What is the importance of financial advisor – A financial advisor is nothing but a coach of your money. Before learning about why a financial advisor is important? You need to know who is a financial advisor. So, a financial advisor is a person who simply provides you guidance on how, when, and where to invest your money. Generally, the advice they give is a wholesome financial plan or individual investments made straight away to a large financial plan. In short, advisors help you by providing advice on where to invest, in deciding how much you invest, and the review that takes care of corrective measures.
Now, let’s learn what is the role of the financial advisor of a fitness coach. As we all understand that being fit and healthy is important, but we sometimes fall out of our goals due to a lack of paucity of time, discipline, and unawareness of what to do after that? Then, here is when the role of a fit
ness coach comes. Simply a coach’s rule is to make sure you work towards your goals without any hazards. So, just like a fitness coach, a financial advisor does the same. Now, in this article, we answer the question of why a financial advisor is important in detail. Read along.
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What Are Financial Advisors?
Let’s be honest: Not everyone has the time or desire to become a financial expert. Still, these days, it is increasingly important to be able to manage one’s personal and household finances.
Don’t fret, though. If you would rather have an easy plan that you can execute without having to constantly worry about changes in legislation or the economy or financial products, then you might consider hiring a financial advisor.
Understanding Financial Advisors
Financial advisors, sometimes known as financial planners, are professionals who advise their clients on decisions related to wealth management and personal finance. Depending on their area of expertise, financial advisors can help you with everything from putting together an entire retirement savings plan with a timeline attached to it or simply answering a question about whole life insurance.
Here’s a small snapshot of some of the things that a financial advisor can do:
- Meet with you to assess your current financial situation and future goals
- Develop a comprehensive plan that addresses your major areas of financial concern: retirement, college planning, insurance, avoiding estate tax, etc.
- Provide advice as unexpected financial issues arise in your life
- Set up investment accounts and invest funds for you
- Locate appropriate financial vehicles for you, such as insurance policies or mortgages
Within the financial advisor field, there are many different designations and industry credentials, including Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and Chartered Financial Consultant (ChFC).
Of these designations, one of the best-known is the CFP. This designation is issued by a private trade association: the Certified Financial Planner Board of Standards (CFP Board) in the United States. The CFP Board mandates qualifying exams and continuing education for those with the certification.
Life Events That Can Prompt Financial Advice
Oftentimes, particular events prompt a person to seek out financial advice. These events usually involve windfalls or major losses—or a major life event. You may be more likely to seek financial advice if you find yourself in one of these scenarios:
- I’m nearing retirement, and I want to ensure that I’m on the right track.
- I just inherited some money from a parent, and I want to get some advice on how to invest the money.
- I was recently married, and we need help managing our finances as a couple.
- I was recently divorced or widowed, and I need help moving forward financially as a single person.
- Mom and Dad are getting older, and they/we need help managing their overall finances.
- I hate investing and financial planning, and I want professional help to ensure that I don’t mess up my future.
- I enjoy financial planning and investing, but I want a second opinion to see if I could do it better.
At some point, everyone needs to develop a long-term financial plan that includes considerations for retirement, paying off your house, funding college education for your children (if you have them), estate planning, and a timeline for when you can actually retire. These are also good reasons to seek out a financial advisor.
When to Seek Financial Advice
With all of the information available to you in books, print media, and the multitude of websites dedicated to personal finance, do you really need a financial advisor?
Before making a decision, ask yourself these questions:
- Do you have a fair knowledge of investments?
- Do you enjoy reading about wealth management and financial topics and researching specific assets?
- Do you have expertise in financial instruments? Do you have the time to monitor, evaluate, and make periodic changes to your portfolio?
Doing your own research is a possibility, but to do it right, you’ll need to spend a lot of time keeping current on all of the changes in investing and insurance regulations.
There are also changes in tax laws or other legislation that could affect your financial affairs. Changes in mutual fund options at your brokerage firm can also have a huge impact on your financial situation. For example, if one of your funds closes, you will need to decide where to put the money.
If you want to handle your finances alone, you will also need to stay abreast of popular financial products and the introduction of new products. A financial advisor can handle all of that research for you, reducing the cognitive overhead and greatly simplifying the process of investing.
If you’re not working with a financial advisor, will you really do it yourself?
Properly managing your investments and making the right financial decisions takes time, skill, and effort. It’s not a one-time thing, either. For now, let’s set aside the skills, we’ll get to that later. Time is our most precious commodity. There are plenty of things in life you could do, maybe run a marathon or learn a new language, but it doesn’t mean you’re going to do it.
Busy executives, business owners, working parents, and caretakers have a lot on their plate. Finding time to research financial questions, evaluate your options, and execute a decision takes time. (Perhaps this is why over half of 401(k) investors are invested in just one target-date fund!)
Even if you could make the time, perhaps you’d rather not if it takes time away from other things you rather do. Personal finance isn’t interesting to everyone! And it doesn’t have to be. But if you’re neglecting your finances, it’s likely worth it to hire a wealth advisor. Time is money, and there’s a cost to delaying good financial decisions or prolonging poor ones, like keeping too much cash or putting off doing an estate plan.
If you’re wondering if you need a financial advisor or if you should do it yourself, consider whether DIY investing is a realistic option. What changed so you now feel you can devote more time and energy to your investments than you have before? Do-it-yourself can easily turn into no-one-does-it. We all have a home project or two to prove it. So if your to-do list is endless and you never quite have time to tackle your personal finances, you might need a financial advisor.
If your strategy is a blend of winging it and Google
We don’t know what we don’t know. If you’re just Googling for answers to specific questions, how will you know you didn’t miss anything? We often find the greatest risks facing a new client weren’t even on their radar.
Our financial lives are complex and inter-related. Pulling one lever can have unintended consequences in another aspect of your life. How can you be sure you’re going to get the best outcome if you haven’t done it before? Often, what makes a financial advisor worth it is their ability to keep you on track and proactively identify financial risks and opportunities for you. We value experience in nearly every aspect of life, don’t discount it when it comes to managing your life savings.
Your finances are disorganized, and you don’t know where you stand
If your accounts are scattered across multiple institutions, it’s hard to know where you stand financially. Particularly if you don’t have a saving or investment strategy. This is another situation where it’s probably worth it to get a financial advisor instead of doing it yourself. For starters, an advisor can help you move or consolidate old 401(k)s, IRAs, and brokerage accounts in one spot or at least as few as possible.
There’s a lot that goes into your financial position. Perhaps you’re a victim of lifestyle inflation or just don’t have a grasp on your spending at all. It’s really important to know where you stand financially. Especially if you are afraid of the answer.
During this process, you can also discuss developing a cohesive investment strategy and understand how you’re tracking towards your goals. Getting organized and building a strategy going forward is a critical step. But it doesn’t just end there. People often need help implementing it, staying on track with savings goals, or revising plans when things change.
One-time financial health checkups typically fail. Getting on the right track is an important first step, but unless you’re just starting to save for retirement, insular advice will likely fall short of what you really need. Without ongoing support, recommendations likely sit idly in a desk drawer. And changes to your personal financial life keep coming. New laws, like the Secure Act, can require strategy changes, while a decline in your account could be a tax-loss harvesting opportunity.
It’s worth it to get a financial advisor before you make a life-changing decision
We have a lot of flexibility to unwind many of the decisions we make. But you can’t always rely on a take-back, especially for major financial decisions. You’ll need the tools, experience, and objectivity a financial advisor brings to help you make the best decision the first time. Because you might not get another chance.
Deciding to retire, take an early retirement buyout package, sell a business, take a lump sum over a pension, start Social Security, or buy a home with cash are some examples of major financial decisions. You may also be making a major decision by taking no action at all. For example, if you exercise stock options but don’t have a plan to sell and diversify, you risk your entire on-paper windfall if the stock sinks.
There’s no good reason to shoot from the hip with so much at stake. A wealth manager can help you quantify the decision, understand the impact on other areas of your life, and assess your alternatives. It’s often worth it to build a financial plan to help with the decision making process.
A comprehensive financial plan can help you make big financial decisions
A financial plan helps accomplish four main objectives:
- Answer the big questions. If you’re contemplating a big decision like can I retire at the end of the year, should I use a windfall to pay off my mortgage early, or how much do I need to save to retire and maintain my lifestyle, a financial model is the best way to evaluate the goal and compare alternatives.
- Incorporate the various ‘side effects’ of making a decision about your money or investments, like tax implications or funding one goal at the expense of another. Our financial lives are incredibly intertwined. Looking at it in a vacuum won’t give you the whole picture. The only way to pull it all together is through a financial plan.
- Considering and quantifying alternate paths using what-if analysis. Who doesn’t like options? Maybe you have your heart set on retiring at 55. Wouldn’t you want to know what your retirement budget could be if you worked another two years?
- Stress-test your plan with a risk simulation to help ensure you don’t run out of money. By accounting for the variation in investment returns, a risk simulation can help investors feel confident knowing the probability that their plan will succeed.
This is another part of financial planning and investing where you really need a financial advisor. If you’re not working with a professional, there’s no guarantee you’re asking yourself all the right questions or haven’t overlooked anything.
If getting a financial advisor would give you peace of mind or reduce money stress, it’s worth it
There are a lot of reasons investors choose to work with a money manager or financial planner. One reason is the peace of mind it gives individuals and their families. If busy working executives don’t have time to oversee their investments, it can become a source of stress. Or perhaps a retiree is always worrying about overspending or running out of money. And if something happens to the breadwinner and financial manager of the household, who will the surviving spouse and/or children turn to for help and guidance?
Every day, people decide they need a financial advisor to address these and other money concerns. Worries or disagreements about finances are among the top stressors for individuals and couples alike, so these issues are very real. So too are the consequences for inaction.
Finally getting your finances in order, ensuring family is cared for, or getting a grasp on your retirement plan can be empowering and liberating. Reducing or removing this source of anxiety can make working with a financial advisor worth it.
How to Choose a Financial Advisor
Getting One-Time Financial Advice
Some financial planners and advisors will work with savers on a one-time basis, to either develop a financial plan or help with a specific issue or question. Generally, these sessions will be based on an hourly rate or for a flat fee.
For example, if your company has offered you a buyout package to take an early retirement, you might engage the services of a financial advisor to help you sort through your options. They can help you to evaluate any incentives that your company may be offering, such as enhanced pension benefits, and to visualize the long-term costs or benefits of such a decision.
As another example, you might ask a financial planner to put together a comprehensive financial plan or review your current situation. In addition to helping you better understand your finances, you would likely walk away with actionable steps or a road map to follow.
Keep in mind that it is not uncommon for a one-time engagement to evolve into either a full-time advisory relationship or more regular financial checkups.
A financial advisor is not the same thing as a Registered Investment Advisor (RIA). An RIA advises individuals on investments and actively manages their portfolios, usually receiving a percentage of the assets’ worth in compensation.
Hiring a Full-Time Financial Advisor
Just as there are many good reasons to seek out the services of a financial advisor for a one-time or short-term need, it can also make sense to engage the services of an advisor on a long-term basis.
Different advisors and firms all work in different ways, but it is common for an advisor in one of these arrangements to provide ongoing investment management services, as well as ongoing advice on financial planning issues that an investor might encounter. These topics can include estate and tax planning, preparations for retirement, saving for your children’s college, and a host of other considerations.
Payment for these services is sometimes a percentage of the investment assets under management (AUM). Other times, the fee structure is a flat retainer. Under this type of arrangement, the investor and advisor typically would formally meet (in person or virtually) twice per year or quarterly, with the client having access to the advisor as often as needed for any questions or issues that might arise in the interim.
The benefit to this sort of arrangement is that the investor not only has a professional watching their assets but also receives advice on their overall situation throughout the various stages.
Advantages and Disadvantages of Hiring a Financial Advisor
Benefits of a Financial Advisor
Financial advisors can be great when you are confused, emotional, or simply ignorant of various wealth management topics. Add in the fact that a majority of people can’t see far enough into the future to imagine their retirement, much less plan for it, and professional advice can be very handy. A qualified advisor will ask you a lot of questions—some of them uncomfortable—to get the full picture of where you want to take your life.
Once all of the details are in hand, the financial advisor can put together a plan and offer you advice on investments, retirement planning, estate planning, tax liability, and your kids’ college education. The breadth of the advisor’s knowledge can make a lot of your difficult decisions easier.
Some financial planners go further, actively helping you to buy insurance products and to invest in financial products, such as mutual funds or certificates of deposit (CDs). While not all financial advisors can actually trade securities, many can act as your liaison with a broker or money manager who does. They can also work with a trust- and estate-planning lawyer or an accountant on your behalf.
Limitations of Financial Advisors
As great as a good financial advisor can be, there are always some bad apples. An incompetent (or, worse, dishonest) advisor can cost you a lot of money. Here are some red flags to look out for when you are working with an advisor:
- Churning your investments: Some advisors may prompt clients to buy and sell securities more than necessary, generating higher commissions for themselves.
- Expensive investments: Pointing you to mutual funds with high expense ratios when a similar, low-cost index fund or an exchange-traded fund (ETF) would be a better choice.
- Bad planning: A well-intention ed advisor who puts together a financial plan that is sketchy or ridden with holes is not helping you at all. Of course, plans do need to be flexible, given changes in the economy, interest rates, and the curve balls that life can throw at you personally (loss of a job, long-term illness, etc.). But you need to start out with a detailed blueprint and a clear course of action.
- Not responding: Even an unbiased advisor is useless if they never return your calls or emails when an urgent need arises. Timing can be of the essence in many financial and investment scenarios, and you must feel confident that your advisor will respond to you promptly.
Always ask a prospective advisor if they are a fiduciary. This means that they work for you, and are legally bound to act in your financial interest.
Fiduciary Financial Advisors
To avoid problems, make sure that your advisor has a fiduciary duty to you. Fiduciary duty means that your advisor is legally obligated to put your needs above their own and always act in your best interests, offering you an unbiased view and opinion.
In a financial planning context, this means that the advisor can’t steer you toward investments that are expensive for you (through expense ratios and sales charges) just because they’re more profitable for the advisor (as a result of the commissions that they earn). The advisor must also fully explain any recommendations to you and disclose any potential conflicts of interest—for example, they might say, “XYZ mutual fund company pays me a 30% commission, and ABC company only pays me 25%.”
Being a fiduciary also means that the advisor must respect your financial goals and risk tolerance, advise you accordingly, and recommend appropriate action. A planner can’t guarantee investment performance—that the mutual fund in which they put you will rise by a certain amount or even rise at all.
However, if you make it clear that you want to invest conservatively, preserving your capital at all costs, then it would be against the advisor’s fiduciary duty to put you in an aggressive growth stock fund that is extremely volatile. Or, if you are dependent on investment income to live, then it would be against the advisor’s fiduciary duty to push high-interest junk bonds without revealing that they have a high risk of default.
It’s important to understand the compensation structure for your advisor because it can impact the kind of advice that you receive. Whether or not a financial advisor is a fiduciary depends on how they are licensed and regulated.
Paying Your Financial Advisor
Getting quality advice isn’t free, and a professional financial planner will cost you money. Some planners charge by the hour or have a set rate for certain services: This is called fee-based or fee-only planning. Some are compensated by a commission every time they make a transaction or sell you a product. Some get paid in both ways.
Fee-based advisors often claim that their advice is superior because it carries no conflict of interest, as commission-based recommendations might. In response, commission-based advisors argue that their services are less expensive than paying fees that can run as high as $100 per hour or more—and that you’re paying for demonstrated services and activities, not just amorphous advice or untraceable work hours.
6 Reasons Why Do We Need A Financial Advisor?
Maybe you thought that there is a lot of advice available on the online platform for free, so why do we need a financial advisor? So, here is the answer to your question: a financial advisor is specialized in giving financial advice to their customers that are based on his/her expertise, knowledge, and requirements. While you have been aware of your requirements and the way to go for the investments, you may not always have time to do it on your own so here a financial advisor comes into the story and takes the responsibility from you. Now, we discuss the benefits of having a financial advisor for your financial planning and investment.
Understanding your investment requirements.
The financial advisor firstly understands the requirement and purpose of their clients that they understand through you and then draws a successful long-term plan to fulfill it.
A financial advisor comes with her/his expertise in the markets of finance. They are experts because they undergo various training and also carry certificates to secure the title of a financial advisor. And thus, having a financial advisor will help you by building a portfolio, learn your goals that could be a good idea.
Goals require to be smart – measurable, specific, realistic, achievable, and time-bound.
In your financial plan, you have to learn your goals that are achievable keeping in mind factors like income, the expectation of goals, and returns. For that, a financial advisor will help you to do this.
When you have decided what your goals are then your financial advisor will help and support you to choose the correct investment options so they can easily achieve them.
Regularly monitoring is important. In that, a financial advisor helps you to reassess and monitor the investment performance as you do not always have time to monitor regularly. Monitoring is important because it makes sure the alignment of your valued investment with your financial goal.
Revision from time to time.
It is important to revise your portfolio on time because an investment portfolio requires reallocation and reviews that depend on the situation of the market and needs that have changed. In such market situations, a financial advisor would suggest revisions based on his/her knowledge and expertise.
Managing your finances is not so big but it is all a matter of trial, knowledge, and experience. Getting the right financial advisor is the key to get success on your financial plan and it is crucial to shop around for the right financial advisor. They will help you by knowing it. And it is as important as a fitness coach for your health. I have discussed the importance of financial advisors above in this article read along. Hope you understand why you need a financial advisor. Thanks for reading.
Frequently Asked Questions
What is Automated Financial Advice or Robo-Advisors
Today, financial advice has also benefited from automation and information technology. So-called robo-advisors offer a hybrid advice model that combines the typical asset allocation and advice services of a traditional advisor with a digital, automated platform. These platforms use computer-based algorithms that don’t fall prey to human bias or emotion. Instead, they follow sound investment models such as modern portfolio theory (MPT) and other index investing strategies. Because they are automated, robo-advisors cost much less than a human advisor, and you can often begin with an opening balance as small as $5. However, since they are based on algorithms, don’t expect customized advice, unique strategies, and hand-holding when markets turn volatile. Still, several robo-advisor platforms today have increased their human staff to answer your questions and keep you informed.
What Is the Difference Between a Wealth Manager and a Financial Advisor?
The key difference is that a wealth manager is largely tasked with preserving and growing existing assets and wealth, while a financial advisor is concerned with managing day-to-day finances and investments, as well as achieving long-term goals. Sometimes, the same professional may be able to provide both wealth management and financial advisory services. Other times, a specialist will focus on just one aspect.
How Many Financial Advisors Are There in the United States?
According to data by the U.S. Bureau of Labor Statistics (BLS), there were 275,200 individuals employed as financial advisors in 2020. That number is expected to grow by around 5% per year over the next decade.
How Much Money Do Financial Advisors Make?
According to ZipRecruiter, as of 2021, a financial advisor in the United States makes, on average, around $74,500 per year, But there is a lot of variation, with many advisors earning far less than the average and a relatively small handful making into the high six figures.
How Do You Choose a Financial Advisor?
Finding a financial advisor or planner can seem intimidating at first, but it pays off if your portfolio is too large to manage alone. The first step is to figure out what kind of financial advice you need–whether that be estate planning, saving for retirement, or simply seeking the best way to invest your savings. This will determine what kind of specialist is best suited to your needs. It is also important to understand any fees and commissions. Some advisors may benefit from selling unnecessary products, while a fiduciary is legally required to choose investments with the client’s needs in mind.
How Do You Become a Financial Advisor?
Depending on the path you choose, it can take five to seven years to become a financial advisor. The simplest route is to take the series license through FINRA, which can take a matter of months if you already have a bachelor’s degree. CFPs or other qualifications can take up to seven years, between degrees, exams, certifications, and mandatory work experience.
What’s the difference between a financial advisor, wealth manager, financial planner, investment advisor, etc?
There are many synonyms for financial advisors. While there are some restrictions on who can call themselves an advisor (or adviser), it’s usually easiest to set the individual’s chosen title aside. Instead, focus on the other aspects, like services, firm structure, credentials, personality fit, fees, and so on.
How will I know my advisor is acting in my best interest?
Not all advisors are held to the same standards. A fiduciary duty is the highest standard of care under the law. Only registered investment advisors always have a fiduciary duty to act in your best interest. Other types of advisors may not be held to a fiduciary standard at all or only at certain points in the relationship, but they’re not a full-time fiduciary.
How are financial advisors paid?
Compensation methods vary between advisors. There three main types of fee structures: Fee-only: A fee-only advisor is only paid by their clients; they do not sell products. Fees are most often based on a percentage of investment assets the advisor manages. So as your accounts grow, the advisor does better too. The fee-only financial advisor model is typically considered the most transparent and least likely to create conflicts of interest between the client and the advisor, as sales-based incentives are removed. While many fee-only financial advisors are registered investment advisors (and fiduciaries), it is possible for a firm to be one and not the other. Fee-based: Fee-based advisors are typically paid in two ways: a percentage of the investor’s assets under management and by commissions from selling products, such as life insurance, annuities, mutual funds, or other investments. In a fee-based relationship, the client isn’t the only one paying the advisor. They also receive commissions and referral fees by third parties. Commission only: Some insurance agents, banks, stockbrokers, or large wirehouses may not charge the end client at all and rely on commissions from selling products instead. The relationship here will be the most transactional in nature and heavily focused on advice with a product-based solution.