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When Shopping for an Advisor, Know the Pros and Cons

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Nicolas Hansen | E+ | Getty Images

When choosing a financial professional, keep in mind that there are three distinct categories.

(Read More: Even Skilled Investors Can Use a Financial Advisor)

Brokers

Brokers can provide advice and planning services and manage your portfolio. Importantly, they are compensated through the commissions they earn when they sell you investments. Since different investments pay higher or lower commissions, this can create conflicts of interests. Brokers are often backed by the considerable research and other services of big parent firms such as Merrill Lynch. They are regulated by the Financial Industry Regulatory Authority, a "self-regulatory organization."

Investment Advisors

Like brokers, investment advisors can provide advice, planning and portfolio management. In an effort to limit conflicts of interest, they are compensated for their advice rather than for selling products. Advisors charge ongoing fees (typically 1 percent of your account assets annually) which can add up to a considerable sum over time. They are regulated by the Securities and Exchange Commission.

Financial Planners

The financial planner category is the most loosely defined and least regulated of the three groups. The services planners provide can range from recommending a few products to designed an agenda on a full range of financial matters. Many investors hire financial planners on a one-time, hourly basis. Certified Financial Planner and Certified Financial Analyst are two respected credentials for planners.

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