Who Are Financial Advisors and What Do They Do?
Managing your finances can be a complicated and confusing process. From setting financial goals, knowing how to best save for retirement to managing your taxes in the present, and even after retiring or passing on your legacy to your kids, everything requires intricate management. According to Northwestern Mutual’s 2019 Planning and Progress study, 92% of survey participants said they feel happier and more confident when their finances are in order.
However, it can be slightly overwhelming to come up with a suitable strategy for your individual goals and retirement options. This is where a financial advisor can help you. A financial advisor or a financial planner can guide you through the financial planning process and also address questions and concerns associated with any aspect of your financial plan. Whether you are just beginning your wealth accumulation process, have questions about your current finances, are nearing your retirement, or are living paycheck-to-paycheck, hiring a certified financial planner for any of the aforesaid scenarios could be advantageous for you. In Northwestern Mutual’s 2019 Planning and Progress study, 66% of the respondents who had a financial advisor said they felt financially secure. 85% of the survey participants who had sought professional financial help said their personal finances were moving in the right direction.
The survey’s findings suggest that individuals who work with a financial advisor can potentially be better at balancing the art of spending and saving for the future. These individuals are also more likely to set realistic financial goals and feel confident about achieving those targets. Moreover, people with professional financial advice have a sound plan to navigate the economic ups and downs, minimize taxes, plan for retirement, and do much more.
Here is everything you should know about financial advisors, what do financial advisors do, and how to hire one that best fits your needs:
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Who is a financial advisor?
A financial advisor assesses your financial needs and provides comprehensive financial guidance. These professionals are experts in managing all money-related matters, enabling you to save time, eliminate financial risks, and build wealth in the long term. A competent financial advisor can provide different services, including goal planning, debt management, investment management, tax planning, retirement planning, estate planning, succession planning, and more.
However, a financial advisor is a broad term that includes people from diverse backgrounds and different educational qualifications, offering a wide range of services. This umbrella term encompasses various professionals – investment advisers, tax planners, wealth managers, financial planners, etc. – offering specialized or generalized financial planning services. You could meet a financial advisor who only offers retirement planning support or another professional who provides a range of professional services, including tax management, retirement planning, estate planning, portfolio management, etc. Each type of financial advisor holds different degrees, certifications, and professional licenses. Hence, it is important to evaluate each professional and determine if they are qualified to offer the required financial advice as per your needs.
What does a financial advisor do?
A financial advisor is a skilled professional with years of training, education, and experience in money and related matters. Here are some things that can help you understand what a financial advisor does:
1. Budgeting: The basis for all financial plans is a realistic and infallible budget. A financial advisor can help you create an effective budget that helps you save more, spend frugally, and achieve your financial objectives, such as buying a house or car, paying for your child’s education or wedding, setting up a business, creating a retirement corpus, etc. The advisor sets achievable savings targets and offers guidance on how to best use your money without compromising your current standard of living. The budget is created keeping in mind your current income, financial liabilities, and dependents. The advisor works with you to allocate a specific sum for your non-discretionary expenses (such as rent, house bills, etc.) and discretionary expenditure (like online subscriptions, eating out, etc.). Usually, these advisors create a zero-based budget, where each dollar of your income has a defined purpose. The objective is to help you spend wisely to optimize your savings in the long run. A financial advisor also acts as a coach, constantly reminding you of your savings targets and financial goals, encouraging you to adhere to the set budget.
2. Debt management: Debt, especially high-interest ones, can be a significant hurdle in reaching your financial goals and can affect your future financial security. The interest generated can erode your savings, and if not paid off, can also eat into your retirement corpus later. A competent financial advisor can help you manage your debts effectively, minimize the interest burden, and identify ways to fill the income gap to ensure you remain debt-free in the future. The advisor will work with you to constructively manage your financial liabilities and navigate the complex debt management process that involves multiple stakeholders and rules.
3. Investment and portfolio management: Investing your money optimally is equally important as saving your money. Efficient portfolio management is crucial to your overall financial success in the long run. A financial advisor will aim to understand your monetary goals, risk tolerance, and risk capacity, life stage, investment time horizon, and eventually, create a sound investment plan. The objective is to minimize risk, maximize profit, and optimize asset allocation to support the accumulation of wealth in the long run. These advisors are specialists in their areas and can help you meet set goals through profitable investments. Moreover, your financial advisor will also assist you in restructuring your portfolio in case of a major life change. For instance, if you are more than ten years away from retirement, the financial advisor could consider having a more aggressive asset allocation with securities like stocks in your investment portfolio. However, as you approach your retirement age, the objective of investment changes from wealth accumulation to capital preservation. Hence, your financial advisor may suggest investing in securities that offer stabilized returns at low risks, such as municipal bonds. Your advisor may also opt for annuities to create a reliable retirement income stream. That said, apart from structuring your investment portfolio, your financial advisor will also offer other portfolio management services, like monitoring the performance of the portfolio and deploying effective strategies to navigate market volatility while keeping your long-term goals in mind. Further, if you have additional investment goals like impact investing, your advisor can also help in that sphere. The financial planner can create an investment strategy that generates financial returns as well as creates a positive social or environmental impact.
4. Retirement planning: Your financial advisor can help you create a foolproof retirement plan that ensures a comfortable, safe, and secure retired life. The expert assesses your current income, financial liabilities, years left to retire, expected standard of living, the number of dependents, etc., to create a holistic retirement plan. The advisor can help you stay focused on your savings target and make the best use of retirement savings plans, such as a 401(k), an IRA (Individual Retirement Account), a Roth IRA, etc. The professional can help you manage and maximize contributions to these accounts while adhering to the IRS (Internal Revenue Services) guidelines. The advisor can also help you identify effective ways to evade penalties and minimize taxes while withdrawing from your retirement savings account. Apart from these, the advisor works with you to identify secondary sources of income during retirement, such as Social Security benefits, pensions, etc. Your advisor can also provide advice on how to maximize your Social Security benefits, leverage home equity, or optimally use government aids, such as Medicare during retirement.
5. Tax management: Your financial advisor or planner has the necessary expertise to help you minimize
