This article is an excerpt from the Shortform book guide to "A Random Walk Down Wall Street" by Burton G. Malkiel. Shortform has the world's best summaries and analyses of books you should be reading.
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What are the different types of financial advisors? Which types are more effective?
According to economist Burton Malkiel, there are four main types of financial advisors: investment advisors, standard advisors, automated advisors, and hybrid services. Understanding the different types of financial advisors and what services they offer can help you make the right choice.
Learn about the different types of financial advisors below.
The 4 Types of Financial Advisors
Rather than play the stock market yourself, you might choose to pay a professional to play for you. Below we’ll look at the four types of financial advisors, according to economist Burton Malkiel.
Malkiel’s years of studying actively managed mutual funds have yielded two key insights: One, that fund managers’ past performance has little bearing on future performance, and two, actively managed funds rarely beat the average market return for long.
In short, if you index the majority of your savings and (perhaps) hold a little back to speculate with, there’s no need to invest in an actively managed fund. If you decide to anyway, make sure you choose one with a low expense ratio and a low turnover rate. The higher the expense ratio, the more of your returns you’re giving to the manager; and the higher the turnover rate, the more you’re handing over in capital gains taxes.
Here are the four different types of financial advisors:
Investment Advisors
As of 2018, investors have the option of choosing a standard (living, breathing) advisor, an automated advisor, or a hybrid service. However, like actively managed funds, investment advisors are typically an unnecessary expense. If you follow Malkiel’s precepts, you should be able to build and rebalance your portfolio on your own.
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