"Financial Advisors and What They Do" Posted by MRiles at TNT
MRiles: Essential Questions for a Financial Advisor
By Wendy Connett Updated Jun 25, 2019
Choosing the right financial advisor is, in essence, taking the time to invest in what should be a long-term professional relationship that keeps your financial health and future on the right track. The search should go well beyond referrals from colleagues, friends and family and an emphasis on investment performance.
In fact, investors should dedicate as much effort as they would to finding a medical professional with whom they trust their physical well-being. The right financial advisor will provide the professional help needed to reach long and short-term financial goals.
The following are questions that should be asked when choosing a qualified financial advisor. If they can’t or avoid answering them keep looking.
For advisors, being able to answer these questions may be the difference between whether or not a potential client decides to choose you over a competitor.
What are Your Professional Qualifications?
Anyone can hand out business cards maintaining they are a financial advisor so it is important to ask about qualifications and credentials.
While there are myriad professional designations, top advisors typically have credentials such as certified financial planner (CFP), chartered financial analyst (CFA) and chartered financial consultant (ChFC).
Advisors with CFP designations, for example, are regulated, licensed and take mandatory courses related to financial planning, such as estate planning and retirement planning among others.
Some advisors are also certified public accountants (CPAs). For those who also need tax advice and preparation choosing a financial planner who also has a CPA designation may make sense.
Financial advisors who sell stocks, bonds, mutual funds or insurance have licenses including the Series 6, Series 7, or Series 63. To obtain these licenses they must take exams administered by the Financial Industry Regulatory Authority.
Are You an RIA?
Some financial advisors are registered investment advisors (RIAs), which means they are held to high fiduciary standards put in place to protect investors. The fiduciary standard requires that advisors unconditionally put their clients' best interest first at all times no matter what.
Advisors who aren’t fiduciaries adhere to a less stringent standard called the suitability standard. This means that any investments they offer must be suitable for a client although it may not be in their best interest.
True to their name, RIAs are also required to register with the Securities and Exchange Commission or the states in which they conduct business. (For more, see: Becoming a Registered Investment Advisor.)
How Do You Charge for Your Services?
Most RIAs charge clients a percentage of assets under management or a flat fee or hourly rate. Advisors who are fee-only do not earn commissions on investment products they sell to clients. On average they charge no more than 2% of assets under management. That percentage often declines the more assets you have for them to manage.
Advisors who work for full-service firms, such as big broker-dealers like Merrill Lynch and Morgan Stanley, typically charge commissions on investment products such as stocks, bonds, mutual funds, exchange-traded funds and annuities that are bought and sold. In theory, advisors who charge commissions could be less objective when recommending investments.
Who Are Your Typical Clients?
It's important to get a sense of what types of clients a financial advisor you are evaluating typically caters to in order to make sure they have experience and expertise aligned with your circumstances. A millennial just starting to save for retirement, for example, might not be best served by an advisor who caters mainly to baby boomers nearing retirement or those already retired.
Some advisors specialize in clients within certain professions. If you are a medical doctor or small business owner, for example, ask if they have experience in handling similar clients. You will want to hire an advisor with expertise ranging from insurance to taxes that suit your circumstances.
How Do You Communicate With Clients?
Make sure they are willing to communicate as often as you are comfortable with. Some clients are happy to meet once a year, while others prefer to meet quarterly. You also want to get a sense as to how accessible they are outside of scheduled meetings. Ask them how quick they typically return calls and answer emails.
Are They Asking You Questions?
Questions an advisor asks a potential client during an initial meeting can be telling. Financial planning is much more than numbers. An advisor who focuses on touting stellar performance is probably best avoided. Instead, they should be asking you about your financial goals, concerns you may have and how comfortable you are with risk when it comes to investing.
The Bottom Line
While there is no shortage of financial advisors, choosing the right one can be daunting. It's important to interview an advisor you are considering like you would a job candidate. Make sure you understand how they are compensated and whether they have the credentials and experience to come up with a plan that best suits your personal financial needs and circumstances.
MRiles: What Do Financial Advisors Do?
By Amy Fontinelle
Updated Jun 25, 2019
You may wonder what a financial advisor does with your money and how this professional decides on the best investments and course of action for you. This article breaks down exactly what a financial advisor does. You’ll understand the advisory process and how an advisor selects appropriate investments for you.:00
Get the Most Out of Your Financial Advisor
A Financial Advisor's Many Roles
A financial advisor is your planning partner. Let's say you want to retire in 20 years or send your child to a private university in 10 years. To accomplish your goals, you may need a skilled professional with the right licenses to help make these plans a reality, and that’s 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, and disability) 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 could be budgeting and saving. As you advance in your knowledge, the advisor will assist you in understanding complex investment, insurance, and tax matters.
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 Questionnaire
The advisor works 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. An understanding of risk assists the advisor when it’s time to determine your investment asset allocation. You'll let the advisor know your investment preferences as well.
The initial assessment also includes 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 (or lack thereof) 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.
future projections, you’re ready to work together on a plan to meet your life and financial goals.
Creating The 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 drills down into 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, so 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.
Advisors Plan Action Steps
A financial advisor is not just someone who helps with investments. Their job is to help you with every aspect of your financial life. In fact, you could work with a financial advisor without having them manage your portfolio or recommend investments at all.
For many people, however, investment advice is a major reason to work with a financial advisor. If you choose this route, here’s what to expect.
The advisor will set up an asset allocation that fits both your risk tolerance and risk capacity. The 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 and money market holdings, while an individual who is more comfortable with risk will take on more stocks and corporate bonds and perhaps investment real estate. Your asset allocation will be adjusted for your age and for how long you have before retirement. Each financial advisory firm will act in accordance with the law and with its company investment policy when buying and selling financial assets.
Financial Advisors and Investments
It’s important for you, as the consumer, to understand what your planner recommends and why. You should not blindly follow an advisor’s recommendations; 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.
A commonality among firms is that financial products are selected to fit the client’s risk profile. Take, for example, a 50-year-old man who’s already amassed enough net worth for retirement and is predominantly interested in capital preservation. He may have a very conservative asset allocation of 45% in stock assets (which may include individual stocks, mutual funds and/or ETFs) and 55% in fixed-income assets such as bonds. Alternatively, a 40-year-old woman with a smaller net worth and a willingness to take on more risk to build up her 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 fit your needs 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 questions you 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 promoted.
Signs You May Need an Advisor
Anyone can work with a financial advisor at any age and 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.
It’s also fine to approach one when you’re coming from a position of strength but want someone to ensure that you’re on the right track and 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.