Understand what financial advisors do and how they help clients better manage their money
Do you plan to retire one day? Maybe get married or go to college? How about paying off some debts? These are all reasonable and achievable financial goals. For many of us, however, it's not always clear what we should do to make those dreams come true. And then it might be a good idea to ask for professional help.
A financial advisor can be a valuable asset if you have financial goals you want to achieve but aren't sure how to make it happen. They can also educate you about financial products, tax advantages, and insurance options you may not have known could help you build and protect your wealth. Here's a closer look at what a financial advisor is and what they can offer you.
What is a financial advisor?
A financial advisor is a professional who provides clients with guidance regarding financial goals, mortgages, insurance, retirement, investments and general financial management. The term is often used interchangeably with “financial planner” and can encompass a wide scope of specialization. Although some financial advisors offer a variety of services, many specialize only in making and managing investments.
“I became a financial advisor to guide my clients through all financial aspects of their lives,” says John Stoj, investment advisor representative and founder of Verbatim Financial. “This can include investments, but also issues related to careers, business ownership, estate planning, insurance and taxes… essentially anything that could benefit from planning.”
Types of Financial Advisors
Nowadays, you will find different types of financial advisors at your disposal. Some of the most common include:
- Robo-advisor: A robo-advisor is an automated platform that makes investment recommendations based on the information you enter into the system. It uses algorithms and often artificial intelligence to determine your risk tolerance and which investments might be good ones to make. These types of services are generally low cost but limited in what they can offer.
- Online Financial Planning Services: These services go a step further than robo-advisors, often offering a broader scope of options. Online financial planning services are often automated and can help you create financial plans and budgets, as well as portfolio building, goal setting, and reporting.
- Traditional financial advisors: include certified financial planners (CFP), brokers, registered investment advisors (RIA), and wealth managers. Traditional financial advisors often provide comprehensive, personalized advice about your financial life. They can provide product recommendations based on your specific situation and goals, make investments on your behalf, and help ensure you stay on track.
What does a financial advisor do?
Financial advisors can offer a wide range of services. Some focus only on investments and portfolio construction/management. Others provide comprehensive services for everything from saving for college and retirement to tax and budgeting strategies.
“In an ideal world, a financial advisor should look at your big financial picture and help you build a plan to get you to and through retirement,” says Mary Lyons, financial advisor and founder of Benchmark Income Group. “This includes investment portfolio management, but it also includes reviewing your insurance coverage, working with your real estate attorney, communicating with your accountant, helping determine your mortgage structure and budget. A good financial advisor should be able to answer any question you have about your finances. ”
If you're looking for a financial advisor, it's a good idea to shop around to find someone who offers services that suit your situation. Also look at how they make money. Working with a fiduciary, such as a CFP or RIA, is often preferred. These financial advisors often have a fee-only business model, meaning they charge clients directly for their services and do not receive any type of commission.
Virtually anyone can benefit from working with a financial advisor. Some of the most common services they offer include the following:
2. Tax planning
Many financial advisors provide tax planning services. This doesn't mean they will help you file your tax returns or that they are fully trained in tax law like a certified public accountant (CPA). Instead, they can help you manage the tax liability that results from your investment strategies and help you build wealth by taking advantage of rules that can reduce your tax liability.
Not every financial advisor offers or is qualified to offer these types of services, but some are also CPAs. At a minimum, a financial advisor should be willing to work with your accountant or tax attorney to ensure that your financial plan keeps your tax obligations to a minimum and doesn't create new problems.
3. Succession planning
A financial advisor can help you plan what you want to pass on to your heirs when you die. They may be trained in estate planning or be willing to work with your attorney to determine what type of insurance you need, what types of financial products you might want to set up to pass along (such as a trust or endowment fund), what should be done with your investments, etc.
“It’s critical that your entire team – CPA, lawyer, banker, consultant – is communicating at least once a year,” says Lyons. “Otherwise, they could be working against each other instead of all pulling in the right direction.”
4. Long and short term financial planning
Financial advisors work with clients to create and execute plans designed to achieve short- and long-term goals. For example, you can work with a financial advisor to review your debt and create a plan to reduce the amount you owe this year.
At the same time, you can also create a college savings account for your new baby. A financial advisor can work with you to create a monthly budget that aims to reduce your debt while funneling deposits into a 529 college savings plan.
The financial conclusion
Consulting a financial advisor is a smart way to make progress toward achieving short- and long-term financial goals. You should always research what options are available to you and ask questions about what services are offered and how they are compensated.
Since there is no education or experience requirement for someone to be a financial advisor, it's also a good idea to look into the background of someone you're considering working with regarding your money.
Some advisors will only focus on a few services, while others offer more comprehensive planning and management options. New technology has also given way to automated financial tools. It is up to you to investigate and determine what is best suited for your situation.
