Key Takeaways
- If you’re out of debt and have a fully funded emergency fund, now’s a good time to start looking for a financial advisor.
- Financial advisors are different from financial coaches. Financial advisors are certified, bound by the law and often act as a financial coach—but not the other way around.
- There’s an alphabet soup of acronyms that signal a financial advisor’s specialty. We’ll explain some of them below.
- A financial advisor can keep your retirement investments on track through the ups and downs of the market. Depending on their certification, they can even manage your portfolio for you.
Let’s face it—we hate paying people to do stuff we feel like we can handle ourselves. You know, dentistry, surgery, piano moving . . . just kidding. But jokes aside, maybe you feel like you can fly solo when it comes to investing. You may think, Why should I pay a financial advisor when I could manage my money myself? How hard can this stuff really be?
Get expert money advice to reach your money goals faster!
Here’s the thing about financial advisors: it’s not just about what they know. It’s also about what they do. In fact, a lot of super smart people have financial advisors (because they’re super smart!).
When you hire a pro, it’s usually because they have more education and experience than you in a certain area. And because they know what they’re doing, they won’t freak out (like you might) when things get rough.
In short, there are times you need a financial pro in your corner! Let’s begin by looking at who a financial advisor is and how they can help.
What Is a Financial Advisor, Exactly?
First, the term financial advisor isn’t an official title. It’s a generic term for pros who provide a wide variety of financial services. Depending on what these pros do, they’re often required by law to have specific training, certification and experience. Here are a few examples:
- Certified Public Accountant (CPA): These pros have to pass a rigorous exam to be certified. They can help you with taxes, business services (like mergers and acquisitions), consulting and, of course, accounting.
- Personal Finance Specialist (PFS): A PFS is a CPA who has not only invested more in their education (and passed even more exams) but also gained extensive experience. They combine their knowledge of tax and accounting to help you with in-depth financial planning.
- Registered Investment Advisor (RIA) and Investment Advisor Representative (IAR): An RIA is a financial advisor or firm that provides investment advising and management services to clients for a fee. They’re registered with state or federal authorities (like the Securities and Exchange Commission, or SEC) and are held to a fiduciary standard (meaning they have to act in the client’s best financial interests). The individual advisors under the RIA who deliver advice and work one-on-one with clients are Investment Advisor Representatives (IARs).
- Certified Financial Planner (CFP): A CFP has to pass an exam to earn certification like other financial advisors, but they also must have work experience and agree to a code of ethics. Their expertise includes taxes, estate planning, insurance and retirement planning.
- Chartered Financial Analyst (CFA): These pros must take three exams (that’s a lot of studying!) and have three years of experience in their field. They focus on stock analysis for banks, mutual funds and other big institutions—not financial planning for individuals.
Financial advisors usually specialize in one of the three following areas:
- Financial planning (helping you set and reach goals)
- Asset management (helping you with your investments)
- Wealth management (helping you with your legacy)
A financial advisor can hold more than one license too. For example, a Certified Public Accountant (CPA) can also be a Certified Financial Planner (CFP). And a fiduciary is legally bound by a code of ethics to put your needs first.
Now that we’ve covered all the technical gobbledygook, remember your goal: to find a financial advisor who has the training, certification and experience your situation requires.
5 Reasons to Work With a Financial Advisor
Okay, now that you understand what a financial advisor does—and what they’re good at—you could be asking yourself, Hey—do I need a financial advisor? Great question. Let’s look at five reasons why it makes sense to work with one.
1. Financial advisors keep your investment plan on track.
How much money should you have in your retirement accounts at your age? How can you make up for lost time if it’s not enough? Should you change your investing portfolio as you get older?
While answering these questions may seem as fun as doing your taxes by hand with a dull pencil and a bad eraser, they’re pretty much first-grade math to a financial advisor.
And because they’re not like most folks—who’d rather have a root canal than do math—they'll help you keep your eyes on the prize as you save and invest for retirement. In fact, according to a recent study, those who regularly get advice from a pro have a lot more confidence about reaching their goals.1
2. Financial advisors can do more than invest your money.
Some people think a financial advisor’s only job is to invest money. While that's one of their responsibilities, it's not all they do. They can also work with you on a wide range of other financial tasks:
- Investment rebalancing: A diversified portfolio can be made up of all kinds of investments—mutual funds, bonds, cash equivalents—and at different percentages. For example, you may have 25% of your money diversified in each of the four types of mutual funds we recommend (growth, growth and income, aggressive growth, and international). As you get closer to retirement, you may want to change (rebalance) those percentages to reduce risk, protect your wealth, and maximize fund performance. Rebalancing won’t make millions of dollars of difference, but it’s still a good idea to check in on your investments’ performance and make adjustments if needed. A financial advisor can give you guidance on the best time and method.
- Tax planning: Do you know what tax laws apply to your financial situation? Or which investment will be taxed the most? A financial advisor knows which of your assets will have the most impact on your taxes, when those taxes are due, and how much you’ll owe. And if the only thing your financial advisor does is help you stay on good terms with Uncle Sam, we say they’re more than worth it.
- Estate planning: As you build wealth, you’ll have to decide where that money goes at the end of your life. Your financial advisor can team up with your estate attorney to make sure your assets are distributed according to your instructions—instead of a probate court order.
- Long-term care planning: One of the biggest expenses you may have in retirement is long-term care. If you need in-home medical care or if you have to stay in a rehab hospital while you recover from surgery, you could burn through your retirement funds more quickly than you thought you would. A financial advisor can help you make the best decisions in this area so you’re better prepared.
- Spending strategies: When you retire, which of your investments will require a minimum withdrawal every year? Which income stream should you tap first? Questions like these are critical when you actually start spending your retirement savings. A financial advisor can help you when it comes time to make these decisions.
3. Financial advisors identify blind spots.
Doctors don’t perform surgery on themselves. Dentists don’t pull their own teeth (okay, we promise that’s the last dental reference in this article). The point is, even the experts in a given field look for advice from other experts they respect. Because everybody has blind spots.
Imagine you’re driving. Ever decided to change lanes only to discover there’s another car hiding right next to you? Every car has a blind spot—a place beside the vehicle where neither your peripheral vision nor your mirror can tell you anything about the real situation. It’s the same in wealth management.
For some, emotion is a blind spot. For others, it’s misinformation. Or the fact that you don’t know what you don’t know. Blind spots can cause big mistakes (or small mistakes with big consequences) in your financial planning.
That’s one of the benefits of a financial advisor: A pro has the mountaintop view of your financial situation because they’re on the outside looking in. And they know what to look for. They’ll spot trouble you can’t see and give you advice on how to address it. They’ll keep a cool head when you’re tempted to panic, and they can give you educated advice on making wise moves with your money.
4. Financial advisors save time and reduce stress.
Think about your typical workday. If you’re crazy busy from the moment your alarm goes off until your head hits the pillow, allow us to ask you a pointed question: Do you have enough time in your schedule to put in the hours of research it takes to choose the right mutual funds or find the right balance in your portfolio?
Financial advisors are elbow-deep in this stuff all day, every day. You could spend hours looking up definitions, figuring out acronyms, and trying to decipher reports. But a financial advisor eats, sleeps and breathes investing, so they can save you time—the one resource you can never grow (better spend it wisely!).
5. Financial advisors keep your emotions in check.
Feelings are real, but they won’t always tell you the truth. When the stock market plummeted during the 2008 financial crisis, a lot of people freaked out. Why? Because a lot of people had a lot to lose. You know that when the market tanks, your portfolio takes a dive too. It’s like watching your savings evaporate—and nobody invests their hard-earned money just to lose it.
But that’s when your financial advisor can remind you that the market will go back up (because it always has). Without a financial advisor’s helpful input, your emotions might overwhelm you and lead you into stupid decisions—like pulling out all your money and hiding it under a mattress.
A good financial advisor knows that when the market dips, investments are actually on sale. They’ll strongly encourage you to leave your money alone—and to keep investing while you can buy at a lower price.
Likewise, when a stock or new investing fad is soaring, an advisor will help you keep a balanced portfolio and not turn your retirement into a Las Vegas roulette wheel.
Financial Advisor vs. Financial Coach: What’s the Difference?
It’s important to recognize that there are big differences between a financial advisor and a financial coach.
A financial coach is someone who meets with you consistently to help you identify and achieve your money goals. Think of them as a personal trainer for your finances—they help you develop better money habits.
The financial sector is heavily regulated, so while a financial coach can help you with things like your monthly budget, they aren’t allowed to give you specific investment advice or manage your assets. Only a financial advisor who’s trained and certified can do that for you.
A financial advisor can act as a financial coach and often does, but a financial coach can never act as a financial advisor—because they’re not educated and certified for that work.
Also, a financial advisor’s clients are often way different from a financial coach’s clients because they have different needs. This handy chart shows how it usually works:
| Financial Advisor | Financial Coach | |
| Main Focus | Wealth building, investment management, long-term financial planning, complex financial situations. | Near-term goals, financial education, budgeting, debt repayment, improving financial habits and mindset. |
| How They Advise You | Usually give advice about specific investments and can also manage your portfolio. | Not allowed to give specific advice about investments. |
| How They’re Regulated | Heavily regulated. Licenses through the SEC, state registration and FINRA often required. May be held to a fiduciary standard. | Less regulated. Often no specific license required. Not held to a fiduciary standard. |
| Typical Clients | Clients usually have assets and need help managing and growing them. | Clients usually need help with basic financial literacy, getting out of debt, or establishing good money habits. |
| What It’s Like Working With Them | Often long-term. Ongoing, hands-on monitoring of and adjustment to financial plans and investments. | Often short-term, with a focus on achieving specific financial goals (like the Baby Steps!) and improving financial behaviors. |
| How They’re Paid | Often fee-only (paid hourly or as a percentage of assets under management), commission-based, or a combination of these methods. | Usually paid either hourly or with flat fees for sessions. Sometimes offers payment packages tied to how their clients’ needs change as they progress. |
A financial coach focuses on your behaviors with money (and debt!). They point you in the right direction, provide encouragement and accountability, and help you establish solid habits with your money so you can succeed. In the end, you’re the one who does the work here.
A financial advisor is more hands-on, though. They do a lot of things for you, like actively managing your investments and making specific recommendations. They help you make a plan for your money, then take steps to manage what you’re invested in—as well as your legacy.
When Should I Meet With a Financial Advisor?
You probably won’t need to find a financial advisor until you’re out of debt and have a fully funded emergency fund. You’ll team up with a pro when you start building wealth through investing.
Once you begin investing, you should plan to meet with your financial advisor once or twice each year to review your portfolio and talk through your situation. It’s okay if you have questions more often than that (especially at the beginning). They’re a phone call away, and it’s their job to be available for you.
What to Consider When Choosing a Financial Advisor
There are four basic things you need to know about a financial advisor:
- What certifications do they hold? Are they a Certified Financial Planner (CFP), Certified Public Accountant (CPA) or Personal Financial Specialist (PFS)? These certifications aren’t like a prize found in a cereal box, y’all—they’re earned. Financial advisors with these credentials have a high level of expertise and ethical standards.
- How are they paid? Some compensation structures are fee-only, some are commission-based, and others are a blend of these. It should be obvious that a financial advisor who works on 100% commission is mostly interested in their own bottom line (not yours). It’s best to work with one who doesn’t have to juggle that conflict of interest.
- Are they a good fit? Find an advisor with lots of experience. Look for those who work with clients like you—and ask for references. You can also check up on their track record through Investment Adviser Public Disclosure (IAPD, a database maintained by the SEC) or through FINRA’s BrokerCheck.2,3
- What’s their communication style? If you’re one of those people with 15,000 unread emails, a financial advisor who only emails their updates probably isn’t a good fit. Your financial advisor should provide the info you need when and how you need it (most financial advisors give updates to their clients at least twice a year).
You can also ask for references, what kind of investor they prefer working with, and how long they’ve been in business. Another great question to ask is what part of the job is their favorite (and least favorite). That should tell you a lot about them.
Once you’ve chosen the financial advisor you want to work with, you’ll set a follow-up appointment. At that meeting, you’ll take a look at your current financial situation and the retirement accounts you have, like IRAs or Roth 401(k)s. If you have kids, you may talk about when or if you want to save for their college funds. Of course you’ll discuss your long-term financial goals too—and work together to create a plan for reaching them.
But your future and your legacy start with you—today. Your financial future is in your hands. And if not now, when? It’s time to get moving!
Next Steps
- Are you going to hit your retirement goals, or do you need to double-check your aim? Find out with our retirement calculator.
- If all this talk about investments and retirement is a little depressing because you still aren’t debt-free, maybe it’s time to talk to a financial coach.
- If you want a promotion from investing rookie to retirement boss, get connected with a financial advisor in our SmartVestor program today.
Make an Investment Plan With a Pro
SmartVestor shows you up to five investing professionals for free. No commitments, no hidden fees.
This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.
Get Weekly Insights Delivered Straight to Your Inbox
Did you find this article helpful? Share it!
About the author
Ramsey Solutions