An effective financial advisor is like an architect for retirement, creating the blueprints for your retirement based on your current familial and fiscal situation, and executing decisions to build and grow your investments.
These trained financial professionals maximize your income and wealth by assisting with taxes, insurance, retirement and estate planning, investments, budgeting, real estate, net worth analysis and reducing debt. Whether you are nearing retirement or planning for the future, there is a financial advisor available to help you make wise decisions to meet your goals no matter what you earn or have saved.
What is a Financial Advisor?
A financial advisor is a financial professional who helps clients utilize their income and savings to reach their short-term and long-term financial goals. These professionals can work with clients for decades to ensure they manage money to meet those expectations. Advice from a well-educated, certified financial advisor costs you up front, but you typically come out ahead by having one of these professionals manage your finances. A financial advisor can prevent you from making unnecessary financial missteps.
Financial Advisors by Another Name
Some financial advisors have a different title behind their name. Financial managers, financial planners, wealth managers and many others are financial advisors. The only difference is the title given by the employer or certifying organization. Consumers need to choose a financial advisor carefully because the Securities Exchange Commission does not provide any way to authenticate these professionals. You’ll want to look for someone who took the Certified Financial Planner (CFP) exam, or who is a chartered financial consultant (CFC) or chartered financial analyst (CFA).
Insurance agents, stockbrokers and others who sell a financial product can legally call themselves a financial advisor. These professionals can be swayed by commissions earned on options presented to clients if they are not fiduciaries. Financial advisors who are fiduciaries must put the client’s best interests first at all times. The SEC recently adopted the Regulations Best Interest rule requiring broker-dealers and investment advisors to disclose their relationship with the recommended products they sell. Companies selling financial instruments involved with financial planning have until June 30, 2020, to comply with the rule.
Basic Services from a Financial Advisor
Many financial advisors specialize in retirement investments, debt reduction, financial education and other money management services. However, some advisors offer a broad set of services to assist with any financial concerns. You can also work with a financial advisor at a firm that has a team approach where many specialized advisors work together to help you manage your money. The following is a list of what financial advisors do while considering your goals, although it’s not all-inclusive.
- Budget Planning: A financial advisor helps you prioritize lifestyle and monetary goals, determine a target amount for emergency savings and meeting expenses. Using this information, the advisor devises a plan for managing your income to meet your goals.
- Debt Management: You learn how to pay down debt, and financial advisor looks for opportunities to save money, like a lower-interest mortgage or car loan. The advisor helps you determine the best order to pay off multiple debts.
- College Savings: Your financial advisor shows you how much you need to save to put 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: Receive portfolio allocation advice, so your risk tolerance correlates with a mix of stocks, bonds, mutual funds and other investment choices. A financial advisor suggests investments and strategies for optimizing return on investment while ensuring your portfolio remains diversified.
- Insurance and Taxes: Financial advisors determine how much and what type of coverage you need at each life stage, including life and long-term care insurance, and other policies. You typically learn about disability insurance as well. A financial advisor can assist with income tax questions and prepare your tax return.
- Self-employment: A financial advisor can take the headache out of quarterly income taxes by doing the reporting for you. You can receive advice about the benefits and drawbacks of setting up your business as an LLC or one of several types of corporations. If your business is exceptionally successful, consult with a financial advisor for succession planning and the preparation of various financial statements.
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. The advisor can establish a trust to shelter your estate from taxes, assist with drafting your will, choosing beneficiaries and various types of life insurance and annuities.
- Strategic Tax Planning: Learn how to reduce income taxes using retirement investments and strategically selling stock to avoid capital gains taxes. A financial advisor can prepare your tax returns and explain how to reduce taxes on an expected inheritance.
- Retirement Planning: A financial advisor helps you determine how you want to live in your retirement years and forecast costs. You discuss Social Security and supplemental insurance, and various retirement savings accounts like an IRA, 401(k) and others. A financial advisor sets up a plan for retirement savings and choices you need to make before retiring, such as downsizing your home.
- Planned Giving: Learn about tax and other advantages of charitable and philanthropic giving. A financial advisor can establish donor trusts and investigate giving opportunities.
- Business Planning: When business profits become lucrative, talk to your financial advisor about business continuation when you want to step back from operations but stay involved. Business succession planning is a strategy for when you leave the business and requires tax planning, revenue streams and choosing new owners from your family or employee pool. If you sell a business, financial advisors can help you come up with a valuation and save you from potential pitfalls in buy/sell agreements.
How Often to Meet with a Financial Advisor
At first, you meet with your financial advisor a few times to develop a strategy and consider opportunities for managing your money. After the initial planning phase, you may only meet annually to adjust the plan to life changes and expectations. However, these professionals take calls or meet with clients any time to answer questions or to adapt your strategy should unexpected circumstances arise.
What About Robo-Advisors?
Robo-advisors are digital financial advisors that provide direction and recommendations to clients after they complete an online questionnaire. Robo-advisors have been available since around 2010 and are built on the same software financial advisors use to guide their clients’ investments and retirement planning. These inexpensive tools can work well for automatically balancing your portfolio or taking advantage of stock indexing strategies. However, a robo-advisor can’t quickly react to various types of financial situations, and may not offer your preferred investment options or adequately explain terms.
Some firms combine a robo-advisor with a financial advisor. This solution provides convenience and savings to clients with access to a professional for help or swift responses to life changes.
Concluding Thoughts On Financial Advisors
A good financial advisor helps you identify your priorities and use your income to support those targets. Your financial planning needs may amount to fundamental financial advice, or you may have substantial wealth requiring hands-on financial management. Financial advisors help people make the most of income at any level while removing the fear of making costly decisions. The value of a financial advisor is priceless when you’re navigating the world of money management.
