go up or rise by a certain amount. However, if you make it clear that you want to invest conservatively, preserving your capital, it would be against their fiduciary duty to put you in an aggressive growth-stock fund that carries a high amount of risk.

Pros and Cons


  • Acts as quarterback for your financial team
  • Helps you plan long-term
  • Researches, comparison-shops, and recommends investments, products for you


  • Generates an additional expense
  • May not be unbiased in recommendations
  • May recommend more expensive products

The Price of Using a Financial Planner

Getting quality advice isn’t free. Going to a professional financial planner will cost you money. Some planners charge by the hour—this is called fee-based planning—and some make commissions from the investment products you buy. Some are compensated in both ways.

Some consumers may balk at the idea of paying hundreds of dollars just to plan budget and invest their money, but think of it as an investment: The money can buy you a quality plan that can be put together in a few hours and last you 20 years, with only a minimal need for a financial checkup with the planner from time to time. Isn’t a successful retirement worth a few hundred bucks?

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