Investment Advisor vs. Financial Advisor: What’s The Difference?

An investment advisor helps in choosing and managing investment portfolios, while a financial advisor offers broader financial guidance including insurance, retirement and estate planning, taxes, and other areas of your finances.

When deciding between a financial advisor and an investment advisor, it's important to understand their distinct roles and areas of expertise. Investment advisors focus on managing investment portfolios, maximizing returns, and managing risk. In contrast, financial advisors provide a broader range of services including retirement planning, investing, life insurance, estate planning and anything relating to your finances. While both professionals provide valuable insights, the choice between them depends on your specific needs. Here’s everything you need to know about how a financial advisor vs. an investment advisor compares and when to use each.

Financial Advisor vs. Investment Advisor: An Overview

Take a deep dive into the services and insights an investment advisor vs. financial advisor provides to learn which might be best for you.

Financial Advisor vs. Investment Advisor: Key Differences

There are several key differences between the work of a financial advisor and an investment advisor. First, an investment advisor focuses on providing advice and management for investments and securities based on your risk profile and financial goals. In contrast, a financial advisor might still offer investment advice, but that comes alongside reviewing your other finances, including your retirement accounts, estate, taxes, budgeting, insurance needs, debt repayment, and more.

Investment advisors specialize in focusing on one aspect of your finances, while financial advisors are more generalists who provide advice and insights for various financial needs.

Here's a quick look at some of the key roles and functions of financial advisors and investment advisors.

What Financial Advisors Do

• Comprehensive financial planning: Financial advisors offer a variety of services that include retirement planning, tax management, asset protection, and estate planning, in addition to investment advice.
• Retirement planning: They help you plan for retirement by considering your desired retirement age, the income you'll need, and strategies to ensure you have sufficient funds for a comfortable life thereafter.
• Tax strategies: Financial advisors employ tax-efficient strategies such as Roth conversions, Health Savings Accounts (HSAs), and tax-loss harvesting to reduce tax liabilities and increase long-term wealth. These methods enhance after-tax returns and help clients achieve their financial objectives.
• Asset protection: Financial advisors help individuals prepare for unexpected situations like disability or long-term care. They assess clients' needs and implement strategies such as insurance, emergency funds, and investments to ensure financial security during health-related challenges. 
• Estate planning: Financial advisors play a crucial role in estate planning by helping clients arrange asset distribution after their death. They use strategies such as wills and trusts to align clients' goals and values, protect assets, and reduce taxes.

What Investment Advisors Do

• Investment advice: The advice given is exclusively about investments. They help you choose investments based on your risk tolerance and financial goals.
• Investment management: Investment advisors help you grow your money by managing your investments in financial products such as stocks, bonds, mutual funds, and ETFs.
• Portfolio management: They help individuals and institutions manage their investments by creating diversified portfolios based on specific financial goals and risk tolerances. They conduct market research to identify opportunities, monitor trends, and adjust asset allocations to maximize returns while minimizing risks.

Should You Work With an Investment Advisor or a Financial Advisor?

The answer to whether you should work with an investment advisor or a financial advisor comes down to your goals. If your goal is to build wealth with investments, you should hire an investment advisor to help you earn passive income with the assets you already have. But if your goal is to figure out how you’re doing financially, where you should place your assets and how to plan for long-term goals, such as retirement or purchasing your first home, a financial advisor is a better option.

Generally, people work with investment advisors once they have reached a certain point with their finances where everything is running smoothly, and they have a large sum of money to invest. More than likely, they’ve already worked with a financial advisor to build a strategy around retirement, insurance, and budgeting. While a financial advisor can guide a client on investments, they aren’t solely specialized in this area like investment advisors and might only handle assets up to a certain point.

Even within the terms investment advisor and financial advisor, some professionals specialize in certain types of financial planning. For example, some financial advisors work solely with business owners to help them understand how to maximize their tax advantages or better manage their assets to grow the business. Other advisors focus their financial services on those nearing retirement who want to know they are prepared.

Ultimately, financial advisors focus on a holistic plan for your financial well-being, while investment advisors help you grow your wealth through investment strategies.

How Do Investment Advisors and Financial Advisors Make Money?

Investment advisors and financial advisors make money in varying ways. When reviewing these professionals, you'll see two key terms: fee-only and fee-based. At first glance, the terms seem to indicate the same thing, but here’s what they mean.

• Fee-only: These professionals charge a flat fee or a percentage of the assets under management. This covers their services and is their only form of compensation. For example, they might charge $10,000 per year for their services. Or if you have them managing $500,000 in assets and they charge a 1% fee, you’ll pay them $5,000 per year for their services.
• Fee-based: While you’ll still likely pay a standard fee for services with a fee-based professional or firm, these advisors also make commissions on the products they sell. For example, you might pay an annual fee of $1,000 for the advice and insights a financial advisor provides. On top of that, the advisor might receive a commission for selling you life insurance or a specific security.

Although fee-based firms make money from selling some financial products, they have the same fiduciary duty to clients as fee-only firms. That means no matter which professional you work with, they are bound to your financial interests and only recommend financial products that will benefit you, despite the kickback they might get for that recommendation.

How to Find an Investment Advisor or Financial Advisor

You should start your search for an advisor by reviewing those with licenses in your area. You do not want any form of financial advice from a professional who is not registered with the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA). Follow this step-by-step process to narrow your search to the best professional based on your needs.

1. Start Online

Search for professionals and firms near you. Check on the advisor's services and see if they have a specialty that matches your financial characteristics and goals. 

2. Read Reviews

An important aspect of working with any professional is their customer service skills. How responsive are they? How easy is it to get an appointment? Do they make their clients feel dumb or unwise regarding money? Current and past clients share their experiences online for others to see and learn from — good and bad.

3. Review Credentials

If you’re planning to go with a financial advisor, a certified financial planner (CFP) is a wise selection. These professionals complete rigorous coursework to earn their credentials and must have adequate experience before being awarded the certification, including three years in financial planning.

4. Set Up Meetings

You should meet with a few advisors to see how well you work with them. These meetings can be digital or in person. Ask questions about your situation, such as how they work with business owners, generational wealth, estate planning, etc. 

5. Understand the Fee Structure

Ask about the firm's fee structure. Understanding what that means and how it could impact your total service cost.

6. Select Your Advisor

Once you’ve put the advisor through their paces, you can select your advisor and begin working with them.

Planning for Your Financial Future

Regardless of whether you select a financial advisor or investment advisor, you can start planning for your financial future now with advice and insights related to your unique situation to make the most of your financial circumstances.

Frequently Asked Questions