Financial Advisors vs. Investment Advisors

By Jeff White | AUG 30, 2023

Like doctors, lawyers and other professions, financial advisors have different areas of expertise and focus. The financial advisory industry features a broad and wide-ranging spectrum of professionals. Financial advisors who help with investing are known as investment advisors, while other advisors may specialize  in financial planning or estate planning. It’s important to understand that while all investment advisors are financial advisors, not all financial advisors offer investment management. Below, we’ll break down some of the key differences – and areas of overlap – between investment advisors and financial advisors. You can also use SmartAsset’s free matching tool to find the right type of financial professional for you.

What Is a Financial Advisor?

In simplest terms, a financial advisor is a professional who helps people improve their financial circumstances. This broad label can encompass a variety of services, including investment management, retirement planning, cash flow analysis, tax planning, charitable giving, estate planning and more. One financial advisor may specialize in retirement income, while another may focus solely on retirement planning. 

Financial advisors can have a variety of certifications and credentials. An advisor with the certified financial planner (CFP) designation will typically work with clients to identify their financial goals and build a plan to reach them. A CFP may also make particular recommendations related to a client’s investment portfolio and retirement plan. Meanwhile, a financial advisor who is a certified public accountant (CPA) may specialize in tax advice, helping clients minimize their tax liabilities. 

Financial advisors may offer some or all of the following services: 

• Portfolio management
• Retirement planning
• Risk management and insurance planning
• Planning for education needs
• Tax planning
• Charitable giving
• Budgeting
• Cash flow analysis
• Debt management
• Emergency funds management
• Estate planning
• Small business planning

What’s important to understand is that the term “financial advisor” is rather generic and can be used by a variety of financial professionals. In fact, until recently stock brokers could refer to themselves as financial advisors, even if they were not bound by fiduciary duty to always act in their client’s best interest. 

But  brokers who are not registered as investment advisors with the U.S. Securities and Exchange Commission may no longer market themselves as financial advisors under Regulation Best Interest, an SEC rule instituted in 2019. That’s because brokers need only follow the suitability standard, which dictates that a recommended transaction or investment strategy must be suitable for a client. This less-stringent standard can lead to a broker recommending a particular product or service that will generate a commission for him or her over more affordable alternatives. 

What Is an Investment Advisor

An investment advisor is a specific type of financial advisor who focuses primarily on giving investment advice or directly managing client portfolios. While “financial advisor” is a broad term that can apply to a variety of financial professionals, the Investment Advisers Act of 1940 specifically defines investment advisors as any person or firm that, for compensation, “is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.” 

Working with an investment advisor often entails giving the advisor some level of control or input when it comes to your assets. Often, this means the advisor will design your investment strategy, allocate your money to different investments and asset classes, and rebalance your portfolio when necessary. When portfolios are managed on a discretionary basis, the advisor has the authority to make trades without your approval. With non-discretionary management, you’ll have the final say on individual transactions. 

Investment advisors may focus on particular asset classes and investment strategies. While one firm may invest client assets exclusively in mutual funds and exchange-traded funds, other firms may build managed accounts for clients using individual stocks. A firm’s website and/or Form ADV will likely elaborate on the types of investment strategies and methods of analysis that it uses. 

What Differentiates Investment Advisors From Other Advisors?

As mentioned earlier, all investment advisors are financial advisors, but not all financial advisors are investment advisors. Money managers, investment consultants and financial planners can all be investment advisors, provided they pass the Uniform Investment Adviser Law Examination, known simply as the Series 65. This exam and certification process enables financial professions to give clients investment advice and analysis. 

Perhaps most importantly, investment advisors are regulated either by the SEC or a state regulatory authority. Advisory firms with $100 million in client assets under management (AUM) are required to register with the SEC and abide by fiduciary duty. Advisors who manage less than $100 million in client assets typically must register with one or more states. Firms who register with the SEC must subject themselves to federal oversight and file annual disclosures about their business, any potential conflicts of interest and other information clients may want to know. 

How Do Investment Advisors and Financial Advisors Make Money?

The fees that financial advisors and investment advisors charge for their services vary from firm to firm. 

Investment advisors typically charge clients a fee that’s based on a percentage of AUM, anywhere from 0.20 to 2%. A Kitces Research survey, which collected responses from over 800 financial advisors, determined that median fees for asset management amount to 1% of AUM for clients with up to $1 million. 

Investment advisors may also charge hourly fees or flat rate fees. Those who are registered as both advisors and brokers may collect third-party commissions for selling investment products. Financial advisors whose services extend beyond portfolio management may be compensated in more ways than one. For standalone financial planning, advisors charge fees that typically range from $1,000 to $4,820, although the median fee is $2,500, according to Kitces Research. For ongoing financial planning, an advisor’s fee may be linked to a client’s AUM. 

Bottom Line

Portfolio management and financial planning are two common offerings of financial advisors. But not all advisors offer the same services. An investment advisor specializes in investment advice and asset management. Other kinds of advisors may focus on retirement planning, taxes and/or estate planning. While the term “investment advisor” is clearly defined within the Investment Advisers Act of 1940, the title of financial advisor tends to be more generic and malleable. However, a recent SEC rule change has narrowed the scope of professionals who can call themselves financial advisors. 

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• When you’re looking to hire a financial advisor, be sure to interview multiple candidates. During the interview, make sure you ask them the right questions so that you can work with the right financial advisor for you. 

Photo credit: iStock.com/Ridofranz, iStock.com/simonkr