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Have you ever wanted expert help with your finances but felt you didn’t have enough money to hire an advisor? Financial advisors aren’t just for the wealthy—they also help everyday people achieve their financial goals. But first, you should understand what financial advisors do and the different ways they can work with you.
Financial Advisor Basics
A financial advisor is a professional who is paid to offer financial advice to clients. Just as you would hire an architect to create a plan for your home, you hire a financial advisor to create a plan for your finances. It’s all about paying someone for the expertise you need to reach specific goals. In this case, a brighter financial future.
To be effective, you should consider a financial advisor as a partner. A financial advisor needs to get to know you well—that means understanding your current spending and savings habits, your income and your expenses.
With that knowledge in hand, a financial advisor offers advice that you can implement across the entire breadth of your life—from budgeting in the present to retirement savings for the long term. Together you and a financial advisor refine your short- and long-term goals, and then your advisor helps you stay on track to achieve those goals.
With some advisors, you can do your own investing. Others offer full-service investment management services, handling tasks like trades and portfolio rebalancing for you.
It’s important to note that the term “financial advisor” encompasses a variety of job titles, such as wealth manager, financial representative and investment advisor. Many advisors also have earned certifications like the Certified Financial Planner® or Chartered Wealth Manager, as well as degrees that speak to the depth of their training and ongoing commitment to financial industry standards.
Financial Advisors and Fiduciary Duty
If you hire a financial advisor, how do you know this professional will make recommendations that are a match for your financial goals? After all, they could just advise you to make investments and buy services that bring them the highest commissions and fees. This is where fiduciary duty comes into play.
Financial advisors fall into one of two classifications: fiduciary and non-fiduciary.It’s important to know which your prospective financial advisor adheres to before engaging in a relationship:
- A fiduciary financial advisorhas an obligation to put your best interests above their own. They’re not allowed to collect commissions from the sale of any investment and typically operate on a fee-based system, one where clients pay a flat fee (monthly, annually) for their services. Any fees charged are paid separately and not taken out of your investment balances or trade proceeds.
- A non-fiduciary financial advisoroften works for institutions that incentivize them (via commissions) for selling particular investment products. They’re only held to the standard that investments be “suitable” for your needs and not necessarily the lowest cost or best match. This isn’t a red flag, but it does mean that you need to ask how fees and commissions could impact your portfolio earnings over time.
To help you understand the difference, consider two mutual funds with similar performance. A financial advisor who is a fiduciary must recommend the fund with the lowest fees since that’s in their client’s best interests. A non-fiduciary financial advisor can recommend the fund with higher fees since it’s still “suitable” although it nets them a higher commission.
When considering advisors, always be sure to ask how the advisor is compensated and whether they practice in a fiduciary or non-fiduciary capacity.
Services Offered by Financial Advisors
The types of services offered by different financial advisors will vary. There’s no one-size-fits-all model, so it helps to understand the common services many professionals offer. All in all, the best financial advisors have a vested interest in the whole of your financial life and will help build a road map for your ongoing financial health. Here’s what you should look for:
- Investment advice: Financial advisors can help you identify the best investments for your risk tolerance and goals. They also can help you stay the course or make strategic adjustments when life’s unexpected events come calling.
- Saving for college: With the cost of education on the rise, an advisor can help identify educational savings strategies that match your desire to fund a loved one’s education.
- Debt management:If you feel like your debts are standing in the way of a sound financial life, a financial advisor can create strategies to pay down your existing debtand help keep you out of debt for the long term. Less debt means more in your pocket to save.
- Budgeting: From saving for a vacation to buying your dream home, financial advisors can help craft savings strategiesfor the money you both spend and save, putting your goals within reach.
- Retirement planning:Whether you already have some money stashed away for retirement or not, advisors can help you boost your savings, identify shortfalls and then protect what you’ve saved as you head into retirement.
- Estate planning:From strategies to transfer your wealth to family members, to creating charitable gifts, advisors can help identify opportunities to accomplish your desires for your legacy.
- Long-term care:No matter your age, your advisor can help chart a path toward providing for your healthcare later in life, including long-term care insurance that works for your budget.
- Tax planning: Advisors can help you identify ways to take advantage of available tax savings. This can include charitable donations, strategies like tax-loss harvesting and working with your tax professional to make sure that your investment plan helps minimize your annual tax liability.
The top financial advisors will always be those who offer the depth and breadth of services you both need and will use. When comparing advisors, be sure to also compare their offerings to your current needs and needs you might have in the near future.
Financial Advisor vs. Robo-Advisor
Speaking of your needs, you might be wondering if there’s a middle ground between a full-service financial advisor and going it on your own. Arobo-advisorcould offer the exact financial services you need and at an affordable cost. Here’s howtraditional financial advisors compare with robo-advisors:
- Fees: Traditional financial advisors will charge either by transaction or with an annual management fee. Rates can vary, and are often between 1% to 2% of the assets under management. Meanwhile, robo-advisors have lower fees, typically ranging from 0% to 0.25% of the assets under management.
- Services: Robo-advisors only cover your investment accounts and don’t offer the robust, personal advice that a traditional advisor can, such as budgeting, educational savings or estate planning.
- Investment options:Robo-advisors tend to offer carefully curated collections of exchange-traded funds (ETFs)and prebuilt portfolios, such as those with a target retirement date a certain number of years in the future. Traditional advisors offer a more diverse selection of individual stocks, mutual funds and fixed-income investment vehicles.
If you’re trying to decide between these two types of advisors, here are a few ways to determine which might be a better fit:
You May Wanta Financial Advisor When:
- You can meet account minimums.
- You find the annual management fees reasonable.
- You want more than just investment advice.
- You need a variety of investment options at your disposal.
You May Want aRobo-Advisor When:
- You need to start with a low opening account balance.
- You would prefer to pay lower management fees.
- You only need basic investment advice.
- You’re comfortable with a few low-cost investment options.
With over 200 robo-advisorsavailable on the U.S. market, plenty of options await if you decide that’s the best fit for your needs.
Financial Advisor vs. Wealth Manager
If you’ve already accumulated a fairly large portfolio of financial assets, you might wonder if you need a financial advisor or a wealth manager. Understanding the differences between these two related but different categories can help you choose.
Wealth managers are financial advisors who specialize in working with high-net-worth clients. Depending on the wealth manager, asset minimums to qualify for service can be as low as $250,000, while others require anywhere from $1 million to $10 million as an opening balance.
Wealth managers offer their clients a set of comprehensive services that investors with lower levels of assets might not need. These services include full-service tax planning, family foundation management, philanthropic planning, legal services and more.
A traditional financial advisor often will be a better fit for those with assets below the above minimums who don’t have more complex business, estate and tax planning needs.
Do I Need a Financial Advisor?
Now that you know what a financial advisor does, the types of advisors and the different capabilities they can offer clients, you probably have a good idea of whether you’d find a financial advisor helpful.
No matter your current financial picture, there’s a type of financial advisory service out there that’s the right fit for your assets and goals. Your next step is doing the research, evaluating your options and taking the next step toward financial success.
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