What a financial advisor actually does

A financial advisor helps you make decisions about money — where to put savings, how to plan for retirement, whether to buy a house, how to pay off debt. They are not required to manage your money at all. Some advisors only answer questions when you ask them. Others take control of your accounts and make trades on your behalf. Some charge you a flat fee per hour. Others take a percentage of the money they manage for you. The type of advisor and how they're paid changes what conflicts of interest they might have.

You do not need an advisor to open a bank account, invest in a retirement plan, or buy stocks. You can do all of those things on your own through a bank or brokerage website. An advisor's job is to help you think through what to do with your money and to execute that plan — or to execute it for you if you want them to.

Key Takeaways

  • You need an advisor most when you have a large amount of money to invest, a complex situation like a business or inheritance, or you genuinely do not want to make financial decisions yourself.
  • A fiduciary advisor is legally required to put your interests first; a non-fiduciary advisor is not, so the type matters when you are paying for information.
  • Flat-fee advisors and hourly advisors have fewer conflicts of interest than advisors who take a percentage of your assets, because they do not earn more money by steering you toward bigger investments.
  • If you have less than $50,000 to invest and no complicated situation, a robo-advisor or self-directed investing through a brokerage is usually cheaper and works just as well.
  • Before you hire anyone, ask whether they are a fiduciary, how they are paid, and what they charge — and get the answer in writing.

When you probably do not need an advisor

If you have a straightforward financial life — a job, a checking account, maybe a savings account and a retirement plan through your employer — you do not need an advisor. You can open these accounts yourself, and the institutions that hold them will walk you through the basics. A 401(k) through your employer comes with educational materials and a customer service line. A brokerage like Fidelity or Vanguard will let you open an account and invest in index funds without talking to anyone.

If you have less than $50,000 to invest, an advisor is expensive relative to what you own. Most advisors charge either a percentage of your assets (often 1% per year) or a minimum flat fee ($1,000 to $3,000 per year). On $30,000, that is a meaningful chunk of your money going to fees. A robo-advisor — an automated service that builds and manages a portfolio for you based on your age and risk tolerance — typically charges 0.25% to 0.50% per year and requires no minimum balance. If you want to learn to invest yourself, a brokerage's educational resources and customer service are free.

If you are comfortable reading and making your own decisions, you do not need an advisor. Many people manage their own investments successfully by reading about index funds, asset allocation, and their own retirement plan options. The internet has free, reliable information on these topics. You can also talk to your bank or brokerage's customer service team for free when you have a specific question.

When an advisor becomes worth the cost

An advisor makes financial sense when you have a large amount of money to manage, a complicated financial situation, or you genuinely do not want to make these decisions yourself. "Large" varies by region and by advisor, but many advisors will not take on a client with less than $100,000 to $250,000 in investable assets. At that level, their fee as a percentage of your money becomes smaller relative to the value they provide.

A complicated situation means you have multiple sources of income, a business, an inheritance, rental properties, stock options, or a pension you need to coordinate with other retirement savings. You might have a spouse with different financial goals or a child with special needs. You might be close to retirement and unsure how to structure withdrawals. In these cases, an advisor's job is to think through how all the pieces fit together and make sure you are not making a costly mistake.

Some people straightforward do not want to think about money. They find it stressful or boring or they do not trust their own judgment. If that is you, an advisor can take that burden off your shoulders — but you are paying for that peace of mind, and it is worth understanding what you are paying.

The difference between a fiduciary and a non-fiduciary advisor

A fiduciary advisor is legally required to put your interests ahead of their own. If recommending a high-fee investment would make them more money but a low-fee investment would be better for you, they must recommend the low-fee investment. A non-fiduciary advisor has no such requirement. They must not lie to you or commit fraud, but they can recommend an investment that pays them a higher commission, even if a different investment would be better for you.

Most financial advisors who work for large banks or investment firms are not fiduciaries all the time. They are fiduciaries only when they are giving you information about retirement accounts like IRAs and 401(k)s. When they are advising you about regular taxable investments, they are held to a lower standard called "suitability" — the investment just has to be reasonable for you, not necessarily the best choice for you.

Independent financial advisors — people who work for themselves or for small firms — are more likely to be fiduciaries all the time. Before you hire anyone, ask them directly: "Are you a fiduciary 100% of the time, or only for certain accounts?" Get the answer in writing. If they hesitate or give a complicated answer, that is a sign to keep looking.

How advisors are paid and what that means for you

An advisor paid by the hour or by a flat annual fee has no incentive to steer you toward bigger investments or to trade more often than makes sense. You pay them the same amount whether they recommend you invest $100,000 or $500,000. This structure has the fewest conflicts of interest.

An advisor who takes a percentage of your assets under management (usually 0.5% to 1.5% per year) earns more money if your account grows or if you give them more money to manage. This creates a mild conflict of interest: they benefit from you investing more, even if you would be better off paying down debt or building an emergency fund first. However, they also benefit from your investments growing, so they have an incentive to do a good job.

An advisor who is paid by commission on the products they sell you has the strongest conflict of interest. They earn money every time they sell you a mutual fund, insurance product, or annuity. They might recommend a product that pays them 5% commission when a product that pays them 1% would be better for you. Many commission-based advisors are also not fiduciaries, which makes this structure riskier for you.

Ask any advisor you are considering: "How are you paid? Do you earn a commission on any products you recommend? What is your fee structure in writing?" Compare the total cost across a few advisors before you decide.

Questions to ask before you hire an advisor

Before you commit to working with an advisor, you should have clear answers to these questions in writing:

  • Are you a fiduciary 100% of the time? If the answer is anything other than "yes," ask them to explain when they are and are not a fiduciary.
  • How are you paid? Ask for the fee structure in writing, including any commissions, percentage of assets, or flat fees.
  • What is the total cost to me per year? Ask them to calculate this based on the amount of money you plan to give them.
  • What services do you provide? Do they manage your investments, or do they only give information? Do they help with tax planning, estate planning, or insurance? Do they meet with you once a year or whenever you call?
  • What are your credentials? Look for CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), or CPA (Certified Public Accountant). These require education and testing. Credentials like "financial consultant" or "wealth advisor" do not.
  • Do you have any disciplinary history? Check the Financial Industry Regulatory Authority (FINRA) BrokerCheck database or the SEC's Investment Adviser Public Disclosure database. Both are free and searchable by name.

Alternatives to a traditional advisor

If you want professional help but do not want to pay for a full-service advisor, you have other options. A robo-advisor like Betterment or Vanguard Personal Advisor Services builds and manages a portfolio for you based on a questionnaire about your age, goals, and risk tolerance. It costs much less than a human advisor (usually 0.25% to 0.50% per year) and works well for straightforward situations. Some robo-advisors also offer access to a human advisor by phone or email if you have questions.

A fee-only financial planner charges you a flat fee or hourly rate to create a financial plan — a document that lays out your goals, your current situation, and what you should do with your money. You then execute the plan yourself or take it to another advisor. This is cheaper than ongoing management if you only need information once or twice.

Your bank or brokerage's customer service team can answer basic questions for free. If you have a specific question about how to invest a lump sum or how to structure your retirement withdrawals, calling them costs nothing.

Frequently Asked Questions

Do I need an advisor if I have a 401(k) through my job?

No. Your employer's 401(k) plan comes with educational materials and a customer service line. You can choose your investments yourself by reading the fund descriptions in your plan. If you want help, many plans offer free consultations with a financial advisor. You do not need to hire your own advisor for this.

What if I inherit money or get a large bonus?

This is one situation where an advisor can be worth the cost, especially if the amount is large. An advisor can help you think through whether to invest it, pay off debt, or split it between both. They can also help you understand the tax consequences. You could also talk to a fee-only planner for a one-time consultation instead of hiring someone ongoing.

How do I know if an advisor is trustworthy?

Check their disciplinary history in FINRA BrokerCheck or the SEC database. Ask whether they are a fiduciary and get it in writing. Ask for references from other clients. Meet with them in person or by video before you give them any money. If something feels off, trust that feeling and keep looking.

Can I fire an advisor if I am not happy?

Yes. You can move your money to a different advisor or manage it yourself at any time. There is no penalty for leaving. Read your advisory agreement to see if there is a notice period (usually 30 days), but you are not locked in.

What is the difference between a financial advisor and a financial planner?

The terms are often used interchangeably, but a financial planner typically creates a comprehensive plan covering your whole financial life, while an advisor might focus on investing. A CFP (Certified Financial Planner) has passed specific education and testing. Not all advisors are planners, and not all planners are advisors.