Types of Financial Advisors: How to Find One You Can Trust

Financial advisor isn’t a single, regulated job title. Anyone from an insurance salesperson to a stockbroker to a certified financial planner may call themselves a financial advisor, even though their training, legal obligations and compensation can differ dramatically. Understanding these differences can help you find advice that genuinely serves your interests.

Why the differences matter

The advice you receive can be influenced by who’s giving it, what legal standards they must follow and how they’re paid. Two advisors might recommend very different strategies for the same situation, partly because of their training and partly because of their incentives. Knowing what to look for helps you choose an advisor you can trust.

Fiduciary duty

A fiduciary is legally required to act in your best interest, putting your interests ahead of their own. This includes duties of care, meaning providing advice based on a reasonable understanding of your situation, and loyalty, meaning avoiding or disclosing conflicts of interest.

Registered investment advisers, often called RIAs, and their representatives generally owe a fiduciary duty to their clients under federal or state law. Certified Financial Planner professionals are required by the CFP Board to act as fiduciaries when providing financial advice to clients.

Brokers, also called registered representatives, are generally held to a best interest standard under the SEC’s Regulation Best Interest when making recommendations to retail customers. While this standard requires brokers to act in customers’ best interest at the time of a recommendation, it differs from an ongoing fiduciary duty in certain respects.

Some professionals are dually registered, acting as investment advisers in some roles and brokers in others, which can make their obligations confusing.

Ask any advisor, in writing, whether they act as a fiduciary at all times when working with you, not just for certain services.

How advisors are paid

Understanding how an advisor is compensated is one of the most important factors in evaluating potential conflicts of interest.

Fee-only advisors are paid only by you, the client. They may charge a flat fee for a financial plan, an hourly rate for advice, an annual retainer or a percentage of the assets they manage. Because they don’t earn commissions on products, fee-only advisors may have fewer conflicts of interest.

Commission-based advisors are paid through commissions on the financial products they sell, such as insurance policies, annuities or mutual funds. You may not pay them directly, but commissions are often built into the cost of products.

Fee-based advisors, despite the similar name, are different from fee-only advisors. They charge fees and may also earn commissions on certain products.

Commissions can create conflicts of interest, since an advisor may earn more by recommending certain products over others. That doesn’t mean every commission-based advisor gives poor advice, but it’s important to understand how your advisor benefits from their recommendations.

Asset-based fees, typically a percentage of the assets managed, are common. While they align the advisor’s compensation with the growth of your portfolio, they can become expensive as assets grow and may create incentives to keep money invested with the advisor rather than paying off debt or making other decisions.

Common credentials

Credentials can indicate an advisor’s education, expertise and ethical commitments, though they don’t guarantee quality.

CFP, or Certified Financial Planner, professionals must complete coursework covering financial planning topics, pass a comprehensive exam, meet experience requirements and adhere to ethics standards, including a fiduciary duty when providing financial advice. CFP professionals often provide comprehensive financial planning.

CFA, or Chartered Financial Analyst, charterholders complete a rigorous program focused on investment analysis, portfolio management and ethics. CFAs often work in investment management.

CPA, or Certified Public Accountant, professionals have tax and accounting expertise. Some CPAs also hold the Personal Financial Specialist credential, indicating financial planning expertise.

Other credentials include the Chartered Financial Consultant, Enrolled Agent for tax matters and various specialized designations. Some credentials require significant education and testing, while others require relatively little. FINRA’s professional designations database lets you look up what various credentials require.

Check their background

Before working with an advisor, check their background. Use FINRA BrokerCheck and the SEC’s Investment Adviser Public Disclosure website to look up an advisor’s registration, employment history, qualifications and any disciplinary history, customer complaints or regulatory actions. The CFP Board also lets you verify whether someone holds the CFP certification and see any public disciplinary history.

Request the advisor’s Form ADV, a disclosure document that registered investment advisers must provide, which describes their services, fees, conflicts of interest and disciplinary history. Brokers and advisers must also provide a Form CRS, a short relationship summary.

Questions to ask

Ask potential advisors several key questions. Are you a fiduciary at all times when working with me? How are you paid, and how much will I pay in total? What services do you provide, and what’s included in your fee? Who is your typical client, and do you have experience with situations like mine? What is your investment philosophy? How often will we communicate? Who holds my money? Reputable advisors typically use an independent custodian to hold client assets.

You may not need ongoing help

Not everyone needs an advisor managing their money on an ongoing basis. Some advisors offer one-time financial plans, hourly advice or project-based services, which can be a cost-effective option for people who want guidance on specific questions or a comprehensive plan but prefer to manage their own investments.

Robo-advisors offer automated investment management at lower cost, which can work well for straightforward investing needs. Choosing the right type of advice for your needs and budget can help you get valuable guidance without paying for services you don’t need.