A financial advisor helps you make decisions about money, investments, insurance, and retirement — but the type of advisor and how they're paid changes what they can recommend to you
A financial advisor is someone licensed to give you guidance on managing your money. They might help you build an investment portfolio, plan for retirement, buy insurance, save for education, or organize your overall financial life. What matters most is understanding how they make money, because that structure shapes what they can and cannot recommend.
The title "financial advisor" is not legally protected, so anyone can use it. What matters is whether they hold a license — and what that license requires them to do. A registered investment advisor, a broker-dealer, a certified financial planner, and an insurance agent all do different things and follow different rules.
Key Takeaways
- Financial advisors are paid either by commission (a percentage of what you buy), by fee (hourly, flat, or a percentage of assets they manage), or by a combination of both.
- A fiduciary advisor is legally required to put your interests first; a non-fiduciary advisor only has to recommend products that are suitable for you, which is a weaker standard.
- Registered Investment Advisors (RIAs) and Certified Financial Planners (CFPs) are held to fiduciary standards; brokers and insurance agents typically are not, except in specific situations.
- The same person can wear multiple hats — for example, a broker who also holds an RIA license — so you need to know which hat they're wearing when they make a recommendation.
- You can ask an advisor directly how they are paid, what licenses they hold, and whether they are a fiduciary in writing, and you should get a clear answer before you hand over money.
How financial advisors are paid
An advisor's payment structure determines what products they can recommend without a conflict of interest. There are three main models: commission-based, fee-based, and fee-only.
Commission-based advisors earn money when you buy or sell an investment product. If you buy a mutual fund, they get a percentage of that purchase. If you buy an insurance policy, they get a commission from the insurance company. The higher the commission, the more incentive they have to recommend that product over another one. This does not mean the recommendation is wrong, but it does mean there is a financial reason they suggested it.
Fee-only advisors charge you directly — either an hourly rate, a flat fee per project, or a percentage of the assets they manage for you (called AUM, or assets under management). They do not earn commissions on products you buy. This structure removes the incentive to recommend one product over another based on payout, though it creates a different incentive: advisors who charge a percentage of assets have a reason to encourage you to invest more money with them.
Fee-based advisors use both models — they charge you a fee and also earn commissions on some products. This is common and not inherently a problem, but you need to know which products earn them a commission and which do not.
Fiduciary versus non-fiduciary advisors
The legal standard an advisor must follow depends on their license type. A fiduciary is legally required to put your interests ahead of their own. A non-fiduciary only has to recommend products that are "suitable" for you — a much lower bar.
Registered Investment Advisors (RIAs) and Certified Financial Planners (CFPs) are fiduciaries when they give information about investments. Brokers and insurance agents are typically not fiduciaries, though they must follow suitability rules. A broker can recommend a product that is suitable for you even if a different product would be better for you and would earn them less money.
Some brokers and insurance agents do become fiduciaries in specific situations — for example, when managing a retirement account like an IRA or 401(k). But outside those situations, they are not held to that standard. This is why you need to ask directly: "Are you a fiduciary in this recommendation?" Get the answer in writing.
Types of financial advisors and their licenses
Different licenses allow advisors to do different things. Here are the main types you will encounter:
Registered Investment Advisors (RIAs) are registered with the Securities and Exchange Commission (SEC) or their state and are held to a fiduciary standard. They can give investment information and manage money. They typically charge fees rather than commissions, though some charge both.
Certified Financial Planners (CFPs) have passed a rigorous exam and follow a code of ethics that requires them to act as fiduciaries. They can help with comprehensive financial planning — investments, retirement, insurance, taxes, and estate planning. CFP is a credential, not a license type, so a CFP might also be an RIA or work at a brokerage firm.
Brokers and broker-dealers are licensed to buy and sell securities (stocks, bonds, mutual funds) on your behalf. They are not required to be fiduciaries unless they are also registered as investment advisors. Many brokers work for large firms like Fidelity, Vanguard, or Charles Schwab and earn commissions on trades and products they sell.
Insurance agents are licensed to sell insurance products — life, health, disability, long-term care. They earn commissions from insurance companies. They are not required to be fiduciaries unless they are also registered as investment advisors or are managing retirement accounts.
Robo-advisors are automated investment platforms that build and manage a portfolio for you based on your goals and risk tolerance. They charge a fee (usually 0.25% to 0.50% of assets per year) and are typically registered as investment advisors, so they are held to a fiduciary standard. They do not offer personalized financial planning.
What advisors can and cannot do
A financial advisor can give you guidance, but they cannot make decisions for you. They also cannot do certain things without specific licenses.
An advisor can recommend that you open a retirement account, but they cannot set up the account itself — you do that with the bank or brokerage firm. They can suggest an investment strategy, but you execute the trades. They can explain how tax-loss harvesting works, but they cannot prepare your tax return unless they are also a tax professional.
An advisor cannot may provide returns. Anyone who promises a specific investment return is breaking the law. They also cannot tell you to move money out of a retirement account to avoid taxes without explaining the tax consequences — and if they do, they are not acting as a fiduciary.
An advisor cannot give you legal information about wills, trusts, or estate planning unless they are also a lawyer. They can recommend that you work with an estate attorney, but they cannot draft documents or tell you what your will should say.
How to check an advisor's background and licenses
Before you work with an advisor, verify their licenses and check for complaints or disciplinary history. The SEC and the Financial Industry Regulatory Authority (FINRA) maintain public databases.
For Registered Investment Advisors, search the SEC's Investment Adviser Public Disclosure database at adviserinfo.sec.gov. This shows you their registration status, what they charge, and any disciplinary actions.
For brokers and broker-dealers, search FINRA's BrokerCheck at brokercheck.finra.org. This database shows licenses, employment history, and any complaints or disciplinary actions filed against them.
For Certified Financial Planners, verify the credential at the CFP Board's website at cfp.net. You can search by name to confirm they hold the certification and whether any disciplinary actions have been taken.
For insurance agents, search your state's Department of Insurance website. Each state maintains a registry of licensed agents and any complaints against them.
Questions to ask before hiring an advisor
Before you commit to working with an advisor, ask these questions in writing and keep the answers:
How are you paid? Ask them to explain their fee structure in detail. If they earn commissions, ask which products pay commissions and how much. If they charge a percentage of assets, ask what that percentage is and whether it decreases as your account grows.
Are you a fiduciary? Ask whether they are a fiduciary in all recommendations or only in specific situations (like retirement accounts). Get this in writing.
What licenses do you hold? Ask them to list every license and credential. Verify each one using the databases above.
Do you have any disciplinary history? Ask directly, then verify using the databases. If they have a history, ask them to explain what happened.
Who do I contact if I have a complaint? Ask what the complaint process is and whether they are registered with FINRA, the SEC, or your state regulator.
Frequently Asked Questions
Is a financial advisor the same as a financial planner?
Not exactly. A financial planner typically creates a comprehensive plan covering investments, retirement, insurance, taxes, and estate planning. A financial advisor might focus on just one area, like investments or insurance. A Certified Financial Planner (CFP) is a specific credential that requires passing an exam and following a code of ethics. Not all financial advisors are planners, and not all planners hold the CFP credential.
Can I use a financial advisor if I don't have much money to invest?
It depends on the advisor's minimum. Some advisors require $100,000 or more in assets before they will work with you. Others charge hourly fees and will work with anyone. Robo-advisors typically have no minimum or a very low one ($500 or less). Ask about minimums before you meet with an advisor.
What should I do if an advisor recommends something I don't understand?
Ask them to explain it again in simpler terms. If they cannot or will not, that is a red flag. A good advisor can explain any recommendation in language you understand. You should never invest in something you do not understand, and a fiduciary advisor should not recommend it.
Can I have more than one financial advisor?
Yes, and many people do. You might have a fee-only planner who creates your overall strategy and a broker who executes trades. You might have an insurance agent and an investment advisor. Just make sure each one knows about the others so they do not duplicate work or recommend conflicting strategies.
What happens if an advisor breaks the law or acts unethically?
You can file a complaint with the SEC (for RIAs), FINRA (for brokers), your state insurance department (for insurance agents), or the CFP Board (for CFPs). You can also sue an advisor for breach of fiduciary duty or fraud. Keep all written communications and account statements as evidence.