You’ll agree with me that the term financial advisor is a buzzword in the finance sector.
The term refers to a wide range of financial professionals that it’s almost impossible to know for certain who or what is a financial advisor?
And so in this article, we’ll talk about everything financial advisor and answer the question: what is a Financial Advisor?
We’ll cover:
And so much more…
So, let’s dive right in.
Understanding Financial Advisors
The title, a financial advisor, refers to tax preparers, stockbrokers, financial consultants, investment managers, insurance agents, bankers, and even estate agents, just to mention a few.
You’ll notice that some of these professionals are product salespersons whose main goal is to convince a potential customer to buy a product.
They aim at making the most sales and maximizing their commission.
So, what really sets financial advisors apart?
Unlike salespersons, financial advisors’ main goal is to guide and advise on all matters concerning money.
They help clients make informed financial choices regarding budgeting, investments, tax payment, savings, and insurance.
There’s a wide range of professionals in this field with different educational qualifications, certifications, and credentials.
The advice they give depends on their area of expertise, i.e., certification.
The different designations you’ll come across in the financial advisory industry include:
- Certified Public Accountant (CPA): CPAs are experts in matters accounting. They offer financial advice regarding tax planning, auditing, and public accounting.
- Chartered Financial Analyst (CFA): As the name suggests, a CFA offers financial planning, analysis, and management services.
- Chartered Life Underwriter (CLU): Financial advisors with CLU designation focus on real estate planning and life insurance.
- Personal Finance Specialist (PFS): PFS certification is available for certified public accountants interested in expanding their knowledge in other areas of personal finance planning. PFS helps individuals in retirement planning, estate planning, insurance, and investment.
- Chartered Mutual Fund Counsellor (CMFC): CMFC work revolves around advising clients about mutual funds.
- Chartered Financial Consultant (ChFC): ChFC is a specialist in insurance, investments, estate planning, taxes, and retirement planning.
There are many designations!
Most of the certifications above require an advisor to have a bachelor’s degree and some work experience.
Sometimes, like in the case of PFS, one must have initial certification.
Equally important to note is that different institutions administer the various certifications.
For example, CPA and PFS are administered by the American Institute of Certified Public Accountants (AICPA), while the CFP board administers CFP.
And it doesn’t stop there.
There’s more to personal financial advisors than what meets the eye.
Advisors’ services are categorized into Registered Investment Advisors (RIAs) and broker-dealers (BD), which brings us to the next important point.
RIA firms have to abide by the fiduciary standard.
Fiduciary investment advisors are required by the law to put the client’s best interest first, regardless of the circumstances.
RIAs charge clients a percentage of the assets under management.
Some RIAs will charge an hourly fee or fixed rates.
Unlike RIAs, broker-dealers are subject to suitability standards.
Their advice on financial matters is based on what suits the clients’ needs, not necessarily what’s in the client’s best interest.
BD gets a commission from each sale they make.
When it comes to the bodies that oversee financial advisory services, Financial Industry Regulatory Authority (FINRA) oversees and regulates brokerage firms and their registered representative.
Registered Investment Advisors (RIA) firms and their Investment Advisor Representatives (IRA) are regulated by the Security and Exchange Commission (SEC).
On the other hand, insurance agencies and companies are overseen by state authorities.
What Do Financial Advisors Do?
What is a Financial Advisor; what exactly do they do?
Financial advisors help individuals to manage their money effectively.
The help you’ll get depends on the financial problem at hand.
In the same breath, you’ll get an advisor that is qualified to meet your individual need.
Generally, financial advisors use their wealth of knowledge and expertise to offer financial guidance and advice based on their area of specialization.
An advisor will first assess your financial situation.
They’ll analyze your expenses, assets, and debts.
Part of assessing your current financial standing involves you answering a detailed questionnaire.
Why does this matter?
It’s only by giving an accurate overview of your financial standing that an advisor can identify areas that require improvement and guide you accordingly.
Depending on your financial health, the guidance may revolve around retirement plans, tax planning, emergency fund, investments, or simply clearing your debts.
More than financial planning, an advisor is also an educator.
They’ll take you through what it takes to meet your financial goals.
At the preliminary stages of your relationship, they might start with concepts like saving and budgeting.
As you expand your knowledge on the different concepts, you’ll progressively get into more complex topics like tax strategies or insurance policies, which align with your long-term goals.
Suppose you are planning to retire at 40.
An advisor will educate you on the type of savings that will help this dream come to life.
They’ll equally fill you in on the insurance you might need, real estate investments, or even ways to maximize tax advantages.
Every step of the way, a financial advisor keeps you in the loop.
They keep tabs on your financial situation, re-evaluate the financial plan and make any necessary improvements for the best outcome.
Financial Advisors Daily Life
A financial advisor’s life revolves around clients.
They spend most of their time meeting with new prospects and existing clients.
If they are not reviewing the financial plan for existing clients, they are most likely implementing new financial strategies.
They also have conversations with potential clients about their financial needs.
Six to eight hours of their daily schedule is dedicated to working with clients.
The good news is each day brings a new experience as they keep meeting new people with different needs.
When advisors are not meeting clients, they are marketing their services to prospects or preparing for a meeting with a client.
They also spend their time furthering their education through certifications, licenses, and seminars to refresh their knowledge and keep up with emerging trends.
How to Become a Financial Advisor
Financial advisory is a huge field with financial professionals with diverse educational backgrounds, knowledge, skills, certifications, and licenses.
The process of starting and nurturing a career in this field is rigorous.
Here is the process of becoming either an employed or independent advisor.
Earn a Bachelor’s Degree
To start your journey as a financial advisor, you need a bachelor’s degree.
Though it doesn’t have to be in a specific field, a major in finance, business, or marketing from an accredited educational institution is recommended.
You can also take a personal initiative as you study and inquire from those in the field about how financial advisors work, how their daily schedule looks like and compensation, etcetera.
This will give you an overview of what to expect in the field.
Gain Experience Through Internship
A financial advisory firm will rarely hire a fresh graduate without experience.
Thus, it will be best to get your feet wet in the industry through an internship.
While studying, you can consider working with a solo practitioner or a firm to have firsthand experience in the financial advisor career.
An internship will give you a sneak peek at the daily life of an advisor.
An internship gives a platform to translate the knowledge learned in college into real life.
You also stand to acquire experience and demonstrate if you are really cut out for the job in terms of passion and skill set.
More than that, an internship will set you up in terms of creating a network.
Some of the financial professionals you’ll interact with will prove important all through your career.
You might be lucky enough to even find a mentor.
Lastly, an internship experience will boost your resume big time.
You stand a better chance to get a job after graduation.
Apply for Your First Job
Now that you have your degree certificate and internship experience, it’s time to start job hunting.
First things first, get your resume ready.
There are several resources online to help you write a crisp resume that stands out.
A few pointers to note include using a template with a professional outlook and ensuring your skills and expertise are to the point.
If you are drawn to selling products, your target employer should be large broker-dealers.
These firms will equip you with hands-on experience in working with clients.
When you are scouting for broker-dealers or financial firms to work with, it’s crucial that you settle for those that offer in-depth in-house training for their employees.
Mid-size or even small firms will be a great starting point if you want to steer your career towards financial planning.
Once you’ve settled in, be deliberate about finding mentors that can guide you at the start of your career.
You can also get a mentor and learn a lot if you join financial planning organizations.
With experience, you can further your career by taking certifications or licenses that fit your interest.
Acquire Certification and Licenses
Your first job will give you an overview of the route you want to take in your career.
The services you offer and where you work will equally guide you to the certification or license that best suits your career growth.
There is a wide range of certifications, with CFP being the most common among personal financial advisors.
The certification is offered by the CFP board.
The program gives in-depth training in financial planning.
Chartered Financial Analyst (CFA) is administered by CFA Institute.
In the program, advisors learn about accounting, securities, and money management.
There is also CLU certification granted by the American College of Financial Services.
The certifications have different requirements and varying levels of difficulty.
Though these certifications are not required, they are recommended.
They give you an edge and sets you apart from the competitors.
Besides, the financial adviser industry is quite competitive.
Apart from the certifications, you will also have a competitive advantage by getting a license.
If you are selling financial products for a broker-dealer, there are several exams by FINRA for advisors.
The investment products an advisor sells and the mode of employment will determine the right license one should take.
- Many professional advisors hold series 7, also known as the General Securities Representative Qualification Exam. The license allows an advisor to sell a wide range of investment products.
- To work with clients in different states, series 63 is the ideal license. The series 63 exam mostly covers rules and regulations that advisors must comply with.
- Series 65 is for advisors who opt for fee payment rather than commission.
- Series 6 focuses on mutual funds and variable annuities. Advisors who opt for Series 6 can specialize in selling very limited products while preparing to take other exams to expand their portfolios.
These are the most common exams that FINRA offers.
All the details about the requirements for these exams are on their website.
But that’s not all.
If you are selling annuities for insurance firms, an insurance license from your state is a must-have.
Suppose you’ve taken a management role.
There are additional exams you must pass.
Financial services are diverse hence the many licenses.
An advisor must be well equipped to offer financial advice.
There’s no better way to prove your expertise than through these certifications and licenses.
Now, this is important.
If you’ve chosen not to sell investment products and perhaps focus on financial planning, then FINRA licenses are not mandatory.
Become an Independent Financial Advisor
You’ll become an independent advisor if you choose to open your own practice.
To do this, you’ll register your RIA firm with SEC.
You’ll also register yourself with the same body as an investment advisor representative (IAR) managing your own RIA.
More than that, IAR must pass series 66 or 65 exams.
It also required that you comply with the Investment Advisors Act of 1940.
Types of Financial Advisors
There are three types of financial advisors: traditional, online, and Robo.
The three options operate differently, and therefore one will choose the option that works best for them, depending on their needs.
Traditional Financial Advisor
Traditional advisors are the personal financial advisors you work with in person.
Often, you’ll choose a traditional advisor if your investment portfolio is complex.
Other times, a milestone in life like early retirement, buying a home, investing in real estate, or even marriage might compel you to seek guidance from a traditional financial advisor.
Sometimes, the reassurance of getting guidance from a human propels people to choose traditional advisors.
There are several designations when it comes to traditional advisors.
The one you’ll choose solely depends on your needs.
- Wealth managers are financial advisors who help high-net-worth and ultra-high net worth individuals manage their investment portfolios. Their wealth management services are tailored depending on the clients’ financial goals.
- IRA offers a holistic approach to planning finances and investment strategies. Their investment management role revolves around picking, managing, and recommending investments in the client’s best interest.
- Broker-dealers specialize in selling financial products to clients.
- There are also advisors with different certifications, such as CPA, CLU, and ChFC, who offer specialized services for different financial needs.
These advisors will help you reach your financial goals by assessing your financial situation.
They check your personal finances and help you develop short and long-term goals.
More importantly, their plan is personalized to address the specific financial need at hand, whether it’s early retirement, estate planning, life insurance, or growing an investment portfolio, among others.
Online Financial Advisor
As the name suggests, these advisors are based online.
You’ll get investment management services online and be in touch with a virtual planner.
Online advisors are cheaper compared to traditional advisors.
It’s the perfect balance between saving money and receiving investment planning and management services.
Online financial advisors, just like traditional advisors, tailor financial management services to meet your individual needs.
Different online advisor services work differently.
In some cases, a computer algorithm manages your investment.
In such instances, financial advisors are on call whenever you have questions.
Other platforms pair clients with certified financial planners to address their individual financial needs.
Robo Advisor
Robo advisors stand out as the cheapest among the three types of financial advisors.
Here, an automated system manages your portfolio.
Their easy entry nature makes them most ideal for many people getting started in investment.
Robo advisors are a great option if you are planning to save for retirement.
They are also great if you want to get started in the stock market.
Suppose you have some cash, lump sum, or otherwise that you want to save to finance a particular goal in the future.
A Robo advisor will be a perfect match.
To get started with your provider, you’ll fill in a questionnaire to give the system an overview of your goals.
The questionnaire will also help ascertain risk tolerance and investment preference.
Using the information you’ve provided, a Robo advisor sets up an investment that suits your profile.
Financial Advisors Salary Snapshot
There are several payment models that financial advisors charge for their services.
Fee-only: Advisors that charge fee-only don’t take a commission. They charge a fee for the services they offer a client.
Commission based: Commission-based advisors get paid a commission for every financial product or investment product sold. For this reason, their products might be expensive than others in the market.
Fee-based: In this model, an advisor charges a client an hourly fee or a percentage of the assets under management. The percentage is usually 1%.
Combination of fees and commission: This model is a hybrid of fee-based and commission. In this model, an advisor will be paid for the service offered and get a commission if they sell a product to a client.
If you are still stuck on how much financial advisors earn, you’ll find out in a bit.
According to The Bureau of Labor Statistics (BLS), the median annual salary for financial advisors in 2019 was $87,850, with the top 25% best advisors earning $154,480 and the bottom 25% making $57,780.
