What is a financial advisor and what do they do?
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Most people are aware of financial advisors and may even hire one at some point in their lives, but what exactly do financial advisors do? Financial advisors provide advice and guidance on a variety of financial issues you’ll encounter over the course of your life such as investments, retirement planning, insurance and even taxes.
Here’s what else you should know about financial advisors including the advantages and disadvantages of using one and when you should consider hiring one.
What is a financial advisor?
A financial advisor is someone who helps you manage various aspects of your financial life. People most often associate financial advisors with planning for retirement, but they can also be involved in general investment management, budgeting, insurance, taxes, estate planning and more. Financial advisors charge a fee, often expressed as a percentage of your assets, in return for their services.
What do financial advisors do?
Financial advisors will assist you with several different aspects of your financial life, but not all advisors or firms provide the same services. Here are some of the common areas financial advisors provide guidance on:
- Goal planning: One of the first things an advisor typically does is ask clients about their short and long-term financial goals. A financial plan is then built around achieving those goals while taking into account the unique circumstances of each individual client.
- Budgeting: If you’re just starting out in your financial journey or even if you’re more established, advisors can help you construct an overall budget and identify ways to boost your savings, if necessary.
- Investments: Financial advisors also provide advice on your investment portfolio and can assess things such as your overall asset allocation. They can also answer questions and recommend investment products such as mutual funds and ETFs.
- Retirement planning: Nearly every financial advisor will be able to assist with retirement planning, which is often the biggest long-term financial goal for most people. They can help you navigate your employer’s 401(k) plan and offer guidance on other choices such as a traditional or Roth IRA.
- Taxes: Not every financial advisor will be able to handle your annual income taxes, but most should be able to provide guidance that takes into account current and future tax considerations. If their firm can’t handle tax filings in-house, they’ll likely be able to recommend someone to you.
- Insurance: Financial advisors can also help you determine whether life insurance or annuity products make sense for you, but be sure to understand whether the advisor will receive a commission on the product they’re selling to you.
- Estate planning: Planning for the end of life isn’t easy, but financial advisors may be able to guide you through the estate planning process, which will make it easier on your heirs when that time comes.
Pros and cons of financial advisors
Financial advisors can be very helpful, but there are some downsides to be aware of. Here are some of the advantages and disadvantages of using financial advisors.
- Construct an overall financial plan – Working with a financial advisor will help you build an overall financial strategy that can help bring clarity to your financial future. The strategy will be based on your individual needs and will take into account your unique attributes such as risk tolerance.
- Removes the burden of managing your own finances – By working with an advisor, you’ll have more time to spend on things you actually enjoy and won’t have to worry about managing your finances other than a handful of times each year.
- May help you stick to your plan during downturns – One of the most valuable things advisors can do for clients is to help them stick to their plans during market selloffs. It’s natural to want to sell when investments fall or the economy enters a recession, but advisors can educate you on why it’s best to focus on the long-term rather than trying to time the market.
- May lead to better results than doing it yourself – A good advisor may help you achieve better overall results than if you’d just managed things on your own. If that’s the case, an advisor has earned their fee.
- Fees may be high or unclear – Fees for financial advisors can be substantial and often run around 1 percent of your total assets. It also may be difficult to understand any other fees that are charged such as commissions around the sale of certain investment products. Be sure to ask an advisor how they’re compensated before agreeing to become a client.
- May be difficult to trust – When you’re placing your financial life in someone else’s hands, it can be difficult to trust them completely. Naturally, no one will care about your finances as much as you do, but a good advisor will manage your money as if it were their own.
- Not every advisor is right for you – Like any profession, there are good financial advisors and ones that are not so good, so don’t be afraid to change advisors if the relationship isn’t going as you’d hoped. You may need a different set of skills than an advisor possesses, or you just may find someone you’re more comfortable with.
- Can require significant sums to get started – Some financial advisors may require relatively high levels of assets before they’ll work with clients. Some will start working with a client who’s early in their career, but others want to see $1 million in assets or more before they’ll establish a relationship with you.
What types of financial advisors are there?
Financial advisor is a fairly broad term that refers to several different aspects of the financial world. Here are some of the tasks that may fall under the umbrella of financial advising.
- Financial planner: A financial planner is typically quite similar to a financial advisor and may hold the CFP designation (certified financial planner), which is awarded by the CFP Board.
- Traditional financial advisor: A traditional financial advisor will meet in person with clients to help them develop an overall financial strategy.
- Robo-advisors: A robo-advisor uses an algorithm to manage your investment portfolio based on your goals and risk tolerance. The fees are typically a fraction of what a human advisor charges and robo-advisors sometimes offer features, such as daily tax-loss harvesting and portfolio rebalancing, that are difficult for traditional advisors to perform.
- Broker: An investment broker sells stocks, bonds or other securities to clients and does not perform the various roles that a financial advisor does.
- Wealth manager: A wealth manager typically caters to high net worth clients and may provide specialized services directed at these individuals and families such as estate planning, tax advice or even advising on the sale of a business.
When to get a financial advisor
Financial advisors can be helpful at lots of different points of life, but they may be particularly helpful for those in certain situations.
If you truly feel lost or confused when it comes to managing your finances, you’ll want to start working with a financial advisor sooner versus later. Feeling lost can be stressful, so working with an advisor should help bring some clarity to your financial plan and give you some confidence that you’re on the right path.
For those individuals with relatively high net worths, your financial situation may be more complex than it is for others. Maybe you have a high percentage of your portfolio in your company’s stock or receive options as part of your compensation. The more complex your financial life is, the more likely you are to benefit from using a financial advisor.
Some people would rather not spend their time thinking about investments and managing their portfolio, but maybe don’t have much in the way of savings right now. Robo-advisors can be a good fit for these individuals because they’ll automate the investment process for you after getting information on your risk tolerance and goals. Plus, you’ll pay a lot less than you would for a traditional financial advisor.
If you’re looking to find a financial planner, Bankrate offers a financial advisor matching tool to match clients with advisors in minutes.
How to choose a financial advisor
Choosing a financial advisor can be difficult, but there are some key things to look for when you’re making a decision on who to hire.
You’ll want to make sure the advisor you hire is a fiduciary, which means they’ll put your interests before their own or their firm’s. This means that they won’t put you in investments just because they earn a commission on the sale and won’t steer you towards products that don’t fit your needs.
Understanding how an advisor is compensated is another key part of choosing a financial advisor. Some advisors charge an annual fee expressed as a percentage of your total assets, while others might charge an hourly rate. Asking how an advisor is paid is one of the best questions you can ask when interviewing potential advisors.
It’s also worth checking an advisor’s credentials before hiring them. Some advisors may hold the CFP designation or be CFA Charterholders (chartered financial analyst), which means they’ve passed extensive exams and made a commitment to behaving ethically, among other requirements. These credentials can help narrow your list of potential advisors down to a few you’d like to meet in person.
How to find a financial advisor
Finding a financial advisor can be a difficult process. There are typically several advisors to choose from in an area and it can be hard to differentiate between them.
One approach is to ask family and friends if they use a financial advisor and whether or not they’ve been pleased with their experience. Word of mouth can be a great way to find out about advisors without getting bombarded with the marketing messages most firms put out there to attract new clients.
You can also use the CFP Board website or the CFA member directory to check on an advisor’s credentials.