What is the Role of a Financial Advisor?

Many people are curious about what a financial advisor does. In general, these professionals assist you in making decisions about what to do with your money, which may include investments or other actions.

A Financial Advisor's Various Roles

A financial advisor is your partner in financial planning. Assume you wish to retire in 20 years or send your child to a private university in ten. To achieve your objectives, you may require the assistance of a competent professional with the necessary licenses to help make your ideas a reality; this is where a financial advisor comes in.

Together, you and your advisor will cover many topics, including the amount of money you should save, the types of accounts you need, the kinds of insurance you should have (including long-term care, term life, disability, etc.), and estate and tax planning.

The financial advisor is also an educator. Part of the advisor's task is to help you understand what is involved in meeting your future goals. The education process may include detailed help with financial topics. At the beginning of your relationship, those topics may include budgeting and saving. As you advance in your knowledge, the advisor will assist you in understanding complex investment, insurance, and tax matters.  

Services Provided by Financial Advisors

• Investment advice: Financial advisors offer advice on those investments that fit your style, goals, and risk tolerance and goals, developing an investing strategy and making adjustments as needed.
• Debt management: Financial advisors can create strategies to help you pay down your debt and avoid debt in the future.
• Budgeting: A financial advisor will provide tips and strategies to create a budget that helps you meet your goals in the short and the long term.
• Saving for college: Part of a budgeting strategy may include strategies that help you pay for higher education.
• Retirement planning: Likewise, a financial advisor will create a saving plan crafted to your specific needs as you head into retirement.
• Estate planning: Financial advisors will create a plan and help you identify the people or organizations you want to receive your legacy after you die.
• Long-term healthcare and insurance: A financial advisor will provide you with the best long-term solutions and insurance options that fit your budget.
• Tax planning: Financial Advisor Tax Planning Services include:
• Tax return preparation.
• Maximizing tax deductions.
• Scheduling tax-loss harvesting security sales, usually around year-end.
• Ensuring the best use of the capital gains tax rates.
• Planning to minimize taxes in retirement.
  

Step one in the financial advisory process is understanding your financial health. You can’t properly plan for the future without knowing where you stand today. Typically, you will be asked to complete a detailed written questionnaire. Your answers help the advisor understand your situation and make certain you don't overlook any important information.

The Financial Health Questionnaire

A financial advisor will work with you to get a complete picture of your assets, liabilities, income, and expenses. On the questionnaire, you will also indicate future pensions and income sources, project retirement needs, and describe any long-term financial obligations. In short, you’ll list all current and expected investments, pensions, gifts, and sources of income.

The investing component of the questionnaire touches upon more subjective topics, such as your risk tolerance and risk capacity. Having an understanding of your risk assists the advisor when it’s time to determine your investment asset allocation. At this point, you'll also let the advisor know your investment preferences as well.

The initial assessment may also include an examination of other financial management topics, such as insurance issues and your tax situation. The advisor needs to be aware of your current estate plan, as well as other professionals on your planning team, such as accountants and lawyers. Once you and the advisor understand your present financial position and future projections, you’re ready to work together on a plan to meet your life and financial goals.  

Creating a Financial Plan

The financial advisor synthesizes all of this initial information into a comprehensive financial plan that will serve as a roadmap for your financial future. It begins with a summary of the key findings from your initial questionnaire and summarizes your current financial situation, including net worth, assets, liabilities, and liquid or working capital. The financial plan also recaps the goals you and the advisor discussed.

The analysis section of this lengthy document will provide more information about several topics, including your risk tolerance, estate-planning details, family situation, long-term care risk, and other pertinent present and future financial issues.

Based upon your expected net worth and future income at retirement, the plan will create simulations of potentially best- and worst-case retirement scenarios, including the scary possibility of outliving your money. In this case, steps can be taken to prevent that outcome. It will look at reasonable withdrawal rates in retirement from your portfolio assets. Additionally, if you are married or in a long-term partnership, the plan will consider survivorship issues and financial scenarios for the surviving partner.

After you review the plan with the advisor and adjust it as necessary, you’re ready for action.

Financial Advisors and Investments

It’s important for you, as the consumer, to understand what your planner recommends and why. You should not follow an advisor’s recommendations unquestioningly; it’s your money, and you should understand how it’s being deployed. Keep a close eye on the fees you are paying—both to your advisor and for any funds bought for you.

Ask your advisor why they recommend specific investments and whether they are receiving a commission for selling you those investments. Be alert for possible conflicts of interest.

The advisor will set up an asset allocation that fits both your risk tolerance and risk capacity. Asset allocation is simply a rubric to determine what percentage of your total financial portfolio will be distributed across various asset classes. A more risk-averse individual will have a greater concentration of government bonds, certificates of deposit (CDs), and money market holdings, while an individual who is more comfortable with risk may decide to take on more stocks, corporate bonds, and perhaps even investment real estate. Your asset allocation will be adjusted for your age and for how long you have before retirement.  

Each financial advisory firm is required to make investments in accordance with the law and with its company investment policy when buying and selling financial assets.

A commonality among firms is that financial products are selected to fit the client’s risk profile. Suppose, for example, a 50-year-old individual who’s already amassed enough net worth for retirement and is predominantly interested in capital preservation. They may have a very conservative asset allocation of 45% in stock assets (which may include individual stocks, mutual funds, and/or exchange-traded funds (ETFs)) and 55% in fixed-income assets such as bonds. Alternatively, a 40-year-old individual with a smaller net worth and a willingness to take on more risk to build up their financial portfolio may opt for an asset allocation of 70% stock assets, 25% fixed-income assets, and 5% alternative investments.

While taking into account the firm’s investment philosophy, your personal portfolio will also fit your needs. It should be based on how soon you need the money, your investment horizon, and your present and future goals.

Regular Financial Monitoring

Once your investment plan is in place, you’ll receive regular statements from your advisor updating you on your portfolio. The advisor will also set up regular meetings to review your goals and progress and to answer any additional questions you may have. Meeting remotely via phone or video chat can help make those contacts happen more often.

In addition to regular, ongoing meetings, it’s important to consult with your financial advisor when you anticipate a significant change in your life that might impact your financial picture, such as getting married or divorced, adding a child to your family, buying or selling a home, changing jobs, or getting a job promotion.

Signs You May Need an Advisor

Anyone can work with a financial advisor at any age and at any stage of life. You don’t have to have a high net worth; you just have to find an advisor suited to your situation.

The decision to enlist professional help with your money is a highly personal one, but any time you’re feeling overwhelmed, confused, stressed out, or scared by your financial situation may be a good time to look for a financial advisor. If you cannot afford such help, the Financial Planning Association may be able to help with pro bono volunteer assistance.

It’s also fine to approach a financial advisor when you’re feeling financially secure but you want someone to ensure that you’re on the right track. An advisor can suggest possible improvements to your plan that might help you achieve your goals more effectively. Finally, if you don’t have the time or interest to manage your finances, that’s another good reason to hire a financial advisor.

Those are some general reasons you might need an advisor’s professional help. Here are some more specific ones.

None of Your Savings Is Invested or You Don’t Know How to Invest

Because we live in a world of inflation, any money you keep in cash or in a low-interest account declines in value each year. Investing is the only way to make your money grow, and unless you have an exceptionally high income, investing is the only way most people will ever have enough money to retire.

You Have Investments, But You’re Consistently Losing Money

Even the best investors lose money when the market is down or when they make a decision that doesn’t turn out as they’d hoped. But, overall, investing should increase your net worth considerably. If it’s not doing that, hiring a financial advisor can help you find out what you’re doing wrong and correct your course before it’s too late.

You Don’t Have a Current Estate Plan

A financial advisor can also help you put together an estate plan to make sure your assets are handled according to your wishes after you die. And if you aren’t properly insured (or aren’t sure what insurance you need), a financial advisor can help with that, too. Indeed, a fee-only financial advisor may be able to offer a less biased opinion than an insurance agent can.1:43

Steps to Evaluate a Financial Advisor

How to Choose a Financial Advisor

Follow these simple steps in order to choose the right financial advisor that provides strategies and services that fit your goals and needs.

• Interview a few different advisors and compare their services, style, and fees. Don't forget to be prepared with a questionnaire to help you decide if they are a good fit.
• Look for an advisor who focuses on educating. A good financial advisor shouldn't just sell their services, but provide you with the tools and resources to become financially savvy and independent, so you can make informed decisions on your own.
• Look for an advisor who is educated and well-informed. You want an advisor who stays on top of the financial scope and updates in any area, and who can answer your financial questions about a myriad of topics.
• Look for an advisor that matches your style and beliefs, and understands your emotions. For example, you want an advisor that is well aware of your risk tolerance and encourages you to take wise decisions.
  

The Bottom Line

Not all financial advisors have the same level of training or will offer you the same depth of services. So when contracting with an advisor, do your own due diligence first and make sure the advisor can meet your financial planning needs. Check out their certifications as well, and be sure you understand, agree with, and can afford their fee structure. Also, investigate their regulatory history with your state regulatory agency, FINRA’s BrokerCheck, and the SEC’s Investment Advisor Public Disclosure database.

Finally, be aware that finding an advisor who is the right fit for your personality is key to developing a successful, long-term relationship.

‍