If you've ever been confused about what a financial advisor does, you're not alone. We'll explore the different roles and responsibilities of financial advisors and clear up any confusion to help you understand exactly how hiring a financial advisor can help you.

Many people have the misconception that the only way they’re going to be able to buy a home, splurge on luxuries like a boat, pay for their children’s college or achieve anything beyond their current financial means is by going out and investing on their own, starting a business or just getting lucky and striking it rich. However, with the guidance of a financial advisor, these aspirations can actually be attainable even if you’re not extremely wealthy. If you're looking to achieve financial success and, most importantly, reach your long-term goals, enlisting the help of an expert financial advisor can be a game changer. 

But with so many different titles and roles in the financial industry, it's natural to wonder what exactly a financial advisor does – are they a stockbroker, insurance salesperson, tax advisor or estate planner? The truth is, they can be all of these things and more! We'll explore how a financial advisor can help you stay on track, achieve your goals and even set new aspirations, no matter which of their many roles they’re filling.

“There are so many misconceptions about financial advisors,” says Leonard Kim of AdvisorCheck. Many people think that they are out here just selling stocks to illegitimate companies or are pushers of mutual funds. However, their roles have evolved so much over the years. Now, many advisors are held by a fiduciary standard and do take the time to look out for their client’s best interest. They will go out of their way to maximize the potential returns that one could earn from the market, all while minimizing their tax liabilities. These strategies ultimately help many people not only reach their retirement goals quicker, but also help people manage and oversee their current budgets, stick to a plan, achieve other financial milestones that they have set forth for themselves and help families navigate through the most significant life transitions that could completely change the course of their lives,” Leonard continued. 

History of Financial Advisors and How They Developed

Let’s start with a little bit of the history of how the category of “financial advisor” developed to give some context on how they got where they are today.

Are Financial Advisors Stockbrokers? Short Answer: They Used to Be!

Originally, financial advisors were stockbrokers – the genesis of the industry was through stock brokerage. If you think of the 1980s movie Wall Street with Charlie Sheen and Michael Douglas, it wasn’t dissimilar to that (although certainly less theatrical most of the time!). Financial advisors would get their Series 7 license and then help people buy and sell stocks and bonds, and overall, their relationship with their clients was pretty much entirely transactional. 

Today this role is equivalent to that of registered representatives (RRs), who have a Series 7 license and do not have a fiduciary responsibility; their only vested interest is in the suitability of the stock they are recommending. You could sum this up as, for example, “I’m recommending you buy AT&T stock at a lower price than it’s been historically because it is suitable for you.” Note that the issue of suitability is distinct from whether or not purchasing a certain stock is actually in your best interest. Stockbrokers are paid on commission, and whether the market is up/down and whether their clients buy/sell, they will make their commission. 

Moving Away From Suitability Alone to Considering Clients’ Best Interests (IARs)

As the industry evolved, however, financial advisors moved away from that RR category and toward becoming investment advisor representatives (IARs) instead. Becoming an IAR requires different licensing: Series 66 or Series 65, which allow you to provide financial advice, a service that’s quite different and much more holistic and wide-ranging than simply stock picking. This shift even had the effect of changing the title of the job itself from “stockbroker” to “investment advisor.” 

Because the industry always takes time to change, there was still a pervasive double licensing situation where advisors were both RRs (selling on commission) and IARs (providing investment advice). This means that advisors could wear different hats depending on what their clients needed. An IAR has the responsibility of being a fiduciary, which means they’re obligated to consider their clients’ best interests, rather than just the question of what’s suitable for their clients to buy. (For instance, buying and selling stocks on a daily basis probably isn’t in the average person’s best financial interest, but it is in an RR’s best interest because they will make a commission on every purchase/sale.)

Shifting to Planning as an Industry Standard (CFPs)

In the 1990s, the industry introduced the concept of the certified financial planner (CFP), and as the name suggests, these professionals were focused on the issue of long-term planning. The question they asked was not only “How do we buy/sell/manage clients’ investments?” but also “How do we plan for clients’ futures?” This orientation came with a greater focus on the larger purpose of planning for clients’ real-life goals, such as:

• Working toward retirement (e.g., retiring at 55 instead of 65)
• Funding their kids’ education
• Buying a second home
• Caring for elderly parents

Once financial planners had established clients’ realistic goals, their comfort with risk and their expected timeline, they could help clients invest their money the way it should be invested. 

At this point, focusing on financial planning became the industry standard. As a result, the relationship between advisors and clients shifted from a short-term, high-cost transactional relationship to a much longer-term personal relationship focused primarily on planning (more on this in the next section). 

So What Does a Financial Advisor Provide?

Planning Advice is the #1 Value You Get From Working with an Advisor

These days, now that the relationship between advisors and clients has shifted away from the purely transactional one of stockbrokers/RRs, planning is the primary value you get from working with a financial advisor. 

Keep in mind that the umbrella of planning is pretty broad. It’s not just about making plans for decades in the future, it’s about planning for even the upcoming year (e.g., responding to tax changes or contribution limit changes this year). You want a financial advisor that gets you to think about the following question and provides a plan for you integrate into it into your life: “How do I make those changes for this year which help maximize my future value for 20, 30 years from now, when I’m going to retire?”

The truly forward-thinking members of the financial advising industry are pure financial planners. But the challenge in the industry is that, although their greatest value to clients is financial planning, this doesn’t line up with how advisors are paid – they are paid on managing assets or through transactions. This misnomer is why a lot of people think that they are paying their financial advisors to manage their money, because although that’s how advisors get paid, their real value is on the financial planning side. 

For example, if your goal is to retire at 55 instead of 65, there’s a great deal of planning (i.e., saving, investment, meetings and budgeting) involved in getting to that point. This planning is where a financial planner/advisor really shines, and where you’re going to derive the most value from working with an advisor in the long term.

Many people who are in debt may think that a financial advisor may not be of use to them, because they have to overcome their debt challenges before they could become forward thinking, however that is not the case. A financial advisor will also be able to help you look at your debt and figure out ways to tackle it down so that you can live debt free as well, then move onto the longevity of your capital through retirement planning. So if you think you can’t meet with a financial advisor because you have nothing to invest as of yet, do not let that hold you back from meeting a financial advisor, who can actually help create a plan for you to get out of an overwhelming financial situation you could currently be facing today. 

Financial Advisors Provide Service

Your financial advisor can’t help you gain access to investments that you wouldn’t be able to access on your own. There are certain investments that are harder to get into (e.g., institutional investments, alternative investments), but especially if you are a high net worth individual, you can access most of them yourself. So what you’re actually paying for is not the direct access to certain investments, but rather service. (That’s why it’s called “financial services”!) 

You may very well be smart enough to do lots of research on your own and successfully figure out how to establish good asset allocation, how to rebalance, and even how to create your own financial plan and stay on top of it. The issue is that doing those things is really hard! It takes time and effort, you have to keep your knowledge up to date and you have to make sure you understand laws and how they change (especially on the tax and estate side). When you hire a financial advisor, you’re paying to offload all that time and effort onto a full-time expert who has the training and knowledge to consistently stay up to date.

Are Financial Advisors…Tax Advisors or Estate Planners?

Although they can technically also hold these roles, a financial advisor is not usually also an attorney or a tax professional. However, they often have knowledge of laws and taxes, and will help coordinate with these other professionals to help you and your family adhere to your overall financial plan. 

There are so many moving parts to being an investor in the U.S. that you may not even account for the issues of taxes, estate planning and laws, as you’re probably already so focused on your investments’ performance. The issue of how taxes come into play here is hugely complex and can get really confusing for the average person. 

For example, let’s say you’re choosing between investing in two funds, one with 8 percent returns and one with 9 percent returns. You might choose to go straight for the one with 9 percent returns, for obvious reasons. But what you might not have considered is that the 8 percent fund could have a tax advantage that takes it to a 9.5 percent return after taxes or more – higher than the fund with 9 percent returns. 

An advisor also keeps up with all the latest changes in tax law to help also take you through inevitable major changes not only in your own life but in the larger legal/tax systems. Consider that every year, tax laws change. When a new president is placed into office every four years, we can expect tax laws to change significantly as well. In this case, a financial advisor would be able to help you respond strategically to these new tax laws, as well as giving a sense of what the impact would be on your financial plan. Perhaps you can retire even earlier, or maybe you’ll end up having to make some changes to stay on track with your plan’s timeline. This is yet another case when a planner’s expertise and the potentially long-term relationship you establish with your advisor are so valuable.

Are Financial Advisors…Insurance Salespeople?

While many financial advisors “wear multiple hats” (including selling insurance policies), not all financial advisors are insurance salespeople. Life insurance and other insurance policies can be an important component of a strong financial plan to some individuals but may not be helpful to others. Because insurances are offered on a case-by-case basis based on one’s own financial situation, some financial advisors choose to take on the role of insurance salespeople in addition to providing other financial services (like those described above). These advisors might offer a range of insurance products (e.g., life insurance, disability insurance and long-term care insurance) to help their clients protect themselves and their families from financial risks. 

Not all financial advisors choose to sell insurance, as their expertise and focus may lie elsewhere in the financial field, such as investment management or retirement planning. Whatever their area(s) of expertise, though, a good advisor will be able to help you choose insurance products that make sense for you among the numerous options that are available. No one knows everything – sometimes your advisor might have to research what’s suitable for your situation. But that’s exactly what you’re paying them for: to understand and, if necessary, research the complexities of insurance, tax law and more so they can make truly high-quality recommendations in your best interest.

Use AdvisorCheck to Streamline Your Search for a Skilled and Reliable Financial Advisor

Now that you understand what financial advisors actually do and how working with these professionals can benefit you, you might be interested in hiring an advisor for yourself. But finding the right advisor can be a daunting task. That's where AdvisorCheck comes in – it’s a free tool that can significantly streamline the process of finding a financial advisor by providing access to information about potential advisors that you might not have known existed. 

AdvisorCheck grants you access to a database of over one million registered representatives (RRs) and investment advisor representatives (IARs), and because you can search by location, it’s an effective tool to search for financial advisors in your area. You can also use AdvisorCheck to research advisors you might already be considering hiring to ensure that they are trustworthy and that their record is free from any serious disclosures. (If you’re unsure, here are some reasons not to hire a financial advisor (and three reasons why you should) to be aware of while browsing prospective hires.) 

The information provided by AdvisorCheck comes from a wide range of high-quality sources, ensuring that you receive the most complete background checks possible. The tool also provides additional functions that make it helpful at all stages of working with a financial advisor. Not only can you save listings to your "Saved" page, allowing you to easily keep track of potential hires, you can also compare up to three advisors, side by side, to see what the differences in each advisor is, to cut down the time it takes to research your advisors by around 80%, if not more. Not only that, you can sign up to be alerted when events like disclosures or bankruptcy are added to your advisor's record. 

There’s no question that choosing to hire a certain financial advisor is always a high-stakes decision, as they will be responsible for handling your money and advising you on financial matters. But with AdvisorCheck, you have the necessary tools to avoid the mistakes that people most often make when seeking a financial advisor. AdvisorCheck can help you ensure that you've selected an honest, reliable advisor to manage your finances, direct your investments, plan realistically for both the short- and long-term and ultimately help you attain your financial goals.

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Written by Billy Quirk

Fact checked by Luke Jara

Reviewed by KJ Kim

Disclosure

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

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