Key Points:
• Anyone, anywhere, can benefit from the guidance of a financial advisor, not merely the ultra-wealthy
• Financial advisors assist clients with planning every facet of their financial lives — including, but certainly not limited to, their investment portfolios
• In addition to developing in-depth financial plans, advisors also operate as voices of reason, helping clients modulate their expectations, and make decisions for rational — not emotional — reasons
• Every advisor is different — possesses different certifications, has different areas of specialization, has different overarching philosophies — which means clients must be diligent about who they choose to work with
• Financial advisors will develop thorough pictures of your financial situation, your risk tolerance, and your life goals, in order to develop and execute a plan to help you realize your objectives
What do Financial Advisors do?
A financial advisor (or adviser) is a person who gives clients financial advice and guidance. The conventional idea of a financial advisor is that they primarily help with investment decisions, helping structure their clients’ portfolios and determining how to allocate their assets. Indeed, investment guidance is a significant part of what financial advisors do, but the scope of their role extends far beyond that single function.
In the broadest sense, financial advisors work with their clients to establish both short- and long-term goals, and then use their expertise, experience, and insight to help them achieve those goals. By developing a complete picture of clients’ financial situation, working with clients to determine the level of risk they are comfortable taking on, generating a plan, and providing regular updates (with tweaks, if necessary), financial advisors help ensure that their clients’ money — the fuel for goal-achievement — is as safe and hard-working as it can be.
This does include investment decisions, but it extends much further. Financial planners help clients update (or establish) their estate plans, tax plans, retirement plans, insurance coverages, and more, depending on the financial advisor. No two advisors are exactly alike — some work primarily with clients close to retirement, helping them preserve their wealth, and transfer it safely to younger generations. Others work more with clients in the earlier stages of their careers, helping them grow their wealth to the point that it can support major expenses like homeownership, children’s college tuition, and retirement.
In addition to developing and executing plans, financial advisors also function as voices of reason, particularly during economically challenging times. While clients may check market reports and get spooked by red numbers, financial advisors act as a stopgap between feelings of fear and irrational decisions. They know, for example, that it is usually a bad idea to liquidate when markets sag, as that cements clients’ losses, obviating any chance of recovery. They also know that, while everyone wants to get in on the next stock to rise meteorically, devoting too many resources to risky plays generally does not pay off.
Experienced financial advisors have worked through bull markets and bear markets, through recession periods and growth periods, through crisis and calm. They are able to help clients navigate all this and more with confidence and equanimity.
Financial Advisor Payment Models:
Just as their areas of specialization may vary, different financial advisors structure their pay differently. This breaks out into three major categories: Fee-Only, Fee-Based, and Commission-Based.
In essence, Fee-Only financial advisors make money either by hourly fee, or when their clients make money. Hourly fees generally range from $120–$300. If not hourly, these advisors’ pay depends directly, and exclusively, on the performance of their clients’ portfolios. Typically, their pay is based on a percentage of their clients’ assets under managements (AUM) — 1%, often.
Fee-Only advisors operate under the fiduciary standard, which means that all of their advice and decisions are legally required to be exclusively in their clients’ best interests. These advisors, aptly termed Fiduciaries, are required by law to act along these ethical guidelines. Advisors can earn fiduciary certifications to show that they have sufficient knowledge of laws, practices, and security-related procedures (screening, background checks) to operate entirely in their clients’ best interests.
The fiduciary standard differs from the suitability standard, which means that advisors’ advice and decisions are simply “suitable” for the client. Advisors operating under the suitability standard include Fee-Based and Commission-Based advisors. Fee-based advisors earn money both by commissions from product and investment sales, and perhaps also by some AUM-percentage fee. Commission-Based advisors make money exclusively by product and investment sales commissions.
Because suitability standard advisors stand to gain personally from sales of products and investments, their advice may come with conflicts of interest. It behooves the client to do due diligence research to determine whether sales and products offered by these advisors are truly right for them.
Financial Advisor Certifications:
There are an abundance of possible certifications financial advisors may attain, including (but, surprisingly, not limited to):
• Certified Financial Planner (CFP®)
• Chartered Financial Analyst (CFA®)
• Certified Fund Specialist (CFS)
• Chartered Financial Consultant (ChFC)
• Chartered Investment Counselor (CFA)
• Certified Investment Management Analyst (CIMA)
• Chartered Market Technician (CMT®)
• Certified Public Accountant (CPA) and Personal Financial Specialist (PFS)
• Chartered Life Underwriter (CLU)
Receiving and maintaining certifications means financial advisors have taken, passed, and re-passed exams, year after year. This is another important piece of a financial advisor’s job: They are extremely well-versed on regulatory requirements which ensure that their decisions are ethical and legal. While certifications do not necessarily make or break a financial advisor, they can act as a kind of extra credit, demonstrating that an advisor is highly knowledgeable and up-to-date.
Each certification refers to a different — sometimes very slightly different — area of specialization. CFP®s, for example, have completed studies on 100+ topics related to financial planning, including retirement planning, insurance, stocks, and bonds. The CFP® designation is administered by the Certified Financial Planner Board of Standards, Inc. Very comparably, ChFCs have demonstrated a “vast” knowledge of financial planning, as according to American College.
CPAs, meanwhile, have passed exams in topics related to taxation and accounting, and can earn the PFS tag by receiving training beyond that required for the CPA designation. While a CFP® and a ChFC share many traits, CPAs and their PFS relatives have completely different specialties. As such, when searching for the right financial advisor, be sure to ask after their certifications, and make sure you understand what each one means.
How a Financial Advisor Will Work with You
How You Know it’s Time to Hire a Financial Advisor
While it’s true that anybody, anywhere who’s hoping to become savvier and more practical about how they spend their money will benefit from the guidance of a financial advisor, there are some situations that more acutely call for expert help. For example, if you are expecting a major change in your life — the birth of a child, the purchase of a home/automobile, a big promotion — financial advisors will be able to help you navigate the transition safely. Likewise, if your net worth is growing but you’re unsure of how to save, invest, or otherwise allocate your money effectively, financial advisors’ advice can be invaluable. Big-picture financial topics — estate planning, insurance coverages, tax optimization — are also the domain of financial advisors.
In short, if you have big goals — homeownership, wealth growth/transfer, tuition funds, and more — it is probably time to seek expert help.
The Financial Advising Process:
As we have seen, financial advisors have many different areas of specialization. But across these various services, financial advisors will follow a relatively similar process, which boils down to the following:
1. Have you fill out a financial health questionnaire
2. Create a financial plan based on the questionnaire results
3. Plan out a series of action steps
4. Monitor your financial situation regularly, and meet with the client to communicate developments
1. Financial Health Questionnaire
In order for an advisor to provide you with accurate guidance, they first need to develop a thorough portrait of what you have now, your regular revenues and expenses, and how this is likely to change over time. A financial advisor will offer very different advice depending on whether you have no children or three children; whether you own or rent your home; whether you are a contractor or a salaried employee with stock options; etc. The financial health questionnaire is designed to provide all of this information and more.
It will give the advisor a full picture of your assets, liabilities, income, and expenses. It will show what future pension/income sources you might have. It will provide a detailed outline of your current investment portfolio. It will show whether you have an estate plan, and if so, how it is structured. It will also give the advisor a sense of what you hope to accomplish with your money over time.
2. Developing a Financial Plan
Once the advisor has a 360-degree view of your financial situation, including what you have now and your future financial aspirations, they can begin to develop a results-oriented plan. They will collate and summarize the findings of the questionnaire, including statistical summaries of your net worth, assets, and liabilities, and more qualitative summaries of your stated objectives.
They will simulate a host of scenarios — ranging from absolute-best-case to absolute-worst-case — of how your financial health could change over time. Based on your stated risk tolerance, they will draw up a series of plans designed to grow your wealth at the rate and level of risk you are comfortable with. This can vary dramatically, depending on the client; a retiree hoping to preserve her wealth for her children and grandchildren will have a very different approach than an early-career bachelor hoping to grow his nest egg.
3. Planning Action Steps
With a general plan in place, your financial advisor will then design a specific asset allocation plan, based on your capacity and your risk tolerance. They will plan to distribute various percentages of your portfolio across different asset classes, ranging from the least risky — government bonds — to the most risky — corporate bonds, investment real estate.
As we have stated, the cliche about financial advisors is that they are primarily investment managers, focused on balancing and optimizing your investment portfolio. Many clients favor this aspect of financial advising, but it is hardly the only function that advisors can fulfill. Because financial advisors cover every aspect of your financial life, action steps will also include milestones like when you will be able to buy your home, at what point your children’s college funds will be fully funded, and/or when you will have enough savings to retire comfortably.
**It is of the utmost importance for you to understand and authorize the action steps your advisor recommends before they start making changes. Do not follow their advice blindly. Their advice is likely very sound, but you do not want to get six months down the road and realize you took on more risk than you realized, or much less risk than you wanted. Ask questions, do research, and perform your own inquiries upfront so that you are confidently attuned to your financial plan. It is your money, after all.
4. Monitoring & Meeting Regularly
Once the plan is in place, your financial advisor will be in touch with you at agreed-upon intervals to tell you how it is progressing. They will set up meetings with you — either in person or remote, depending on your preferences — during which they will outline changes, provide explanations for those changes, and determine how best to move forward.
In order to get the most out of these meetings, come prepared with questions. The advisor-advisee relationship functions best as a collaborative relationship, and asking good questions will set you up to be the best possible collaborator. Also, be sure to provide a report of what has changed in your life since you last communicated. Financial advisors will modify their plans depending on whether you are suddenly in a situation where you need cash now, or if you have had a significant influx and can afford to take on more risk.
A Match Made in Financial Heaven
Because each individual advisor, as well as each firm, are different, prospective clients must be diligent about working with the right advising entity. Before engaging an advisor, and certainly before making any tangible changes to your financial situation, look into how the advisor is paid, who they generally work with, what (if any) is their overriding investment philosophy, how and how often they communicate with clients, whether they operate by the fiduciary or suitability standard, and what certifications they might have.
As you advance through life, fulling all of your responsibilities will likely become more and more challenging. But working with an advisor who understands your needs, has experience handling similar needs, and is certified in relevant areas, can reduce much of the stress and anxiety associated with these duties.
To learn more about how a financial advisor can advise you, please schedule a 30-minute complimentary phone call with a member of our team. Together, we will discuss your current financial situation and any concerns, questions, or goals you have.