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Surveys consistently show that the financial literacy of most Americans leaves a lot to be desired. It's hard to blame them, however, when members of the financial industry often can't agree even on what to call themselves.
Advisors have their work cut out for them, a recent MagnifyMoney poll found:
- 42 percent of respondents believe advisors are only for wealthy people.
- 38 percent believe the same information can be found online.
- One in four said they don't need a financial advisor until they are middle-aged.
- Half of respondents without a paid financial advisor believe they cost more than they actually do.
So what is a financial advisor? U.S. Securities and Exchange Commission rules state that any financial professional or firm that engages in the business of providing advice to others or issuing securities reports or analysis for compensation is technically an "investment advisor" and must register with either the SEC or their state, depending on the advisor's assets under management.
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But other titles and forms of advice are largely unregulated, and that puts the responsibility on the investor to know what to look for.
NerdWallet has helped clear the air by looking at the most common types of financial advisors and what they do.
Investment advisors. An investment advisor is a person or company who is paid for providing investment advice to clients. Investment advisors also can manage client assets directly.
Broker-dealers and brokers. A broker-dealer is an individual or company that buys and sells securities such as stocks, bonds and mutual funds. Broker-dealers can buy and sell on behalf of clients (in which case they're acting as a broker), for their own account (as a dealer), or both.
Certified financial planner. Financial advisors who are CFPs have met the rigorous training and experience requirements of the CFP Board, have passed the certification exam and are held to high ethical standards. CFPs have a fiduciary duty to their clients. Financial planners can offer services that don't require regulation, such as guidance on how to pay down debt, plan for retirement or create a budget, but some also are investment advisors.
Financial consultant. Financial consultant is a general term that can be used by anyone, but some financial consultants hold a designation called a chartered financial consultant, or ChFC. Chartered financial consultants have completed similar education requirements to CFPs. ChFCs have a fiduciary duty and must adhere to the American College's code of ethics.
Financial coach. Financial coaches often are the most beginner-friendly financial professionals. They focus on the basics of financial literacy, such as how to save money or reduce spending. Financial coaches can help their clients build wealth that an investment advisor may help them manage in the future.
Portfolio, investment and asset managers. Whether the business card says asset manager, investment manager or portfolio manager, these professionals do exactly what it sounds like: They manage client investment portfolios. A portfolio manager or investment manager may deal strictly with a client's investment portfolio, but they might offer other financial planning services too.
Wealth advisors. Wealth managers and wealth advisors typically work with very wealthy clients and offer holistic financial planning services as well as investment guidance. Wealth managers and advisors often can help their clients with every area of their financial life, including services such as estate planning, taxes, charitable giving and even insurance. Most wealth advisors have a minimum investment in the millions.
Robo-advisor. A robo-advisor is an inexpensive automated investment management service. Robo-advisors use computer algorithms to create and manage an investment portfolio for as little as 0.25 percent of the client's account balance per year. If someone just wants help managing investments, a robo-advisor might be the right option.
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Alan Goforth
Alan Goforth is a freelance writer in suburban Kansas City. In addition to freelancing for several publications, he has written a dozen books about sports and other topics.
