From my experience, very few people understand what a financial advisor does, or all they can be doing. Frequently I hear people complain that advisors are overpaid, as investing has become easier and less expensive over time. If an advisor is charging you the going rate and only helping with your investments, then they are overpaid. However, an advisor can be doing more for you than just working with your investments.
Working with a financial advisor can provide great value for a client. The key is understanding what a financial advisor can do to help you. This post looks at the major areas a financial advisor can help their clients with, and the limits of what they do.
Working with a financial advisor can provide great value for a client. The key is understanding what a financial advisor can do to help you. This post looks at the major areas a financial advisor can help their clients with, and the limits of what they do.
Why Is It So Unclear?
Unfortunately, the financial services industry makes this much more difficult than it needs to be. There is no standard definition of what a financial advisor is and what they should be doing for clients. Pretty much anyone from insurance salesmen to investment managers can call themselves a financial advisor.
This lack of clarity causes people to sometimes overpay for the services they receive. Sadly, many people do not realize what they are missing.
What Does A Financial Advisor Actually Do?
Perhaps an analogy would help. Imagine you wanted to reach a waterfall on the other side of a jungle filled with danger, but you don’t have a map. What would you do? You could try to do it on your own and hope you reach your destination. Or you could hire a guide, who has travelled that same path with other people just like yourself, and can help you reach the waterfall safely.
A financial advisor is a guide who helps people navigate the financial maze of life. They may not always be able to bring you to your goal, but can help you get as close as possible. You have never walked this path before, but they have done so numerous times with other clients. Having an experienced advisor help you, can make all the difference.
There are many different ways that a financial advisor can assist their clients. I have tried to group them into two major areas:
A. Financial Planning
Financial planning is a very important service that a financial advisor provides. It is a process that helps you identify where you are, define where you are going and establishes a plan to reach your destination.
The Certified Financial Planning Board of Standards defines financial planning as “Financial planning involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals. From saving for education and planning for retirement to effectively managing taxes and insurance, financial planners develop valuable relationships with their clients to provide them with confidence today and a more secure tomorrow.”
Having these types of discussions enables you to get your immediate questions answered, while focusing your finances to reach the goals you set. If you have never met with someone who does this, then you are missing out on a wonderful opportunity to improve your financial situation.
Financial planning is not covered in one discussion, rather it is a life-long process incorporating many different aspects:
- Establishing Goals – what are you trying to accomplish? The old adage if you don’t know where you are going, you will get there every time, is not the way you want to manage your finances. Having regular discussions of your goals, frames the rest of your financial decisions.
- Debt – can be very harmful to your finances. Minimizing the use of debt, and developing a plan to repay outstanding debt, is an essential element of a financial plan.
- Budgeting – establishing a realistic spending plan that takes into account your income, needs, giving and saving towards your goals is essential.
- Education Planning – helps you save for your children’s education (or your own) in the most tax efficient way possible.
- Insurance – evaluates how much insurance you need and for how long to reduce your risk. Balance is important, because spending too much on insurance leaves less for other needs.
- Retirement planning – establishes a regular plan of saving to provide for you when you stop working. It looks at your available options (Social Security, employer retirement plan, IRA’s, taxable accounts etc), your tax situation and optimizes your savings.
- Income planning – when you stop working, how will you draw income off your different accounts? A financial advisor can develop a plan to generate the income you need in the most tax advantaged way, helping funds last as long as possible.
- Tax planning – taxes are a fact of life, and without planning, can be more costly than they need to be. Accountants generally look at the year in review, while a financial advisor can help you plan for the year ahead. Minimizing your taxes can help you better reach your long-term goals.
- Estate Planning – is all about caring for those who you leave behind. This includes a plan of who will care for your minor children, and who will receive your assets upon your passing. Having a financial advisor outline the options and help you define what you want to do before meeting with an Attorney, can save significant time and money.
- Managing Multiple Goals – invariably, we all are trying to do multiple different things at the same time (such as saving for your children’s education and your own retirement). Finding a balance is key so that your most important goals can be met.
- Updating The Plan – almost every year a portion of the tax code, government regulations or your own personal circumstances will change. Each of these have an impact on your overall finances. Staying on top of these changes is very important.
- Accountability – you may know what you need to do, but will you do it? Having someone to gently remind you of the areas you need to be working on throughout the year, can help keep you on track.
A financial advisor creates a plan to help you reach your goal(s) and can help keep you on track when things change and life happens. They are a valuable resource to call upon when needed.
B. Investments
The other key area that a financial advisor can be working on is aligning your investments to meet the goals that you have established through your financial planning discussions.
Oftentimes, people become obsessed with the performance of their investments. Investment performance matters, but keeping an appropriate perspective is key.
Imagine if your goal was to generate a certain amount of income to meet your expenses in retirement. If your portfolio was beating the market indexes by 2-3% a year, but not generating the income you need on a regular basis, that is not helpful. This seems obvious, but is a common mistake people make.
A financial advisor can help you define your goals and align your investments to support those goals. This includes looking at your:
- Mix of Investments (called asset allocation) – all investments entail risk. Creating a mix of several different types of investments that are within your ability to take risk, helps you stay invested through the market’s ups and down.
- Tax Optimization – this entails two parts. While you are working it finds the most tax efficient way to save for future expenses. When you stop working, it looks to turn on income or liquidate investments to provide for your needs, while limiting the tax impact.
- Investment Selection – selecting which types of investments would be most appropriate for a client’s ability to take risk and still help them meet their goals.
- Keeping Costs Low – there have been many studies that show lower cost investments perform better over time. It doesn’t mean that a low-cost investment will always do better, but a financial advisor should be keeping an eye on cost vs the performance of the investment.
- Rebalancing – over time some investments will do better than others. Selling some of them and repositioning the funds into your other investments can reduce risk and potentially improve your return.
- Adjusting Over Time – your ability to take risk will change over time. Periodically revisiting this and adjusting your investments in light of where you are is crucial.
A financial advisor can help you create a plan for your investments, adjust it over time and help you stick with it when the market declines.
Limitations
There are limits to what a financial advisor can do:
- Expertise – No advisor is an expert in all areas. Find an advisor who can help you with the specific issues you are facing.
- Your Responsibility – A financial advisor has the responsibility to educate their clients on the options available to them. The decision, and at least some of the follow through, is left up to the client. You can have the best plan in the world, but if the client isn’t willing to make decisions or follow through on things they need to be doing, it is all for naught.
- Investing – In a perfect world, investing would be easy. Sell before the market declines and buy before the market goes up (called timing the market). However, it is impossible to do as no one (besides God) knows the future. And, if someone could actually time the market, why would they do that for you? They could invest their own money and become very wealthy on their own. If an advisor claims they can time the market, you need to find another advisor.
Final Thought
A financial advisor is a person of influence in your life, so choose one carefully. Finding an advisor with a similar worldview is crucial. As a Christian, I would want someone to influence me in a way that honors the Lord. This would include them periodically talking about giving, how much is enough and depending upon the Lord for my needs. These are difficult issues, but ones that we all should be wrestling with. There is value in finding a Christian financial advisor who can challenge you in your stewardship responsibility.
Points To Consider
- Are you getting what you need from your financial advisor? If you are unsure, start by sharing your needs with your current advisor. They may already be doing what you need behind the scenes (or may not realize you need additional help)
- Setting realistic expectation for an advisor and doing your part (follow through) is crucial
- Every financial decision has an impact on your future options. Plan wisely
- Find a financial guide who will point you to Christ
