Finding a trustworthy investment advisor is akin to dating. It requires time, effort and a lot of discernment. After all, developing a relationship with an investment advisor who knows your investment needs and financial goals is allowing someone to peek into an intimate part of your life. And when you choose one, this person could be in your life for years.
If you’re not looking for a human advisor, you can turn to one of the best robo-advisors to access smart investment management with a lower overall expense. Either way you go, you’ll need to spend some time vetting potential candidates and seeing how they fit your needs.
To aid you in your search, here’s a guide that walks you through various types of financial advisors, the considerations you should keep top of mind, and the resources to find them.
Investment management statistics
Because of their fiduciary duty, registered investment advisory (RIA) firms – the legal entities registered to provide investment services – are one of the largest segments in wealth management, holding $128 trillion in assets under management (AUM) in 2021, according to ThinkAdvisor.
Key industry statistics:
- Assets under management by RIAs have increased in 18 of the past 21 years.
- 93 percent assets of total assets were managed by RIAs holding over $5 billion in AUM in 2021.
- 88 percent of investment advisor representatives (IARs) – those working for investment management companies – worked in smaller firms with 50 employees or fewer.
- Among independent IARs, 88 percent held less than $5 billion in AUM.
- Almost 92 percent of assets were managed on the advisor’s discretionary decisions on behalf of their clients in 2021.
- In 2021, the number of clients working with IARs grew to a record, reaching 64.7 million.
- Combined, the 15,000 SEC-registered RIAs firms employed more than 928,000 non-clerical employees in 2021.
- In 2022, 35 percent of Americans said they work with a financial advisor, 57 percent said they handle their investments, while the rest weren’t sure.
- 25 percent of Americans say they don’t have anyone they can turn to for financial guidance.
- 60 percent of non-retirees believe they weren’t “on track” with retirement savings.
- 75 percent of American teens lack confidence in their financial knowledge.
Source: ThinkAdvisor, Annuity.org, and Statista
Whether it’s building an investment portfolio, planning for retirement, saving for college or buying a home, partnering with an investment advisor can have many benefits.
Difference between a financial advisor and an investment advisor
Although people often use the terms financial advisor and investment advisor interchangeably, there are important differences between the two.
For example, the Securities and Exchange Commission (SEC) has outlined rules for investment advisors to protect investors, including their fiduciary duties to clients. A fiduciary duty means that the advisor must take actions in a client’s best interest, such as exercising good faith, loyalty, confidentiality, prudence, and other qualities.
Whereas investment advisors must put clients’ interests first, financial advisors – which often refers to various investment professionals, such as money managers, stockbrokers and insurance agents, among others – are held to a less stringent standard.
In essence, these kinds of financial advisors can make “suitable” recommendations for clients. While those recommendations might be good, they might not be the best or the best for the client’s situation. Other key differences include fee structures, professional responsibilities, and the government bodies that regulate these two groups.
Investment advisors, for instance, often operate under fixed-fee-based models, where they charge a percentage regardless of how much you invest. The average annual fee in 2021 was 1.12 percent for $100,000 in managed assets, amounting to $1,120 annually, according to research by AdvisoryHQ. Their incentive is to grow your money, so the fees they receive increase along with it. For example, 1.12 percent of $300,000 is equivalent to $3,360 in fees.
On the other hand, financial advisors such as broker-dealers may earn commissions on products they sell to you, such as annuities or life insurance. However, other financial advisors may work under a fee-only model, receiving a per-hour fee for the work they perform.
Types of investment advisors
In addition to delivering tailored investment advice, investment advisors can wear multiple hats, providing a combination of financial planning, portfolio management, and even trading services – if they have the proper license. So, it’s essential to know what they offer and the fees involved.
Common titles for investment advisors include:
- Asset managers: By learning about your long-term financial objectives and risk tolerance, asset managers select investments such as equities, real estate, and commodities. They often provide a broad range of investments beyond stocks.
- Portfolio managers: Mainly focusing on stocks and bonds, portfolio managers specialize in areas of the market like consumer discretionary stocks, buying and selling holdings as opportunities emerge.
- Wealth managers: Catering to high-net-worth individuals and families, wealth managers have dedicated teams of financial experts covering every aspect of investment advisory services.
- Financial planners: Providing counsel on budgeting, maximizing employer benefits, saving for retirement, selecting insurance coverage, and other matters, financial planners focus on personal and financial well-being.
Regardless of their job title, the SEC regulates investment advisors with $110 million or more in assets under management, while state regulators oversee advisors with up to $100 million in assets. Advisors in between those amounts may register with the SEC but are not obligated to.
Considerations when choosing an investment advisor
When selecting an investment advisor, consider your financial needs and objectives along with their specialties and certifications.
For example, to achieve a certified financial planner (CFP) certification, financial planners must undergo extensive training and experience requirements, and pass a test. Beyond selecting investments, CFPs take a more holistic approach to managing your overall financial situation.
Other designations such as certified trust and fiduciary advisor (CTFA), chartered life underwriter (CLU), and financial risk manager (FRM) prepare financial advisors in a variety of areas.
One of the benefits of working with large investment advisory firms is that you’ll likely have access to multiple teams of professionals with diverse experience and qualifications. On the other hand, smaller investment advisory boutiques tend to offer more personalized services.
Regardless of the company’s size, due diligence is critical. From checking their fee structure to assessing their values, trust is one of the main factors in choosing an investment advisor. So don’t hesitate to seek referrals, review performance data, request a proposal, and ask questions, such as:
- What is your investment philosophy?
- Outside of a fixed rate or a percentage of assets, should I expect other fees?
- What type of clients do you primarily work with?
- How often can I expect updates on my investments?
- Beyond investing, do you provide estate and tax planning strategies?
Ultimately, you want to feel good about trusting someone with your money, so take the time to listen and learn. And don’t discount the value of periodically reviewing your investments and staying engaged. You’ll want to understand the incentives of the advisor you’re working with and what their legal duty is to you: Here’s how to choose the right advisor.
How to find an investment advisor
When looking for an investment advisor, consider organizations such as the Financial Planning Association, the National Association of Personal Financial Advisors, or the CFP Board, where you can search for candidates. These free resources let you explore advisors’ areas of expertise, certifications, minimum investment requirements, and the fees involved.
Additionally, large financial companies such as Fidelity and Charles Schwab offer wealth management services, although the minimum investment requirements are much higher.
Other companies such as Wealthfront and Betterment, which use automated investment options powered by robo-advisors, have no-minimum investment requirements. Plus, their fees are minimal compared to using a human advisor.
And for do-it-yourself investors, there are plenty of resources with free financial advice.
Growing your investments can be complex without time, knowledge or resources. By partnering with an investment advisor who looks after your financial needs, you can delegate the task to a professional and instead focus on the things that you truly love to do.