What Is a Financial Consultant?

September 16, 2021

A financial consultant is someone who is trained to assist people with managing their financial lives. The term "financial consultant" is a blanket term that encompasses financial advisors, financial planners, and wealth managers alike, although there are credentials that set certain professionals apart.

Depending on their specific knowledge, experience, and expertise, some financial consultants can help with specific financial planning matters such as taxes, insurance, or estate planning.

Since no two financial consultants are exactly alike, it's good practice to understand an individual's background before tasking them with building your financial plan. Certain consultants who would be a perfect fit for one investor may not be a great fit for another, so it's especially important to find someone who adds value to your specific situation.

What does a financial consultant do?

Very generally, a financial consultant provides advice, analysis, and strategy with regard to an individual's or family's financial situation. Some financial consultants manage clients' money, and others may provide hourly or as-needed advice.

Given technology's meteoric rise over the previous decades, financial consultants now come in the form of robo-advisors, which are technology platforms designed to manage money and provide basic advice to hands-off investors. Robo-advisors primarily provide portfolio management services at a very low cost, which allows investors to simply transfer their money and focus on other aspects of life.

Online financial planning services, such those offered by some of the discount brokerage firms (Vanguard, Schwab, and Fidelity come to mind), are accessible to most investors and also come at low cost. Each of these providers offers a slightly different product, but the general idea is that they'll provide customized investment portfolios along with some contact with a human financial planner. Think of this option as a hybrid approach.

Then there are independent financial planners. If you want to work with a live person, you'll pay more but you'll also receive more personalized guidance. Some people enjoy talking through their financial issues with someone, and others simply want to have a competent individual listen to their thought processes.

Many advisors charge an assets-under-management (AUM) fee, such as 1% of assets managed, to be a client. While this creates a nice revenue stream for the advisor, this fee can be extremely costly to the investor over time. So, if you opt for the AUM fee, you'll need to be absolutely sure that you're receiving appropriate value in return.

Other advisors act in more of a true consultant capacity, charging hourly fees or fixed project fees depending on the nature and complexity of clients' personal circumstances. If you're going to pay for financial advice, this is the most straightforward way to do it. Hourly or fixed-fee advisors charge for their time only and tend to be more focused on broad financial planning as opposed to just core investment management.

Financial consultant with client.

Image source: Getty Images.

What is the difference between a financial consultant and a financial advisor?

There is virtually no difference between a financial consultant and a financial advisor. Both provide the same service but do so under different corporate titles. In effect, both offer guidance and support when it comes to managing your personal finances.

Further, while the difference between a financial consultant and a financial advisor may be of interest to some people, perhaps the more important question is to ask whether or not your financial professional is a fiduciary. A fiduciary is obligated to act in your interest at all times. Moreover, a fiduciary focuses on providing competent, objective advice — not on selling products or earning commissions.

Both financial consultants and financial advisors may provide fiduciary advice, but they aren't necessarily compelled to. Some financial professionals do not have a fiduciary duty to their customers, so it's absolutely critical as an informed consumer to thoroughly investigate a provider's background before engaging them for their services.

Because there is no specific title that refers to a particular level of competency, consumers need to be aware of some specific credentials that set financial providers apart.

The Certified Financial Planner (CFP) credential reflects the gold standard of financial planning, and it's a very good signal that the person you're working with is highly educated in matters of investment, tax, estate, insurance, and retirement planning. CFP certificants are also held to a strict standard of fiduciary duty.

The Chartered Financial Analyst (CFA) designation is widely regarded as the credential with the most difficult series of exams to pass, but the content primarily focuses on investment and portfolio management. The CFA curriculum does not focus on personal investment counseling as much as the CFP designation, but it is a very worthy designation nonetheless — primarily because of its rigor. 

There are a variety of other designations, such as the Chartered Financial Consultant (ChFC) designation, which is an alternative to the CFP designation. Holders of the ChFC designation complete similar coursework to CFP certificants, but they are not held to a fiduciary standard.

Do I need a financial consultant?

While nobody other than you can answer that question, it really depends. Some questions to consider before hiring a financial consultant might include:

  • Are you comfortable managing your own investments?
  • Do you understand the tax implications of your investment choices?
  • Do you need a second pair of eyes to validate your plan?
  • Does your situation include a complicated family dynamic or another unusual complexity?
  • Do you simply want help from a knowledgeable expert?

These are only a few of the questions you might think about if you're weighing whether to work with a financial consultant.

Sometimes the thought arises at a major life juncture. Perhaps you've just gotten married, expanded your family, or lost a loved one. These are natural points at which people take stock of their lives and try to reset their financial plans. Often these are times where financial consultants can add a lot of value. 

However, if your finances are simple enough that you feel comfortable handling it all on your own, that's also perfectly reasonable. Financial consultants exist to help people who want to be helped, so, if you ultimately decide to go it alone, there's no harm done either.