What exactly does a financial advisor do? If you find yourself struggling to handle your finances effectively, enlisting the services of a financial advisor could be beneficial. Let’s delve into the role and responsibilities of a financial advisor and determine if engaging one could be the right move for you.
Who is a financial advisor?
A financial advisor assists in devising strategies to achieve your financial objectives and monitors your progress towards them. They can provide valuable advice on increasing savings, making informed investments, and managing or minimizing debt.
A financial advisor is someone who helps individuals manage their finances directly or indirectly. This broad category encompasses various professionals such as investment managers, financial consultants, and financial planners.
What do financial advisors do?
Financial advisors provide various services depending on their specialization, but generally, they evaluate your financial situation — including assets, debts, and expenses — pinpoint areas needing improvement, and assist in creating a financial plan. Common services include:
- Establishing an emergency fund.
- Helping with saving and budgeting.
- Setting goals for the short and long term.
- Planning for retirement.
- Advising on tax strategies.
- Explaining different account types and suitable investment products.
- Determining the right mix of investments for your portfolio.
- Managing debt.
- Overseeing investment activities.
Depending on your needs, you can select services from different types of advisors. Traditional advisors offer personalized guidance with ongoing fees, robo-advisors provide automated portfolio management at lower costs, and online financial planning services blend affordability with comprehensive human advice.
When to Consider a Financial Advisor
If you find yourself juggling multiple financial priorities, seeking a structured savings strategy, or aiming to optimize your investments, partnering with a financial advisor could be the solution.
Financial advisors offer a seasoned perspective on your finances, providing a comprehensive assessment and tailored recommendations. They can streamline complex matters like taxes, estate planning, and debt management, while also guiding strategic investment decisions such as impact investing.
The value of a proficient financial advisor or robo-advisor often outweighs the expense, especially if it results in increased savings, reduced expenses, or enhanced long-term planning. Beyond financial gains, their expertise can instill a sense of financial security that is invaluable.
It’s important to note that financial advisors may charge varying fees, typically ranging from 0.25% to 1% of your portfolio annually, or flat fees for specific services. Understanding these costs upfront ensures you choose the advisor whose services align best with your financial goals. (Explore our comprehensive guide on financial advisor costs here.)
What to Expect from a Financial Advisor
A good financial advisor will begin by thoroughly understanding your financial situation and goals. Based on this understanding, they will provide tailored recommendations to improve your financial outlook, covering areas such as:
It’s advisable to schedule regular check-ins with your advisor, ideally once a year, to review your portfolio’s performance and make any necessary adjustments.
When selecting an advisor, it’s essential to interview multiple candidates to find one with whom you feel comfortable discussing your finances. Use our checklist of 10 essential questions to ask when vetting potential advisors.
Types of Financial Advisors and Their Services
Robo-Advisors
Robo-advisors are ideal for those looking to invest for retirement or other goals efficiently and affordably. They utilize algorithms to manage investment portfolios, making them accessible even for those with limited initial investments. You may find a robo-advisor suitable if:
- You’re starting to save for retirement and need guidance.
- You prefer a low-cost investment option with minimal account requirements.
What to Expect from a Robo-Advisor:
- Begin with a detailed questionnaire to determine your financial goals and risk tolerance.
- Receive a personalized investment portfolio typically comprising low-cost ETFs and index funds.
Benefit from automatic portfolio rebalancing and tax-efficient strategies.
Online Financial Planning Services
These services blend investment management with virtual financial planning, offering a cost-effective alternative to traditional advisors while providing personalized advice. Consider online planning if:
- You value virtual meetings but still want personalized financial guidance.
- You prefer a flexible fee structure that aligns with the complexity of advice needed.
What to Expect from Online Planning Services:
- Hybrid models provide automated investment management complemented by access to financial advisors.
- Full-service options assign you a dedicated Certified Financial Planner (CFP) for comprehensive financial planning.
Traditional, In-Person Financial Advisors
For personalized, hands-on financial guidance, traditional advisors offer a range of services tailored to your specific needs. They typically serve clients with substantial assets and provide holistic financial management. You might opt for a traditional advisor if:
- You’re experiencing significant life changes or milestones that warrant detailed financial planning.
- You prefer face-to-face meetings and are willing to invest in personalized financial advice.
What to Expect from a Traditional Advisor:
- Meet in person at their office to discuss your financial goals and assess your current financial situation.
- Receive comprehensive planning services covering retirement, investments, insurance, and more.
- Work closely with an advisor who acts in your best interests as a fiduciary, such as a CFP.
- Choosing the right advisor depends on your financial goals, preferences for interaction, and the level of personalized service you require. Each type offers distinct benefits to help you manage and grow your wealth effectively.
Choosing the Right Financial Advisor
Selecting the right financial advisor involves considering several factors tailored to your needs:
- Goals: Define your ultimate financial objectives—whether you seek investment guidance or comprehensive financial planning.
- Comfort Level: Assess your confidence in your investment skills and how much guidance you require.
- Relationship Preference: Decide if you prefer a single, long-term advisor or are open to consulting with multiple advisors as needed.
- Meeting Preferences: Determine if you prefer in-person meetings or are comfortable with virtual communication.
- Cost: Consider your budget for financial advice and services.
Investment Returns with a Financial Advisor
Historically, the stock market has averaged around a 10% annual return, adjusted for inflation and other factors. Your actual returns will depend on your portfolio’s asset allocation, investment horizon, and market conditions.
For instance, a moderate portfolio (typically 60% stocks and 40% fixed income) may not outperform the S&P 500 in a bull market but could provide more stability during downturns. A financial advisor aims to enhance your portfolio’s performance adjusted for risk, though market cycles require patience for optimal results.