Financial Adviser

What is a 'Financial Adviser'

A financial adviser (or advisor) is a professional who provides financial guidance to clients based on their needs and goals. Typically, they provide clients with financial products, services, planning or advice related to investing, retirement, insurance, mortgages, college savings, estate planning, taxes and more. Some other names for financial adviser include "investment advisor" and "registered representative." Financial advisers can also be insurance agents, accountants or attorneys.

Breaking Down 'Financial Adviser'

A significant issue to consider when evaluating a financial adviser or deciding on what kind of adviser to be is how they are paid. Some financial advisors are paid a flat fee for their advice and are considered fiduciaries, while others earn commissions from the products they sell to their clients. Some advisors, such as in the case of a hybrid adviser or dually registered advisor, charge fees as well as earn commissions depending on the product they are selling or the service they are providing. Fee-only arrangements are widely considered to be better for the client.

Financial advisers are required to meet a fiduciary standard. According to the Securities and Exchange Commission, advisers must:

  • Make reasonable investment recommendations independent of outside influences;
  • Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer;
  • Make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation and other factors;
  • Always place client interests ahead of its own.

How Financial Advisors Are Compensated

The most common way advisers are paid is based on a percentage of total assets under advisory, usually about 1-2% (or lower the larger that sum gets). Some advisors are paid via commissions from insurance or financial products they sell, though this can lead to a conflict of interest because of the incentive to recommend the best product commission-wise and not necessarily the best choice for the client. Such a person is acting as a salesperson and must merely meet a suitability standard rather than a more stringent fiduciary standard. Hybrid advisors, a fast-growing segment of the advisory business because of its flexibility, are paid via commission for selling some products and also fees for services and advice as a fiduciary. This arrangement is often referred to as "fee-based" (as opposed to "fee-only," which refers to a 100% fiduciary). Some advisers are paid via an hourly rate, or a flat fee for specific services or projects, or via a regular (often quarterly) retainer fee.

How to Find a Financial Adviser

Aside from asking friends and family for referrals, professional organizations like the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA) can help an individual find an adviser. When choosing a financial adviser, it's important to ask if they have any FINRA licenses or official credentials. Certified Financial Planner® (CFP®), chartered financial analyst (CFA), chartered financial consultant (ChFC), and registered investment advisor (RIA) are good indicators of an adviser's qualifications.

How to Become a Financial Adviser

Many countries require individuals to complete training or obtain a license to become a financial advisor. In the United States, financial advisors must carry a Series 65 or 66 license as stipulated by the Financial Industry Regulatory Authority (FINRA). According to FINRA, investment advisors, brokers, accountants, insurance agents and financial planners can use the term "financial adviser." The North American Securities Administrators Association provides a good brief overview of financial adviser requirements.

Financial Adviser vs. Advisor

While 'adviser' spelled with an 'e' is the official spelling as per the Investment Advisers Act of 1940, 'advisor' with an 'o' is acceptable to refer to someone who provides advice. However, when used in reference to the legal designation 'adviser' should be used.