An effective financial advisor is like an architect for retirement, creating the blueprints for your retirement based on your fiscal situation and executing decisions to build and grow your investments. A financial advisor can help guide your decisions to invest wisely, budget appropriately, or plan for the future.
What Is a Financial Advisor?
A financial advisor is a finance professional who helps you manage your money to reach your short- and long-term goals in exchange for a fee. If you prefer, these professionals can also manage your money for you, overseeing your assets, debts, and expenses.
You can find an advisor locally or work with one online. Their advice will cost you, but a meaningful partnership with a financial expert can prevent you from missing out on surefire investments and other costly financial mistakes.
Financial Advisors by Another Name
Financial advisors can also be wealth managers, robo-advisors, and certified financial planners. The only difference is the title given by the employer or licensing organization. Look for someone with a Certified Financial Planner (CFP), chartered financial consultant (CFC), or chartered financial analyst (CFA) designation.
Financial advisors who are fiduciaries are legally bound always to put the clients’ best interests first. Insurance agents, stockbrokers and others who sell or handle direct investments can call themselves financial advisors, but they might not be fiduciaries. These professionals often earn commissions based on the products they sell you.
In 2020, the SEC introduced greater rules and regulations that require broker-dealers and investment advisors to disclose their relationship with the recommended products they sell. If you’re unsure of a professional’s qualifications, you can ask a financial advisor these questions to filter out the best candidates.
Basic Services From a Financial Advisor
Many financial advisors specialize in retirement planning, debt reduction, and other money management services. You might work with one advisor who handles your portfolio throughout your working relationship or a team of specialized advisors within a firm who help you manage your money. Here’s a list of the common services financial advisors provide:
- Budget Planning and Debt Management: An advisor can help you prioritize lifestyle and monetary goals, create emergency savings, and pay down debt. They’ll also look for money-saving opportunities, like a lower-interest mortgage or car loan.
- College Savings: If you have children, you might hire a financial advisor to determine much you need to save to put your children through college later. You’ll learn about tax-advantaged college savings accounts, grants, scholarships and loans, and the pros and cons of each option.
- Investments: A seasoned investment pro can help you allocate your portfolio according to risk tolerance, such as mixing a hearty concoction of stocks, bonds, and mutual funds. In this instance, they’ll suggest investments and strategies for growing and maintaining a diversified portfolio that can withstand dynamic economic conditions.
- Insurance: Financial advisors determine how much and what type of coverage you need at each life stage, including life, disability insurance, and long-term care insurance policies.
- Self-Employment: Some business owners hand off their business’s tax, reporting, and legal aspects to a financial advisor. They can advise you on the pros and cons of setting up your business as an LLC or an S corporation and then handle quarterly taxes and succession planning down the line.
Advanced Financial Advisory Services
Some financial advisors work with clients who have high-level earnings, investments and savings. These individuals receive what are typically called wealth management services.
- Estate Planning and Trusts: A financial advisor can explain how to maximize assets left to heirs and charitable causes. In these instances, they might establish a trust to shelter your estate from taxes, assist with drafting your will, choosing beneficiaries and various types of life insurance and annuities.
- Retirement Planning: A retirement-focused advisor can help you determine how you want to live in your retirement years and forecast costs. You can discuss Social Security, supplemental insurance, and various retirement savings accounts like IRAs and 401(k)s. Then, they’ll draft a plan for retirement savings and outline the choices you need to make before retiring, such as downsizing your home.
- Strategic Tax Planning: As you grow your wealth and near retirement, a financial advisor can show you how to reduce your tax burden using retirement investments and identify strategic selling opportunities to avoid capital gains taxes. A financial advisor can prepare your tax returns and explain how to reduce taxes on an expected inheritance.
- Planned Giving: A financial advisor can establish donor trusts and investigate advantageous charitable and philanthropic giving opportunities.
- Business Planning: When business profits become lucrative, you can leverage an advisor to conduct succession planning as you slowly retire. They’ll handle tax planning, revenue streams and ownership transfer. If you sell a business, they can determine the valuation and guide you through any buy/sell agreement.
Choosing the Right Financial Advisor
With so many titles and designations to sift through, finding a financial advisor who understands your specific situation can be tough. The easiest place to start vetting a pro is FINRA’s BrokerCheck tool. This tool pulls information from the SEC and can tell you whether someone is registered to sell securities and offer investment advice. It will show you current registrations, employment history, and any disciplinary action taken against the person.
Above all, choose a qualified, active financial advisor experienced in your needs. For example, you might not need an advisor who works with high-net-worth individuals if you’re just starting out. On the other hand, you may search for a Certified Wealth Strategist (CWS) or Retirement Income Certified Professional (RICP) if planning for retirement is an immediate need.
How Often To Meet With a Financial Advisor
At the start of your relationship, you’ll meet with your financial advisor a few times to develop a strategy and consider opportunities for managing your money. Once a plan is set, you’ll cut back your contact to check in and adjust your plan as life dictates. Most advisors will offer to meet virtually or in person. For many, annual meetings are enough to maintain your portfolio, ask questions, and account for changes, such as buying a house, earning more money, or sending a kid to college.
What About Robo-Advisors?
Robo-advisors are digital financial advisors that provide direction and recommendations to clients after they complete an online questionnaire.
These advisors can offer more affordable management fees because they don’t offer the robust, personal advice a traditional advisor would, such as budgeting or estate planning. These pros use the same algorithms as financial advisors, but their advice is less tailored. Here, the algorithm will recommend an investment portfolio based on the needs mentioned in the questionnaire. You might choose a robo-advisor if you need basic advice to build or grow your investment accounts, like ETFs and index funds.
Concluding Thoughts On Financial Advisors
A good financial advisor helps you identify your priorities and use your income to support those targets. Depending on your situation, you might require fundamental financial advice or hands-on financial management. The right financial advisor can help you make the most of your income and squash your fears of making costly mistakes. A financial advisor’s value is priceless when navigating the world of money management.
