Types of Financial Advisors

Types of Financial Advisors

There are several types of financial advisors with overlapping characteristics.

This page will describe some key distinctions that will help you interview the right type of advisor. You may be wondering why determining a type of advisor is so complicated. The financial service industry deliberately blurs the distinctions between advisors and salesmen. The industry knows a high percentage of investors do not want salesmen investing their assets.

Advisors Versus Salesmen

Financial advisors have several unique characteristics:

  • They are Registered Investment Advisors or Investment Advisor Representatives
  • They are financial fiduciaries (highest ethical standard)
  • They provide financial advice and ongoing services
  • They are compensated with fees for their knowledge, advice, and services

Salesmen also have unique characteristics:

  • They have securities and insurance licenses (stockbrokers, registered reps, insurance agents)
  • They are not financial fiduciaries (lower ethical standard)
  • They recommend/sell investment and insurance products
  • They are compensated with commissions by third parties (mutual fund and insurance companies)

Why are these important distinctions? Salesmen may claim to be financial advisors.

Three Types of Financial Advisors

There is one type of salesman, but there are three types of advisors who provide financial advice and services for fees:

  • Traditional Financial Advisors
  • Virtual Financial Advisors
  • Robo Financial Advisors
Traditional Financial Advisors

This is the type of financial advisor you are used to. They have offices in your community and they meet with clients face-to-face to market their services and update financial plans, review past results, and discuss future strategy.

These traditional advisors may call themselves financial planners, investment advisors, and wealth managers.

Virtual Financial Advisors

These professionals provide the same types of planning and investment services as traditional advisors, but they do not meet with investors face-to-face. Instead, they communicate by telephone, email, Skype, and various forms of video chat.

Since they do not meet face-to-face, they are not limited to working with clients they can reach by car or clients who are willing to drive to meet with them.

Virtual advisors may have particular appeal to younger, more tech-savvy investors, investors in remote locations, and investors who do not want to spend excessive amounts of time driving to and from meetings.

Robo Financial Advisors

A robo advisor is like a virtual advisor - there is no face-to-face contact. What distinguishes them from virtual advisors is their use of algorithms to invest client assets. Computer programs are doing the work that used to be the responsibility of advisors and portfolio managers.

To reduce costs even more, robos may limit the level of human interaction to none or very little. They expect their clients to log into their accounts to find the information they are seeking.

It is important to note that some of the robos are becoming more virtual in regard to human interaction. A high percentage of their clients want more interaction with humans, in particular when the markets are volatile.

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