What Does a Financial Advisor Do?

A financial advisor's role goes far beyond managing investment portfolios—though that's central for most. These professionals serve as your personal financial guide, helping you navigate life's major money decisions, from saving for retirement and funding education to managing debt and planning estates.

"The general public is very confused about what we do and who we serve. They are not aware of the many different service models that exist," said Stephanie McCullough, a member of Investopedia's Advisor Council and founder of Sofia Financial in Berwyn, Pennsylvania. "It’s still a common assumption that someone needs millions of dollars of investable assets in order to get the help of a financial advisor."

That's far from true, so whether you're just starting to build a portfolio or managing complex investments, understanding what a good financial advisor does can help you find the one you need.

Understanding the Role of a Financial Advisor

Everyone has financial goals: you want to be able to retire or have money to help your kids pay for college. But most of us don't have finance degrees, and even those who do often find it better to get the help of a trusted professional who has the right licenses and experience to help them meet their goals.

"Being a good advisor is about connecting with people, helping them solve their problems, and making life simpler," said Peter Lazaroff, a member of Investopedia's Advisor Council and chief investment officer at Plancorp, a Missouri-based firm. "It's not all about spreadsheets." As such, "the best advisors these days resemble therapists more than number crunchers."

Values and Portfolio Gains

As Lazaroff suggests, a financial advisor often deals with what matters most to you. Your spending and saving patterns tell a story about your values, and a skilled financial advisor helps align your money decisions with what you care about most.

A financial advisor is your guide, assistant, and educator, helping you stay on track with your financial goals. You generally start by discussing financial and investing strategies tailored to your values, life stage, and finances. Early on, that might mean focusing on budgeting and paying down your debts, but it's not like having limits on your budget won't follow you most of your life.

"Good conversations with clients will bring out the constraints they face and about their personal values," McCullough said. "These should be the guide to how to decide among the many things a dollar could do."

As your savings grow, an advisor can help you dig deeper into investment planning, tax strategies, and estate considerations. At each step, a financial advisor should be working with you to determine how much you should be putting into your portfolio, which assets (stocks, bonds, etc.) best suit your needs, and how to adjust all this as your life and career evolve.

Financial Advisor Services

Some of the confusion noted by McCullough about what financial advisors do comes from the wide range of people who claim the title, as found in the table below. Despite this, you'll likely be looking for qualified professionals who provide these core services:

• Portfolio management: Your advisor crafts an investment strategy aligned with your personal goals and comfort with risk, adjusting your portfolio mix as markets shift and your life circumstances change.
• Debt management: Whether dealing with student loans, mortgages, or credit card balances, your advisor should help you develop a clear path to financial freedom by eliminating debt over time.
• Budgeting: Rather than just creating rigid budgets, your advisor can help you with spending and savings patterns that support your desired lifestyle while keeping your long-term goals on track.
• College savings: Your advisor maps out strategies to help cover education costs, whether for your children or yourself (advanced degrees, professional development, etc.), without derailing other financial priorities.
• Retirement planning: By analyzing what you will need after retirement, along with your income, spending, and savings, your advisor should help you create and regularly update a blueprint for getting you there.
• Legacy and estate planning: Your advisor can help you develop clear plans for wealth transfer, charitable giving, and estate tax management that align with your values and wishes.
• Long-term healthcare planning: Your advisor will help you assess your current and future medical needs to recommend the insurance coverage and long-term care options that can protect your assets.
• Tax efficiency strategies: Your advisor, working alongside your tax professional, will look for ways to minimize your bill to Uncle Sam.

Signs You Need an Advisor

Some people are quite good at handling their finances and are perhaps less in need of help from a professional. But many more people could use one. Here are some signs it might be time to work with an advisor:

Your Money Isn't Growing

If your savings are sitting in low-interest accounts or you're unsure how to start investing, you're likely losing money to inflation each year. An advisor can help you develop an investment strategy that matches your goals and comfort level for risk, potentially putting you on the road to growing wealth.

Your Portfolio Needs a Professional Review

If your investments are consistently underperforming the market or you find yourself making emotional decisions with your money, an advisor can give you objective guidance that helps you restructure your portfolio with proven strategies.

Life Changes

Major transitions like marriage, starting a family, buying a house, changing careers, or approaching retirement involve complex financial decisions. An advisor can help you navigate these changes while keeping your long-term financial picture in focus.

How Financial Advisors Are Paid

Understanding how your financial advisor gets paid helps you make smarter choices about who manages your money. It also can reveal conflicts of interest that could affect their recommendations.

Fiduciary vs. Non-Fiduciary Advisors

Fiduciary advisors are legally required to put your interests first and reveal any conflicts of interest. Non-fiduciary advisors, like stockbrokers, only have to recommend "suitable" investments, which may not be the best or most cost-effective for you.

Fee-Only Advisors

These (typically fiduciary) advisors charge directly for their services through one or more of the following:

• An annual percentage of assets under management (from about 0.75% to 1.5%)
• Hourly rates ($200 to $400 on average)
• Flat fees for specific services
• Monthly or quarterly retainer fees

Fee-Based Advisors

Despite the similar name, fee-based advisors charge direct fees but also might earn commissions from selling financial products. While this model can work for some clients, it's important to understand how these commissions might influence their recommendations.

Commission-Based Advisors

These advisors earn money primarily through the financial products they sell. While their advice might cost you nothing upfront, they may steer you toward investments with higher fees or have less potential for gains, but that pay them better commissions.

Robo-Advisors

Robo-advisors offer a lower-cost alternative, typically charging 0.25% to 0.50% annually to manage your investments through computer algorithms. While they can't provide comprehensive financial planning, they're a popular option for basic investment management.

The Bottom Line

The right advisor serves as your financial partner, helping transform your goals into reality while protecting you from costly mistakes along the way.

Before hiring an advisor, do your homework. Verify their credentials through the Financial Industry Regulatory Authority's BrokerCheck and the U.S. Securities and Exchange Commission's Investment Advisor Public Disclosure database. Make sure you understand exactly how they'll be compensated and whether they're bound by a fiduciary duty to put your interests first.