What is a financial advisor (do I even need one?)

What is a financial advisor (do I even need one?)

What is a financial advisor (do I even need one?)

We asked a former financial advisor. His short answer: Probably not.

What is a financial advisor (do I even need one?)

    A quick disclaimer, before we begin: I spent more than eight years in the financial services industry as both a licensed financial advisor (FINRA Series 7, 24, 27, and 66) as well as a licensed investment advisor representative. I also sat on the FINRA Small Firm Advisory Board. I left the industry in part because I do not believe that it serves clients. I believe that most firms and advisors, by their very nature, have conflicts with their clients because their incomes are based on commissions and advisory fees that their clients pay. An advisor’s goal is to sell their services—not to benefit their clients.

    Now that that’s out of the way…

    A financial advisor is a possibly-licensed professional with a little bit of knowledge about investments and a lot of knowledge about getting you to trust them. An advisor will tell you that their job is to help give you guidance and make the right decisions for your financial future. In reality, their job is to turn you into a client—that’s it.

    So, do you need a financial advisor? Except for certain circumstances, probably not.

    Come to think of it, the very fact that you’re reading this article suggests that you’re already far more aware of your financial situation than an advisor is ever going to be. So, the only thing left for you to do is to spend some time studying different investments and identifying those that suit your needs and risk tolerance.

    Granted, this can be a bit time consuming; but can save you literally tens of thousands of dollars in the long run.

    (Just in case you think I’m being hyperbolic, a 0.5% management fee—very reasonable—on just a $100,000 account equals $500 per year. Over 20 years, that’s $10,000 in management fees on just a $100,000 account. I told you it’s a scam.)

    In actuality, there are maybe four situations in which an advisor can actually be helpful. We’ll get to those later.

    Financial Advisor Description

    OK, so if we’re going to talk about financial advisors, first we should define who exactly we’re talking about and what “services” they offer—if you can call them that. We should also probably talk about how they get paid since that actually plays an important part in how advisors are defined and also how they’re regulated.

    How advisors get paid

    Understanding how advisors get paid is actually the key to understanding how the entire retail investment industry works. Why? Because everything about the industry—which regulators oversee an advisor, what licenses advisors have, the products they offer, everything—is based on how they get paid.

    Here are just a few of the ways that different types of financial advisors make money:

    Commissions, advisory fees, subscription fees, account service fees, and other potential charges—sometimes even hourly (yes, really; and no, I have no idea why).

    There are also trading charges, front end loads, back end loads, wrap fees, and 12b-1 fees.

    And plenty of others that I missed.

    No matter the fee, it’s important to know that it’s always the client’s money that is covering those charges.

    Every dollar that goes towards the fees listed above came out of a client’s account for some service or as part of an “administrative fee” or a “fund expense ratio.” Every dime of a firm’s or an advisor’s income used to be a client’s dime.

    Financial Advisor Requirements

    Licenses are everywhere in the investment industry. Some of the most common include Series 4, 6, 7, 63, 65, and 66. All of these are tests that advisors take to demonstrate knowledge of certain areas of the securities industry. The Series 4 exam, for example, is about options trading. The Series 65 exam is for brokers who want to work as registered investment advisors, which have a different fee structure.

    Of the licenses, Series 7 is the most common. Brokers who pass it can sell stocks, bonds, mutual funds, ETFs—basically all the most common investment products. And, they can collect commissions for doing it. In fact, that’s basically why they take the exam in the first place—so they can collect a fee for making a sale.

    You see, anyone can “sell” you an investment or recommend something to you without a license at all—they just can’t get paid for it.

    For example, I can tell you right now that, if you’re under 35 and make over $60,000 per year, I think you should pick up a few shares of Ford. But I’m not getting paid a commission if you buy it and I’m not charging an advisory fee.

    If I DID have licenses, I’d probably never be able to write in an article that I think readers should buy those shares. Why? Because everything I said or wrote would have to be approved by a firm’s compliance department to make sure I wasn’t providing actual guidance that people might rely on.

    (Reasons #2 that I left the industry.)

    (Oh, and by the way, I do own shares of Ford, just to be transparent.)

    Who governs advisors?

    So, we’ve established that advisors charge all kinds of fees and they carry all sorts of licenses so that they’re ALLOWED to charge those fees. But, who oversees advisors and firms and corrects them if they step out of line?

    In addition to all of their licenses, advisors and firms are also registered with regulators that oversee their activities and conduct regular examinations of their practices. These include FINRA, the SEC, the MSRB (Municipal Securities Rulemaking Board—basically the regulator for muni bonds), and others.

    Many of the licenses that advisors hold are actually issued by regulators—mostly by FINRA. Note: These are different from certifications, which we’ll talk about later.

    On top of the national regulators, there are also individual states in the mix. States oversee investment advisory firms that manage under $100 million (that’s for a whole firm, not just a single advisor). They also regulate all life insurance companies that do business in their state, including any advisors who have life and health licenses.

    To give you an example, let’s consider an advisor who regularly sells investments that he earns commissions on. He also charges investment advisory fees for helping choose the right investments for individual clients. And, he sells a little bit of life insurance. Who regulates this young tycoon? Answer: FINRA, the SEC, the state where his business is based, as well as any states where any of his clients reside.

    What is fiduciary duty?

    This is an important thing to mention because it helps to define an advisor. A fiduciary duty is a standard of care that every financial advisor in the United States owes to his or her clients.

    Whether they’re a financial advisor or an investment advisor, every advisor is legally required to act in their clients’ best interest, period. Any advisor who tries to tell you differently is either lying, uninformed, or trying to specifically structure their practice to skirt very important regulations (read: not someone you want to do business with).

    But, in spite of this requirement, most advisors don’t really act in their clients’ best interest. They can’t, simply because of the way they operate and their compensation structure.

    What advisors are good for

    So, all that said, what are advisors good for?


    OK, but seriously.


    In truth, there’s literally nothing that a financial advisor can do for you that you can’t do for yourself if you’re willing to commit the time and energy to learn.

    via GIPHY

    When an advisor is helpful

    There are maybe four cases in which a financial advisor can be helpful and you should really consider using one:

    1. You’re lazy
    2. You make too much money in your job to worry about managing your savings
    3. Someone else in your family made so much money that you don’t need to worry about managing your savings
    4. You or a family member are incompetent and need someone to babysit your money

    So, if you have a family business that’s transferring between generations and the business is big enough that it supports you, your siblings, your aunts, uncles, cousins, cousins’ ex-spouses, and a bunch of deadbeat hangers-on, then, by all means, let an advisor do the heavy lifting.

    Or, if you have an elderly family member who will need full-time help if something happens to you, talk to an advisor about structuring a trust or buying some long-term care insurance.

    Otherwise, you can probably take better care of your money than an advisor can.

    Certifications to look for when working with a financial advisor

    If you still feel like you need help and you’re going to interview advisors, there are some who go above and beyond normal licensing and get certified to demonstrate particular knowledge in certain areas. These people take classes and sit for exams so they can have strings of letters after their names like CFA, CFP, CAIA, and others. Some are even CPAs (accountants).

    There are a few things to know when it comes to certifications.

    First, you shouldn’t be impressed. Certifications don’t demonstrate an ability to make money—only to take a test and pay an annual fee.

    Second, these certifications have meaning. You should take the time to learn them before working with an advisor who has one. That’s not to say you should know them all before you interview advisors; but if you’re thinking about using an advisor and they have a certification, research the cert to get a better understanding of your potential advisor’s knowledge base.

    Also, ask them why they got the cert(s) they did. That will tell you a lot about where their priorities lie.

    Alternatives to using a financial advisor

    If you’re reading this and thinking that maybe an advisor isn’t right for you, there are plenty of other routes you can go. For example, you can always invest for yourself. Or, you can invest in other assets like real estate. Or, you can use robo-advisors.

    You can even bury money in the backyard in coffee cans. It’ll still be cheaper than paying an advisor’s fees, and you’ll get the coffee.

    Seriously, though.

    If you’re reading this, just keep doing what you’re doing. You’re clearly conscientious with your finances and taking the time to learn and grow. If you feel overwhelmed and want help, then, by all means, interview a few advisors. Ask your friends for referrals and talk to the ones they recommend—initial consultations are usually free, anyway.

    (Or, you can always jump in the comments below. We’d be happy to hear from you and even happier to help, if we can.)

    After speaking with some professionals, you may even decide to use one or more to help with part of your portfolio.

    But first, please, please, please, please, please, please, PLEASE ask your advisor probing questions.

    Every advisor has a schtick, and it always plays to their strengths—which is also typically what makes them the most money. Don’t find yourself buying whatever it is they’re selling just because it seemed like a good idea at the time.

    Instead, ask them about their other offerings. Ask them what types of assets they would recommend for someone your age, with your net worth and your income. Ask why. Ask hypotheticals. If you have trouble thinking of some, use these:

    • “If I were to get laid off tomorrow, what moves would I need to make immediately and how much would it cost me?”
    • What types of investments are you recommending that investors purchase with a 5- or 10-year investment horizon and why?”
    • “How did you guide your clients through the coronavirus pandemic?” (If they tell you they moved them to cash, think seriously about whether you want to work with an advisor who lets their clients lose 40% to 50% of their money and then takes them OUT of the market.)

    When you talk to advisors, it’s your job to ask them questions so you can understand their approach, their thinking, and how they may be able to help you.

    So, if you think you need an advisor, by all means, talk to some, but do it intelligently. Be slow; be methodical. Don’t buy the first thing they try to sell you. Look for ways that what they do can benefit YOU—areas of your portfolio that are lacking where they might actually be able to help.

    If you want or need an advisor to help give you peace of mind, then, by all means, hire one. But, if you think that advisors have some wealth of knowledge that allows them to make all the right moves, think again. There is no secret sauce. There is no magician behind the curtain. There are also no right answers. There’s just you, your money, and your life. You have to find the path that’s right for you, whether it’s with an advisor or not.

    Still not sure if you can do it alone? Let us know what you were hoping to gain from working with a financial advisor in the comments.

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    Dock David Treece

    27 posts

    Dock is a former financial advisor and an experienced real estate investor who loves helping people find ways to build and conserve wealth. He has been featured by CNBC, Fox Business, and Bloomberg.