What Does A Financial Advisor Do?
Many people think that a financial advisor is only for wealthy people, but that’s only partly true. The reality is they can be invaluable for your financial well-being, no matter your net worth.
So, what does a financial advisor do, and, more importantly, when should you get one? We’ve got your answers!
What’s a Financial Advisor?
Simply put, a financial advisor or planner is a licensed professional who helps clients manage their finances better. The truth is that it’s a rather simplistic definition because the scope of what they do is pretty broad.
That may have you curious about what financial advisors do precisely?
The core of what a financial planner does is meeting their client’s financial goals. That’s why they always start the process by meeting with people in person to discuss their current financial standing, and where they want to go from there. Maybe they want to double their net worth, or simply create a comfortable nest egg for retirement.
Once goals have been defined, advisors will then draft a detailed plan to help achieve them. Part of this is researching investment opportunities such as stocks and bonds. They then actively monitor the client’s portfolio and update investment strategies based on circumstances and life stages, such as having children.
A big chunk of the financial advisor definition is giving sound advice. As such, educating clients is their most critical responsibility. Specifically, they need to explain investment options and their potential risks. They are also there to help clients not only earn more but to retain as much of their wealth as possible. Thus, they also advise clients on budgeting, money management, tax laws, estate planning, and other personal finance topics.
Financial management is an extensive topic. And while you’ll find well-rounded financial advisors offering a wide variety of services, you can also opt for advisors who specialize in a particular area. For example, some advisors excel in risk management, helping clients gauge their risk appetite and invest accordingly. Then there are wealth managers and private bankers, who specialize in helping high net worth individuals. The large amount of investment money wealthy people have means that investing is vastly different than it is for the general public.
Different Types of Financial Advisors
There are different kinds of financial advisors, based on how involved you need them to be with your finances.
A robo advisor is a fully digital, automated financial service that gives you a range of investment options based on some information you provide. For the most part, they focus on low cost and safer exchange-traded and index funds.
The main advantage of a robo advisor is that they’re inexpensive and easy to use. Despite this, they offer robust algorithms that can effectively plan your portfolio for you and improve on it regularly.
Robo advisors are best suited for those who have some amount of money to invest but are not sure where to begin, nor do they have the time to learn. However, the opposite is also true. Since robo advisors have minimum maintaining balances, they’re also fantastic for people who don’t yet have a lot to invest, but want to get started.
Online financial planners are a step above a robo-advisor in terms of giving customized advice, but still not as expensive as getting an in-person financial planner. They offer a mix of automated portfolio managed services, with the option of getting help from a human advisor should you need it. Thus, many of these services offer a la carte pricing, charging you for only the services that you use.
For most people, this middle ground is perfect because it provides a wide breadth of financial services while still keeping costs low. It’s ideal if you don’t mind meeting advisors virtually to get financial advice.
In-Person Financial Advisor
Finally, we get to in-person advisors, who give the most personalized service among the three types. They are suitable for individuals who have complex investment portfolios or significant life goals that are beyond what automated services can handle. That, and some people still prefer dealing with a financial advisor face-to-face.
The advantage of an in-person planner is that they will dive deep into your financial health, risk tolerance, and money goals. Hence, they can give the best advice that’s tailor-made to fit your situation.
Of course, the main drawback is that they don’t come cheap. Most charge an exorbitant flat fee and might have minimum account requirements before they accommodate you.
When to Get Financial Advisory Services
Now that we’ve answered the question “what do financial planners do,?” the next thing you might be asking yourself is: “Do I need one?”
As noted previously, there’s a misconception that financial advisors are only for people who have large amounts of money to invest. In a way, that’s partly true, and some advisors do specialize in that. But generally, what a financial advisor does goes beyond just giving investment advice to wealthy individuals or those getting a substantial financial windfall.
In a nutshell, a financial advisor can help you save more money and grow it smartly.
They can help you if you’re struggling with your financial goals even if your bank account is modest. Moreover, they’re valuable because they give an outside, expert perspective of your finances and spot problem areas that you might not have seen. Financial advisors can also give guidance on critical personal finance topics that the average person isn’t well versed in, such as tax and debt repayment.
Financial advisors do charge high fees (often up to 1% of your yearly balance or a flat fee), and this may prevent some people from getting their services. Even if that’s the case, talking to an advisor is still beneficial. Most offer free consultations where they can answer basic questions and help point you in the right direction.
If you’re struggling financially but still need advice, it might be better to get a robo advisor or online financial planning service instead.
Considerations for Hiring a Financial Advisor
The most important consideration when hiring a financial advisor is their reputation. At the minimum, you should look for a licensed broker or advisor. You can use the free FINRA tool called BrokerCheck to browse through a potential advisor’s background, qualifications, and negative history (if any). If you’re working with a financial firm, look at reviews and testimonials from clients as well.
You can also go one step further and seek out certified financial planners. This qualification indicates they have the minimum standards of excellence, experience, and ethics when it comes to giving financial advice.
You should also look for a specialist advisor if you’re looking for advice on a specific area of your finances. If you’re looking for an assessment of your risk appetite and an investment strategy that complements that, then look for someone who does just that. If you’re worried about your estate planning, find a planner with estate planning expertise.
Finally, there’s one thing that most people ignore when choosing a financial advisor, but is equally essential – rapport. Remember that you will be working closely with this person for the long term on a very critical part of your life. Make sure they’re a fantastic fit for your personality. Gut feelings and intuition go a long way, so be sure to factor that in when evaluating potential advisors.
If you maintain an excellent working relationship with your financial planner, the odds are good that they will have your best interests at heart. In turn, you will also follow their advice.
What to Expect from Working with a Financial Consultant
We’ve previously answered “what does a financial advisor do?” with a few of their key responsibilities, but let’s see that in action. Here’s what to expect once you bring in a financial advisor.
An advisor starts by getting to know your financial health. They do this by diving deep into your finances, expenses, spending habits, and risk tolerance. By getting a clear picture, an advisor can give you an action plan on how to move forward with your financial goals.
Advisors can help you with budgeting to help you save more money to use in investing. They will also develop the right investment mix for your portfolio, again based on your goals and risk appetite. A high net worth individual in retirement, for example, will have a lower risk appetite and therefore prefer capital preservation strategies.
Once the plan is in motion, they will monitor your investments regularly to see if you’re hitting your financial milestones.
Most importantly, expect your advisor to answer any questions that you might have. You can (and should!) ask why your advisor picked this particular investment option, and what risks it entails. A good advisor will be upfront with this, especially if they’re getting commissions from it. That’s fine, as long as your financial interest is still a top priority.