What Is a Financial Advisor?

A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors (sometimes spelled as advisers) can provide many different services, such as investment management, tax planning, and estate planning. Increasingly, financial advisors are acting as a "one-stop-shop" by providing everything from portfolio management to insurance products.

Registered advisors must carry the Series 65 license to conduct business with the public. A wide variety of other licenses and certifications may be required depending on the services provided by a given financial advisor.

Key Takeaways

  • A financial advisor is a professional who provides expertise for clients' decisions around money matters, personal finances, and investments.
  • Financial advisors may work as an independent agent or they may be employed by a larger financial firm.
  • Registered advisors must pass one or more exams and be properly licensed in order to carry out business with clients.
  • Unlike stockbrokers who simply execute orders in the market, financial advisors provide guidance and make informed decisions on behalf of their clients.
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Portfolio Management

Understanding Financial Advisors

Financial advisor is a generic term with no precise industry definition. As a result, this title can describe many different types of financial professionals. Stockbrokers, insurance agents, tax preparers, investment managers, and financial planners can all be considered financial advisors. Estate planners and bankers may also fall under this umbrella.

Still, an important distinction can be made: that is, a financial advisor must actually provide guidance and advice. A financial advisor can be distinguished from an execution stock broker that simply places trades for clients or a tax accountant who simply prepares tax returns without providing advice on how to maximize tax advantages.

Furthermore, what may pass as a financial advisor in some instances may simply be a product salesperson, such as a stockbroker or a life insurance agent. A true financial advisor should be a well-educated, credentialed, experienced, financial professional who works on behalf of his clients, as opposed to serving the interests of a financial institution by maximizing the sales of certain products or capitalizing on commissions from sales.

Generally, a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client’s interests come before their own. However, only Registered Investment Advisors (RIAs), who are governed by the Investment Advisers Act of 1940, are held to a true fiduciary standard. This fiduciary standard mandates that an RIA must always unconditionally put the client's best interests ahead of their own, regardless of all other circumstances. There are some agents and brokers who elect to practice in this capacity, as a fiduciary, as a way of attracting clients. However, their compensation structure is such that they are bound by the contracts of the companies where they work.

263,000

There were 263,000 professional financial advisors in the U.S. as of 2019, according to the Bureau of Labor Statistics.

The Fiduciary Distinction

Since the enactment of the Investment Adviser Act of 1940, two types of relationships have existed between financial intermediaries and their clients. These are the reasonableness standard and the stricter fiduciary standard. These relationships characterize the nature of the transactions between registered representatives and clients in the broker-dealer space. There is a fiduciary relationship that requires advisors registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors to exercise duties of loyalty, care, and full disclosure in their interactions with clients.

While the former is based on the principle of "caveat emptor" guided by self-governed rules of "suitability" and "reasonableness" in recommending an investment product or strategy, the latter is grounded in federal laws that impose the highest ethical standards. At its core, the fiduciary relationship relies on the necessity that a financial advisor must act on behalf of a client in a way the client would act for himself if he had the requisite knowledge and skills to do so.

Financial Advisors vs. Financial Planners

The financial planner is one particular type of financial advisor who specializes in helping companies and individuals create a program to meet long-term financial goals.

A financial planner might have a specialty in investments, taxes, retirement, and/or estate planning. Further, the financial planner may hold various licenses or designations, such as Certified Financial Planner (CFP) designation. Financial planners may specialize in tax planning, asset allocationrisk management, retirement planning, and/or estate planning.

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  1. North American Securities Administrators Association. "Series 65 Study Guide." Accessed Jan. 9, 2021.

  2. U.S. Securities and Exchange Commission. "General Information on the Regulation of Investment Advisers." Accessed Jan. 9, 2021.

  3. Bureau of Labor Statistics. "Personal Financial Advisors: Summary." Accessed March 31, 2021.