Types of Financial Advisors: What to Know Before Hiring One
Searching for a financial advisor can be surprisingly confusing. Insurance agents, bank advisors, brokers, investment advisers, and CFP® professionals may all use similar language to describe what they do, even though their services, compensation, licenses, and responsibilities can be very different.
That doesn't necessarily make one type of advisor good and another bad. It does mean you should understand who you're hiring, what they're qualified to do, how they're compensated, and what standard applies to the advice they provide.
In this video, I walk through four common types of financial advisors, explain how their business models differ, discuss Regulation Best Interest and the fiduciary standard, and offer several questions worth asking before you hire anyone to help manage your financial life.
Watch: Know This Before Meeting With a Financial Advisor
Financial advisors can work under very different business models, compensation structures, and standards of responsibility. In this video, I break down the major types of financial advisors, how they get paid, the difference between brokerage and fiduciary relationships, and several questions to ask before hiring someone to help manage your financial life.
Watch the video and related financial planning videos on YouTube
Why the Title "Financial Advisor" Doesn't Tell You Very Much
Imagine you needed to hire a doctor. You probably wouldn't choose someone simply because their website said, "I'm a doctor. I put patients first."
You would want to know what kind of doctor they are. Are they a cardiologist, pediatrician, orthopedic surgeon, or general practitioner? What are they trained to do? How much experience do they have? Is their expertise appropriate for what you need?
The same problem exists in financial services.
Two people may both introduce themselves as financial advisors while operating under different licenses, offering different services, receiving compensation in different ways, and assuming different responsibilities to their clients.
Understanding those differences can help you have a much more productive conversation before deciding whom to hire.
1. Insurance Agents and Insurance-Focused Advisors
Insurance agents are generally licensed by the states in which they conduct business to offer insurance products. Depending on their licenses, those products may include life insurance, disability insurance, long-term care insurance, fixed annuities, and other insurance solutions.
Insurance can play an important role in a comprehensive financial plan. A family can accumulate significant assets and still face substantial financial consequences from a premature death, disability, or extended need for care. A knowledgeable insurance professional can help identify and manage those risks.
The important distinction is the scope of the relationship.
Insurance agents are commonly compensated through commissions when insurance products are purchased. Compensation can vary by product, premium, carrier, and contract. Some insurance professionals also obtain securities registrations, such as the Series 6 or Series 7, allowing them to offer certain investment products in addition to insurance.
If you're working with an insurance-focused advisor, some useful questions include:
- Did the recommendation begin with an evaluation of my financial situation or with a particular product?
- Why is this product being recommended?
- What alternatives were considered?
- What are the costs, surrender periods, restrictions, and other important terms?
- How is the professional compensated if I purchase it?
A product may be entirely appropriate. The objective is to understand why it fits your situation rather than simply whether someone is licensed to sell it.
2. Financial Advisors at Banks
Many banks now offer investment, insurance, lending, trust, and wealth management services alongside traditional banking.
This can provide genuine convenience. A bank may already handle your checking accounts, mortgage, business lending, credit, or trust services. Adding investment advice can allow several parts of your financial life to exist within one organization.
The advisor you meet through a bank could be a registered representative, investment adviser representative, CFP® professional, insurance agent, or some combination of these roles.
Depending on the institution and program, that advisor may offer managed accounts, securities, annuities, lending solutions, trust services, structured products, or other financial products available through the bank and its affiliates.
Compensation can also vary considerably. An advisor may receive salary, bonuses, commissions, asset-based compensation, incentives tied to gathering assets, or a combination of several methods.
None of those arrangements automatically tells you whether the advice is appropriate. But they are important to understand because different products and services may create different economic incentives for both the advisor and the institution.
3. Wirehouses and Large Brokerage Firms
Another major category includes large national brokerage and wealth management firms. These range from traditional wirehouses to large brokerage companies that began primarily as custodians, mutual fund companies, or discount brokers and later expanded into financial planning and wealth management.
These organizations can offer substantial resources: sophisticated technology, research departments, investment platforms, banking and lending capabilities, planning tools, and access to specialists.
Scale can be a meaningful advantage.
It can also affect how advice is delivered.
Large firms have to build systems capable of serving enormous numbers of clients. As a result, investment programs, planning processes, service models, and product offerings may be standardized to varying degrees.
Advisor compensation can differ by firm. Some advisors receive salary and bonuses. Others receive variable compensation influenced by assets gathered, advisory programs used, products selected, or other measures of business activity.
This is one reason it's worth looking beyond the name on the building. Your experience can depend heavily on the individual advisor, their experience, how they approach planning, and the service model available to you.
Brokerage Advice and Regulation Best Interest
When a broker-dealer or its associated person makes certain recommendations to a retail customer regarding securities transactions, investment strategies, or accounts, Regulation Best Interest, commonly called Reg BI, may apply.
Reg BI requires a broker to act in the retail customer's best interest when making a recommendation and not place the broker's or firm's interests ahead of the customer's interests. It also includes obligations involving disclosure, care, conflicts of interest, and compliance.
Reg BI strengthened the standard that applies to broker recommendations compared with the traditional suitability framework.
But it is important to understand its scope. A best-interest obligation associated with a brokerage recommendation is not necessarily the same thing as engaging someone to provide ongoing, comprehensive financial planning across every part of your financial life.
4. Registered Investment Advisers and Independent Advisors
Registered Investment Advisers, commonly called RIAs, provide investment advice under an investment advisory framework. Investment adviser representatives may work for very large organizations or small independent firms.
An independent advisory firm may have more flexibility in how it structures its planning process, investment management, technology, and client relationships because it is not necessarily operating inside the product and service structure of a large bank or brokerage company.
That doesn't automatically make an independent firm the right choice for everyone. Smaller firms can have different resources, capabilities, specialties, service models, and costs. The same due diligence that applies when evaluating a large institution should also apply when evaluating an independent advisor.
The real question is whether the firm's capabilities match what you need.
Where Does a CFP® Professional Fit?
This is where one of the most common points of confusion appears.
CFP® certification is a professional credential, not a type of employer.
A CFP® professional can work at an insurance company, bank, brokerage firm, large wealth management organization, or independent advisory practice.
CFP® professionals must satisfy requirements involving education, examination, professional experience, and ethics. They are also subject to CFP Board's fiduciary standard when providing financial advice.
But the CFP® marks do not automatically give someone every financial license or capability. What a CFP® professional can actually provide still depends on the person's licenses, registrations, employer, and the scope of the client's engagement.
For example, an advisor may have substantial knowledge of tax planning or estate planning while still needing to coordinate with a CPA or attorney when the client requires tax preparation or legal documents.
That's why the letters after someone's name are important, but they shouldn't be the end of your due diligence.
Fiduciary vs. Broker: What Is the Difference?
The word fiduciary gets used frequently in financial services, sometimes without much explanation.
Broadly speaking, a fiduciary relationship requires the professional to place the client's interests ahead of their own when the fiduciary duty applies.
Investment advisers generally owe fiduciary duties to their advisory clients. CFP® professionals are also required by CFP Board to act as fiduciaries when providing financial advice.
Broker-dealers operate under a different regulatory framework. Regulation Best Interest requires brokers to act in a retail customer's best interest when making covered recommendations and prohibits them from placing their interests ahead of the customer's interests.
These standards have similarities, but their scope and application are not identical.
Rather than relying exclusively on a label, ask the advisor directly:
When are you acting as a fiduciary for me, what services does that responsibility cover, and are there circumstances in which you operate under a different standard?
How Do Financial Advisors Get Paid?
Compensation is another area where the same job title can describe very different business models.
Depending on the advisor and firm, compensation might include:
- Insurance commissions
- Securities commissions or transaction-based compensation
- Asset-based advisory fees
- Flat financial planning fees
- Hourly planning fees
- Subscription or retainer fees
- Salary and bonuses
- Revenue or asset-gathering incentives
- A combination of several methods
No compensation structure eliminates every possible conflict of interest.
An advisor paid by commission may have an incentive associated with selling a product. An advisor paid based on assets under management may have an incentive to keep assets under management. A flat-fee advisor still operates a business and has economic incentives of their own.
The goal isn't necessarily to find an advisor with no conflicts. It's to understand the conflicts that exist, how they're managed, and whether the arrangement makes sense for the services you need.
Three Questions to Ask Before Hiring a Financial Advisor
If you're interviewing financial advisors, you don't necessarily need to understand every securities regulation or industry acronym. Three straightforward questions can reveal quite a bit about the relationship you're considering.
1. What are you qualified and licensed to do?
Ask about licenses, professional credentials, experience, specialties, and the types of advice the advisor regularly provides. Someone can be very capable within a particular area without being the right professional for every financial problem.
2. How are you and your firm compensated?
Understand what you pay directly, what the advisor may receive indirectly, and whether compensation changes depending on the product, account, or service recommended.
3. What responsibility do you have to me?
Ask whether the advisor will act as a fiduciary, when that obligation applies, what the relationship covers, and whether there are situations in which the advisor's role changes.
The Biggest Takeaway
Choosing a financial advisor isn't simply a matter of comparing investment performance or finding the person with the most polished website.
You are choosing someone who may help you make decisions involving retirement, investments, taxes, insurance, estate planning, cash flow, education funding, charitable giving, and the financial security of your family.
Before deciding whom to work with, understand the advisor's capabilities, compensation, incentives, and responsibilities.
The title on the business card matters far less than understanding what sits behind it.
Better financial decisions start with understanding.
Bryan Yach, CFP®
Owner & Wealth Advisor
Yach Advisors
Yach Advisors provides this material for educational and informational purposes only. It should not be considered individualized investment, tax, or legal advice. The services, compensation arrangements, regulatory obligations, and professional standards applicable to financial professionals vary based on their licenses, registrations, firms, and the nature of the client relationship. Before engaging a financial professional, review the firm's disclosures and consider asking questions about services, fees, compensation, conflicts of interest, and applicable standards of conduct.