Finding a trusted investment advisor is similar to dating. It takes time, effort and a lot of discernment. After all, developing a relationship with an investment advisor who knows your investment needs and financial goals allows someone to peek into an intimate part of your life. And when you choose one, that person can 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 for access to intelligent investment management with lower overall costs. Either way, you’ll need to spend some time vetting potential candidates and seeing how they fit your needs.
To help you in your search, here’s a guide that walks you through the different types of financial advisors, the considerations to keep in mind, and the resources to find them.
What do investment advisors do?
Investment advisors manage the investment side of your financial life, helping you allocate money to profitable short-term and long-term investments. While other financial advisors may focus on key aspects of your financial life, an investment advisor focuses primarily on investments.
Typically, an investment advisor develops an investment portfolio that is well-diversified and lower-risk, including assets such as stocks, bonds, and funds, as well as alternative investments, including real estate and private equity. Because of this relatively narrow focus, an investment advisor may not typically deal with broader financial issues such as estate planning or taxes.
Investment Management Statistics
Because of their fiduciary duty, registered investment advisory firms (RIAs) – 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 last 21 years as of 2021.
93 percent of total assets are 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 at smaller firms with 50 employees or fewer.
Among independent IARs, 88 percent hold less than $5 billion in AUM.
Almost 92 percent of assets were managed under advisor discretion on behalf of their clients in 2021.
In 2021, the number of customers working with IAR grew to a record, reaching 64.7 million.
Collectively, 15,000 SEC-registered RIA firms employed more than 928,000 non-clerk employees in 2021.
In 2022, 35 percent of Americans said they work with a financial advisor, 57 percent said they manage their investments, while the rest were unsure.
25 percent of Americans say they have no one they can turn to for financial guidance.
60 percent of non-retirees believe they are not “on track” with their retirement savings.
75 percent of American teenagers 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 advisers to protect investors, including their fiduciary duties to clients. A fiduciary duty means that the adviser must act in the best interest of the client, such as exercising good faith, loyalty, confidentiality, prudence and other qualities.
While investment advisors must put clients’ interests first, financial advisors—a term that often refers to a variety of investment professionals such as money managers, stockbrokers, and insurance agents, among others—are held to less stringent standards.
Essentially, these types of financial advisors can make “tailored” recommendations for clients. While these recommendations may be good, they may not be the best or best for the client’s situation. Other key differences include fee structures, professional responsibilities and government bodies that regulate these two groups.
Investment advisors, for example, often operate on flat-fee models where they charge a percentage regardless of how much you invest. The average annual fee in 2021 was 1.12 percent per $100,000 in assets under management, amounting to $1,120 a year, according to research by AdvisoryHQ. Their incentive is to grow your money, so the fees they receive grow with them. For example, 1.12 percent of $300,000 equals $3,360 in fees.
On the other hand, financial advisors such as broker-dealers may earn commissions from products they sell you, such as annuities or life insurance. However, other financial advisors may work on a fee-only model, charging an hourly fee for the work they do.
Types of investment consultants
In addition to providing personalized investment advice, investment advisors can wear multiple hats, providing a combination of financial planning, portfolio management, and even trading services—if they have the appropriate license. So it is important to know what they offer and what the fees are.
Common titles for investment advisors include:
Asset Managers: By learning about your long-term financial goals and risk tolerance, asset managers select investments such as stocks, real estate and commodities. They often provide a wide range of investments outside of stocks.
Portfolio Managers: Primarily focused on stocks and bonds, portfolio managers specialize in areas of the market such as consumer discretionary stocks, buying and selling holdings as opportunities arise.
Wealth Managers: Serving high net worth individuals and families, wealth managers have dedicated teams of financial experts covering every aspect of investment advisory services.
Financial Planners: Providing advice on budgeting, maximizing employer benefits, saving for retirement, selecting insurance coverage and other issues, financial planners focus on personal and financial well-being.
Regardless of their job title, the SEC regulates investment advisers with assets under management of $110 million or more, while state regulators oversee advisers with assets up to $100 million. Advisers between these amounts may, but are not required to, register with the SEC.
How much does an investment advisor cost?
Investment advisors may receive a fixed fee for their work, but it is more common to be paid as a percentage of the assets they manage. An annual fee of one percent of assets under management would be a typical fee, although some may charge less. As noted earlier, the average investment advisor fee in 2021 was 1.12 percent of assets under management.
This fee structure creates some alignment between the client and the advisor, as their fee increases as your assets grow. But it can also be an expensive arrangement over time, as that money comes off the top of your portfolio whether you make money in any given year or not.
The flip side is that the investment advice will be pretty much the same whether you have $100,000 or $1 million. So if you have more money, you pay more to the advisor without getting significantly better returns or better risk-adjusted returns.
How to choose an investment advisor
When choosing an investment advisor, consider your financial needs and goals, as well as their specialties and certifications.
For example, to obtain the Certified Financial Planner (CFP) certification, financial planners must complete extensive training and experience requirements and pass a test. Beyond investment selection, CFPs take a more holistic approach to managing your overall financial situation.
Other designations such as Certified Trust and Trust Advisor (CTFA), Licensed Life Underwriter (CLU), and Financial Risk Manager (FRM) prepare financial advisors in various fields.
One of the advantages of working with large investment advisory firms is that you will likely have access to multiple teams of professionals with diverse backgrounds and qualifications. On the other hand, smaller investment advisory boutiques tend to offer more personalized services.
Regardless of the size of the company, due diligence is critical. From checking their fee structure to evaluating their values, trust is one of the main factors in choosing an investment advisor. So feel free to ask for testimonials, review performance data, request a quote, and ask questions like:
What is your investment philosophy?
Outside of a fixed rate or percentage of assets, should I expect any other fees?
What type of clients do you mainly work with?
How often can I expect updates on my investments?
In addition to 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 committed. You’ll want to understand the incentives of the advisor you’re working with and what their legal obligation 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 allow you to research advisors’ areas of expertise, certifications, minimum investment requirements and associated fees.
In addition, major financial companies such as Fidelity and Charles Schwab offer wealth management services, although the minimum investment requirements may be much higher.
Other companies like 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.
If you’re looking for an advisor in your area, Bankrate’s Financial Advisor Finder can give you suggestions to get you started.
Growing your investments can be complicated without the time, knowledge or resources. By partnering with an investment advisor who cares about your financial needs, you can delegate the task to a professional and instead focus on the things you truly love to do.