A financial advisor is someone who assists with and, in some cases, manages your finances. The term financial advisor, however, refers to a wide array of professionals who render different kinds of services. Types of financial advisors include investment managers, broker-dealers, and certified financial planners just to name a few.
In this article, we’ll tackle what financial advisors do, different types of financial advisors, and tips for selecting the right advisor for you.
What Do Financial Advisors Do?
Financial advisors provide different kinds of services depending on their expertise. Generally speaking, financial advisors will carefully evaluate your current financial situation and goals. Then they determine which areas you can improve upon. This may include computing how much you should save up for retirement, making sure you have enough money tucked away for an emergency, offering tax-planning recommendations, or helping you refinance or pay off debt. Financial advisors may also help invest your money, either by suggesting particular investments or providing a full investment management service.
You can typically pick and choose which services you want your advisor to help you with, depending on the type of financial advisor you choose. For example, a traditional financial advisor would most likely offer custom, hands-on guidance while robo advisors provide an automated portfolio management service, which might work best if you need any assistance in managing your investments. Some financial advisors offer online services, which combine the services of robo advisors and that of a human counselor.
Read on below to learn more about the different kind of services financial advisors provide:
1) Debt management
Debt is a serious issue that you must untangle before it causes longstanding problems. While you do not necessarily need a financial advisor to get yourself out of debt, having the guidance of one can go a long way. A financial advisor can help you come up with a comprehensive blueprint to help you get out of debt as quickly as possible.
2) Coming up with a suitable budget to reach financial goals
Having someone around to keep you abreast of the big picture is of paramount importance especially when it involves your finances. A financial advisor can help you grasp the details of what you need to do to reach your goals—whether it’s buying a suitable house or sending your kid off to college.
3) Long-term care planning
Research has shown that a 65-year-old retired couple can expect to pony up nearly $390,000 for health care costs during their retirement. Having a financial advisor can provide you with long-term care options that are suited to your finances and lifestyle needs as you age.
4) Estate planning
Discussing end-of-life planning isn’t the most pleasant topic, but it’s important. Whether you’ve just recently bought your house or have been at the forefront of your business for the last 40 years, it’s only right that you get to pick what’s going to be done with the assets you’ve worked so hard to accumulate.
Although a financial advisor can help with estate planning, the heavy lifting is typically done by an attorney. Make sure you choose your team wisely, as it can have tremendous consequences for yourself and your heirs down the road.
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5) Retirement planning
Retirement is supposed to be a time spent having fun and relaxing. Do you want to spend the rest of your days chilling at your dream home? Or perhaps you want to see what the world has to offer? Whatever your plans are for retirement, you must have a stable income stream to let you do what you want to for the next decade or two.
Working with a financial advisor or an investment advisor will not only help you accumulate resources but also safeguard them for the long term.
If you’re expecting an inheritance, you might find yourself needing some assistance regarding the tax implications as well as the best ways to use the money. A financial advisor can help you adjust your financial strategy to accommodate the new influx of resources.
7) Tax planning
Dealing with taxes is never enjoyable. However, you can make the job a lot less taxing by working with a financial advisor, who can explain in simple terms how taxes would influence your financial situation. Whether it’s making charitable donations or creating a tax-efficient estate plan, a financial advisor can help reduce your tax burden.
Some financial advisors are also investment advisors who can help determine what mutual funds are suitable for you and show you the ropes with regards to managing and making the most of all your investments. Another crucial function of investment advisors is helping you understand the risks as well as the benefits of certain investment options.
How to Narrow Your Search
There are several different types of financial advisors to choose from. Spend some time evaluating several professionals. Never be too hasty, as you’re going to be with your advisor for quite some time (maybe decades!). Here are some factors to consider:
Goal: What is it that you want to achieve, either in the short- or long-term, by working with a financial advisor?
Comfort level: How confident are you in your investing skills?
One advisor or many different ones: Would you prefer to have just one financial advisor that addresses all of your concerns or would you rather consult with a handful of advisors, depending on the issue?
Cost: How much are you willing to pay a financial advisor?
Tips for Choosing a Financial Advisor
As mentioned, there are different types of advisors and picking one to work with can be challenging. However, you can help yourself make the correct decision by understanding what you’re getting yourself into. Before you even talk with an advisor, think about these three things:
1) Do you need a financial advisor?
Let’s get straight to the point: if you’re working from paycheck to paycheck and you want to save some money, getting a financial advisor won’t work. Harsh as it may sound, a financial advisor will not be interested in working with someone who’s going to save around $30 a week. Between that and what they’ll take away in fees, it just won’t make any sense for both parties to work together.
When should you consider hiring a financial advisor? If you have a steady income and you’re able to put away at least 20% of your annual income, then it’s high time to consider getting a financial advisor.
2) Pick the kind of advisor you want
The financial industry has two different sets of compliances that advisors follow. These are called the suitability standard or the fiduciary standard. The fiduciary standard is when your advisor is bound by law to act in your best interest. Fiduciary advisors must always put their clients’ interests before their own. Fiduciary advisors are also called fee-based advisors because they don’t receive any commissions on profits from their clients’ investments.
3) Check the advisor’s credentials
Always do your due diligence before committing to a financial advisor. One way is to verify your prospect’s credentials on adviserinfo.sec.gov which is a free tool that can give you the background and experience of the person you’re eying. It even provides information about financial firms and robo advisors. If the advisor you’re interested in has experienced disciplinary action, that’s a very bad sign. Time to start looking for someone else.
What Type of Financial Advisor Do I Need?
1. Investment advisors
The United States Securities and Exchange Commission (SEC) uses the term “investment adviser” to designate a registered financial professional. It is also commonly used as a job title and is oftentimes spelled “advisor.” At its core, an investment advisor can be a person or a firm that is paid to provide sound investment advice to clients. They can also directly manage a client’s assets. If you’re considering getting an investment advisor, you must verify that person’s registration through the BrokerCheck by the Financial Industry Regulatory Authority or FINRA.
2. Broker-dealers and brokers
A broker-dealer is a person or a company that purchases and sells securities like stocks, bonds and mutual funds. They can buy and sell on their client’s behalf, for their benefit, or both. They must also be registered with both the SEC and FINRA. The financial products that a broker-dealer can sell depends on their license. For example, a broker-dealer who has passed the Series 6 exam is restricted to selling mutual funds, variable annuities, and related products while someone with a Series 7 license is allowed to sell additional securities. A quick check with BrokerCheck can verify brokers and their licenses.
3. Certified financial planner
A certified financial planner or a CFP has a fiduciary duty to their clients. CFPs are financial advisors who have gone through arduous training set forth by the CFP Board and have passed a certification test. CFPs are professionals that are held to a high standard. They offer services that don’t require regulation like advising on how to pay a debt, plan for long-term care or even formulate a budget. If you are keen on tapping the services of a CFP, you must check their credentials with the CFP Board.
4. Financial consultant
The term financial consultant is a broad one that can be used by anybody. However, some financial consultants are referred to as chartered financial consultants or ChFC. These are consultants that have completed similar requirements as that of CFPs. ChFCs have a fiduciary duty and must comply with The American College’s code of ethics.
5. Financial coach
Most times, a financial coach is the most accessible out of all the financial professionals. They typically focus on fundamental financial literacy like how to save money each month or how to spend your money wisely. Financial coaches can help you accumulate wealth that an investment advisor may help manage later on.
6. Portfolio, investment, and asset managers
Portfolio, investment, and asset managers are professionals that manage a client’s investment portfolio, but they may provide other financial services as well.
7. Wealth advisors
Wealth advisors usually work with affluent clients and are tasked with providing a wide range of financial planning services together with guidance on investment opportunities. Sometimes called wealth managers, these professionals also aid their clients in every aspect of their financial life such as estate planning, tax relief, and even health insurance. Wealth advisors usually have a minimum investment that ranges in the millions.
Robo-advisors are automated investment management programs that utilize computer algorithms to formulate and manage an investment portfolio that is based on your goals. If you just need assistance managing your investments, a robo-advisor might be suitable for you.
9. Other professionals to help you manage your finances
Although these professionals are not financial advisors, they provide a key role depending on your situation:
Estate Planning Attorneys: You will need one to help you set up a trust or other structures to distribute your assets to your heirs. Even if you have a modest amount to pass on, you don’t want it to end up in probate!
CPAs and Bookkeepers: A CPA is helpful for filing your taxes (either personal or business) and answering higher-level questions about P&L’s, balance sheets, etc. It’s essential to have one if you own a business. A bookkeeper handles the day-to-day entries into Quickbooks or helps you manage the logistics of paying bills and other menial financial tasks.
Legacy Planners: This is someone who can help you create a family mission, sort out your family values, determine your philanthropic vision, and plan how your financial and non-financial legacy will impact your family and the world for generations. Typically, it only makes sense to work with a legacy planner if you have substantial assets ($10 million+).
Carefully evaluate your needs to help you decide what type of financial advisor you need.
What Do Financial Advisors Do?—Learn what are the many different responsibilities of a financial advisor.
How to Narrow Your Search—The four factors to consider.
Tips for Choosing a Financial Advisor—Land the ideal financial advisor by following these guidelines.
What Type of Financial Advisor Do I Need?—Learn about the different types of financial advisors.
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