Financial Advisor

What is a Financial Advisor?

If you have any knowledge of personal finance, investing, and the financial markets, you may have heard of the term “financial advisor”. It is a common finance profession, after all. 

But, generally, these advisors are qualified finance professionals with expertise in advising clients to manage their personal finances to reach their financial goals.

Financial advisors don't just sell you their services (such advisors exist). However, a proper fiduciary advisor engages with the client so that the decision maker is still the client, and the advisor just paves the way for the client.

You must have heard of big players in the market who have procured a big name for their services. Such as

1. BlackRock 
2. Morgan Stanley Wealth Management
3. Merrill 
4. Fidelity Investments
5. Vanguard 
6. Boston Consulting Group 
7. J.P. Morgan and Chase Wealth Management
8. State Street Global Advisors 
9. AllianceBernstein 
10. Heritage Investment Group

Now, the question is, everyone knows what finance is, and people are sensitive when it comes to their finances. Hence, no one wants to reveal their finances to anyone. So, are these professionals worth seeking? Let's find out about it.

Financial Advisor Role

A financial advisor or adviser, as mentioned above, is a finance professional who offers financial guidance/advisory services to clients for compensation, aimed to achieve the client’s ultimate financial goals.

“How exactly do they serve?” I hear you say. Well, let's understand by imagining a scenario.

“In your late 30s, with a family of 5, you faced significant debts in the past but managed to build a successful retail business earning 56K annually during a recession. Now, you're concerned about saving for your kids' college and retirement while dealing with high taxes”.

It is too much for an individual to plan without any strategies to overcome this situation. This is where skilled finance professionals such as financial advisors come in to aid you in overcoming this situation.   

These advisors aid in many aspects of finance, including strategies on how to procure enough cash to pay off obligations and get financial freedom from debts. Not only do these professionals show ways to reduce debts, but they also show ways to increase wealth.

Financial advisors play a role as an educator. Transparency and honesty are crucial elements, and educating the clients on the concepts and processes for the clients to understand can make matters simple, especially since the clients' money is at stake.

Initially, the topics can be from budgeting and savings to cutting costs and paying off debts. Later on, complex topics get covered, such as investments, insurance, and taxes, which help clients to grow further financially.

What Services Do Financial Advisors Provide? 

Financial advisory provides multiple assistance ranges, tailor-made to meet a client’s financial freedom/goal. General advice to specific domain advice such as investment, such advisor engages them all.

Below are some common services that you can expect to receive from a financial advisor:

1. Strategic Advisory on Investments: Offer pieces of advice and strategic planning on investment based on the evaluation of the client’s current position and goals.
2. Strategic Planning on Debt Management: They give advice and strategies on tackling a client's debt by getting an overview of the client’s financial position and evaluating routes to reduce deficits and avoid future obligations.
3. Strategic Planning on Budget: They also provide strategies and assistance to create an efficient and effective budget to help reach the client’s short-term and long-term financial goals.
4. Strategic Planning on Retirement: The advisors give out strategies to plan an efficient route to procure a good amount of retirement savings within a time period based on the client’s current circumstances.
5. Strategic Planning on College Savings: Similar to retirement planning, they offer strategies to procure a good amount of college savings to meet the beneficiary’s education within a time period based on the client’s circumstances.
6. Strategic Planning on Estate: They also help provide help in the identification of the people or organizations who are the beneficiaries of the client’s will of inheritance and offer further help in carrying out appropriate tasks to fulfill the client’s will.
7. Strategic Planning on Insurance Coverage: Offer tailored cut advice on approaching and selecting insurance and long-term solutions that are appropriate to the client’s needs, such as Health insurance.
8. Strategic Planning on Taxation: Advisors also offer advice and assistance on preparing tax returns, procurement of maximum possible tax reductions, optimum usage of capital gains tax rates, scheduling tax-loss harvesting security sales, or maximizing taxes on retirement.

Financial Advisors vs. Financial Planners

Financial advisors and financial planners are both highly people-oriented finance professionals.

Even though these careers are different, there are overlaps, especially in the core job descriptions, i.e., managing clients’ wealth to meet clients’ financial goals. But there is a general difference in priority between the two finance careers.

Financial advisors are those finance professionals who advise clients on managing and outperforming clients’ financial difficulties by offering pinpoint advice to tackle financial difficulties.

Financial planners are those finance professionals who plan for clients aimed to achieve their financial growth by analyzing the client’s overall financial picture.

Regulations On Financial Advisors 

In a general scenario, there is no official regulatory body governing the financial advisories, but there is governance in place regarding the service given by the financial advisor.

Taking America as an example, the services provided by financial advisors are regulated by the respective authorities.

Such as, any client’s assets under management (AUM) that are up to $100 million are regulated by the state securities regulators, whereas any assets under management (AUM) exceeding $110 million are regulated by the Securities and Exchange Commission (SEC).

In general, there are both governments as well as professional entities that regulate financial advisors and planners.

Below are the regulatory entities concerning the United States territories

In practice, there is no such requirement, such as certain education or registration to operate as a financial advisor. Relevant knowledge and expertise in the field are required, but indulging in education or registration can boost confidence with potential clients. 

But in the USA, registering with the Financial Industry Regulatory Authority (FINRA) is desired by undertaking a series of qualification examinations, such as Series 7 and Series 65 or 66, while setting such information to the public view.

Any formal compliance issues by the advisors can be found on the Investment Advisor Public Disclosure (IAPD) website, and any non-formal compliance issues can be found at Onesta.

Types Of Financial Advisors

In simplified terms, financial advisors fall under these categories:

1. Broker-dealers (BDs)

Distributors of investment products such as securities through the means of buying and selling.

2. Registered Investment Advisors (RIAs)

Registered Investment Advisors (RIAs) are fiduciary financial advisory firms registered under SEC or state regulators offering financial advice and services.

3. Robo Advisors

Robo-Advisors, also known as Digital Financial Advisors, is an AI tool that some advisory firms like Betterment and Wealthfront utilize to offer clients financial services based on questionnaires and algorithms.

Robo-advisors are often less expensive and time-consuming, unlike human advisors.

But that doesn't mean it doesn't have cons; robo-advisors can’t offer empathy or human touch, and they can't offer advice on getting out of debt, saving for children’s education, selling stocks out of fear, managing individual stock portfolios or helping with complex tax or estate problems.

Robo-Advisor is often utilized in investing clients’ money into Exchange Traded Funds (ETFs) or Mutual Funds, which provide exposure to stocks and bonds and track market indexes.

The above categorization of advisors does not suffice since an even broader spectrum can cause confusion between the two. The advisors can be pin-pointed based on the nature of such advisors’ revenue models or priorities. 

Who Are Fiduciary vs. Non-Fiduciary Advisors?

The above-mentioned types of financial advisors are confusing. Understandable. In general, it is always advisable to choose an advisor who is fiduciary in nature.

Fiduciary advisors work in the client's best interest, keeping the fiduciary standard. In comparison, non-fiduciary advisors are those finance professionals who work in the best sustainable interest of the clients (sustainable standards).

Such non-fiduciary advisors obtain a monetary benefit, i.e., commission, from the sources they lead their clients to. Therefore, those individuals seeking advisors who prioritize clients should seek fiduciary advisors. 

Therefore, even non-fiduciary advisors market themselves as fiduciaries. But these scenario is getting attention as the SEC (Securities and Exchange Commission) is working on implementing regulations on the term “Fiduciary”.

How Much Would It Cost For An Advisor?

Back in the day, the main revenue model for the advisories was the percentage of the assets they managed for the clients. But since then, advisors have found ways to compensate for their efforts.

As mentioned before in the section “Types of Financial Advisor”, there are three major revenue models an advisor can pursue:

1. Fee-Only 

These advisors follow a fee-only revenue model and hold the most fiduciary standard implementing pathways and strategies that are aligned to the best interest of the clients for a fee rate based on an hourly rate or assets managed.

2. Fee-Based 

Even though both are based upon a fee, there is a substantial difference between the two. The advisors who follow the fee-based revenue model offer a dual model of fee-only and commission models.

This model charges clients a fee for the services, which can be an hourly rate or asset-managed percentage, and earns commission from the sources to which the advisor leads the clients.

3. Commission-Based 

The advisors operating under this model offer services free of cost to the clients, which is alluring since who doesn't like free-of-cost services?

But the catch is the revenue for these advisors comes from pure commissions obtained from the sources the advisor leads the clients to. This model looks after the best sustainable interest of the client (sustainable standard) rather than being completely fiduciary.

The Financial Road Map 

The financial advisor assesses all the information obtained from the client and prepares a comprehensive financial plan, which will serve as a roadmap as the advisory process goes further.

The comprehensive plan includes key findings from the initial questionnaire, a summary of the current financial position, such as net worth, assets, liabilities, and working capital, and recaps of the discussed future goals.

This lengthy comprehensive financial plan analysis includes sensitive topics such as risk tolerance, family situation, standing with the tax authorities, estate details, long-term care risk, and other pertinent current and future financial issues.

The financial plan creates a simulation based on the client’s expected net worth and future earnings at retirement. These simulations run through best and worst-case scenarios and explore options to tackle such scenarios.

The plan the advisor prepared is shared and reviewed by the client, and adjusts the plan further according to the client’s preferences (if any). After the review and adjustment stage, the plan gets executed. 

The Questionnaire

A questionnaire is a vital component in preparing a comprehensive financial plan. The questionnaire provides a space for the clients to explain their situation in detail, which helps the advisor to grasp the complete picture of the client’s situation.

The questionnaire explores the client’s assets, liabilities, incomes, and expenses, along with all current and expected sources of income, investments, retirement needs, pensions, long-term financial obligations, and gifts.

The above explores the client's current situation and future goals, whereas the investing section of the questionnaire explores subjective topics such as risk capacity and risk tolerance. Therefore, lets the advisor understand the client’s risk, asset allocation, and investment preferences.

The questionnaire also examines other financial topics regarding the client during the initial assessment, such as insurance issues and tax situations.

These bring to the advisor's attention regarding the client’s current estate plan or any professionals working with the client, such as accountants or lawyers.

Consultancy: One-time Event Or Consecutive Event?

Consulting a financial advisor is not a one-time consulting but rather an ongoing process. The advisor will update the client’s portfolio by issuing statements to the client regularly.

The advisor also will set up regular meetings with the clients to update the progress, review the goals, or answer the client’s inquiries. For convenience, the meeting can be held in person or remotely, such as via phone call or video chat.

The meeting arranged by the advisor is the right time for the clients to update any significant life changes that can affect the prepared plan drastically, such as getting married/divorced, having a baby, job changes/promotions, acquiring any new mortgages, and buying/selling a house. 

Need For An Advisor

The need for an advisor is a personal choice, depending on a person’s circumstances. A financial advisor is not a premium financial service provider that only high-net-worth individuals can apply; rather, everyone from all walks of life can consult an advisor for their budget.

Individuals who are overwhelmed by their financial position and searching for financial freedom are recommended to approach an advisor.

Financial freedom is one end of the spectrum financial advisory deals with; financially secure individuals seeking financial growth can also approach the advisors for a tailor-cut approach.

Any individual who can’t afford a financial advisor due to their financial circumstances can approach advisors who offer pro bono services, such as the Financial Planning Association (FPA)’s pro bono program.

Some of the general cases in which an individual approaches a financial advisory are:

1. First-time Investing/Trading

In today’s era, where the value of money drastically changes, it is crucial to adapt. By the time value of the money concept, any money presently held today will diminish in value when it reaches the future.

It holds true in the inflationary period we are in. The money we hold doesn't hold the value it has right now since people have more money and fewer products to balance it. The rise in general price will diminish any dead investment.

Dead investments are those money held at hand or in a low-interest savings account. Therefore, to maintain the value of money, investing is necessary, just like utilizing a knife to preserve its sharpness.  

2. Losing money on investments

Investing is risky; even a top investor will lose money in this volatile economy. It is part of the risk to lose money.

But saying that doesn't justify if your investment diminishes your wealth. Any individual invests in any project for his/her benefit of increasing wealth. If that purpose is not seeing any progress, then there is a major fault in the investment.

Consulting an advisor can help identify and target the fault lines of investment and prepare countermeasures before it is too late. 

3. No prior estate plans

Life is a venture in and by itself. There are a lot of investments a person has allocated to in his/her life, such as their spouse, children, etc. A person values the well-being of those under their care.

Typically, a person will have a will or estate to transfer their wealth to those they care for. Having estate planning can sort things out based on priority. An advisor can help set an estate plan and carry out the plan when the time arrives.

Getting insured in today’s economy is needed unless a person wants to take an expensive route such as Health insurance, Car insurance, etc. If a person is unsure of the insurance to approach to get insured, a financial advisor can help with that as well. 

Pros And Cons Of Using A Financial Advisor

Seeking professional finance advice from a qualified advisor is a personal choice. Whether he/she will receive financial growth from seeking advisory services would be completely up to the collaboration and efforts of both participants.

Financial advisors are just a map, whereas the one who goes to the destination is the client themselves. So, seeking an advisor is purely a personal choice. Below are the pros and cons of seeking professional financial advice.

The pros are:

1. Expertise: A certified financial advisor is a trained financial professional who has financial training, qualification, knowledge, and experience, making such professionals more trustworthy sources than doing all the complex finances by themselves.
2. Research: An advisor regularly updates himself/herself on the current market situation for offering services based on the markets. Henceforth, they know the available investments and opportunities in the market.
3. Free time: Relying on a trustworthy professional advisor can remove the stress of finance from one’s mind, leading to a more relaxed state and improved mental health.
4. Mediator: Finance can be a source of both the rush of dopamine and cortisol, i.e., it can be a source of adventure for people who are growing their wealth and stress for individuals growing their debt. Some individuals have high stress levels when they review their financial conditions; this becomes a severe health problem. Advisors can become a mediator by becoming the middle ground for such individuals. 
5. Strategy: Financial advisors can offer a depth of strategies to deal with complex issues such as taxation, insurance, and investment, which a layman would not be able to deal with due to a lack of knowledge and expertise.
6. Objective Reasoning: Financial advisors can help clients make financial decisions based on objective reasoning rather than emotional.

On the other hand, the cons are:

1. Clash of interests: Potential conflict of interest always bugs a potential client into investing in the financial services of an advisor, fearing that the advisor would prioritize himself/herself instead of the client.
2. Affordability: Costs of the services are another factor influencing potential clients. The bigger the fee rate, the better the service can be obtained from an advisor. There is a price tag for information, even though some advisors do offer free service in exchange for fiduciary standards (Commission-based advisors).
3. Poor service: Financial advisors who offer poor advice and services can be an expensive drive taken by the client, which can jeopardize whatever is left of the client by pushing deeper than the client was before. 

How To Properly Choose A Financial Advisor?

Finding the right financial advisor for your requirements is a gritty task that requires a good amount of research and background checks. There is no one-fit cookie-cutter approach, especially when you are new to the market and seeking an advisor.

Every financial advisor has their style and expertise at their consultancy. But once you find the right advisor, then your finance is in the right hands.

Below are some ways to seek a financial advisory:

1. Indulge in a tendering process

Interview different advisors and compare their fees, expertise, style of approach, and range of services to find the best value for your buck. This allows the client to understand the advisor more efficiently and make informed decisions for his/her financial requirements.

2. Choose an advisor whose priority is to educate the client 

Educating the client is a crucial part of advisory as it allows transparency and honesty. This result has a direct proportional effect on the client being financially independent and savvy, letting the client make an informed decision and earning the client’s trust.

3. Choose an advisor who is educated and well-knowledgeable

Putting trust and reliance on an uneducated advisor is a hazardous endeavor, especially when the money at stake is yours. A properly qualified advisor has knowledge and experience in his/her domain, which a client can rely on.

Any questions thrown at the advisor by the client should be answered in a way that satisfies the client’s curiosity and helps him/her in making informed decisions. 

4. Choose an advisor who understands the client’s emotions

An advisor should possess empathy along with his/her expertise to allow the Human Touch when dealing with the clients’ issues. This allows the client to rest and settle, trusting the advisor, which makes the whole process smooth and effective. 

This increases the bond between the advisor and the client, and the advisor can truly understand the client's risk tolerance and encourage the client to leap out of their comfort zone.

The above steps are broad in nature. But the result, in the long run, makes it worth it.

Also, don't forget to prepare a questionnaire to learn about an advisor. Just like an advisor will use questionnaires to learn more about the clients, it is also a useful tool for the potential client to use such measures.

The questionnaire should include questions regarding:

1. Advisor’s fiduciary status and commitment
2. Advisor’s compensation structure
3. Advisor’s approach to comprehensive financial planning
4. Advisor’s client base 
5. Any factors posing a potential conflict of interest
6. Advisor’s available services 
7. Financial Budget 
8. Required documents and information for advice 
9. Frequency of held meetings 
10. Willingness to collaborate with other financial experts of the client, such as CPAs or Lawyers. 

An individual should do his/her homework to get the best advisor for his/her financial needs. Asking family, friends, and acquaintances is a good start.

Alternatively, you can take advantage of online sources. Many financial professional planning associations provide free databases listing available financial advisors, such as 

1. XY Planning Network 
2. Alliance of Comprehensive Planners (ACP)
3. Garrett Planning Network
4. The National Association of Personal Financial Advisors (NAPFA)

If any individuals want to check for any disciplinary actions taken against an advisor, they can utilize FINRA’s BrokerCheck.

Researched and authored by Muhammed Ishfaque Ishaque | LinkedIn 

Reviewed and edited by Alexander Bellucci | LinkedIn

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