If you want to take your finances and retirement seriously, it’s smart to consult with a financial advisor. You need an expert in your corner to help you grow your money, manage your risk, and avoid expensive mistakes. Before you hire a financial adviser, however, it’s important to know how they help you.
What Does a Financial Advisor Do?
Financial advisors give you financial advice and help you execute a financial plan. They help you tackle debt, save for emergencies, and build an investment portfolio. Many financial advisors will help you with banking, insurance, and tax needs, too.
Ultimately, a financial advisor's job is to help you meet your short- and/or long-term financial goals. They recommend strategies and plans to meet those goals. Some financial advisors will manage all of your money for you—you only have sign the paperwork.
“Financial advisor” is a generic term. Anyone can be your financial advisor: Your accountant, a stockbroker, your company’s HR representative, or even your best friend who took an economics class in college. It could even be a computer-driven robo-advisor that makes automated decisions based on your inputs.
Financial Advisor Services
Most financial advisors are generalists. They can help you build a plan to tackle any financial goal. But some advisors are specialists. An advisor might specialize in retirement, risk management, or debt relief.
Here are just some of the services a financial advisor may perform for you:
Meet with you to discuss your needs, goals, and current financial situation.
Educate you on financial topics relating to your situation.
Recommend investments or select investments for you.
Help you meet a target goal, like saving for a child’s college.
Monitor your account to determine performance, accommodate change in your life (like having a baby or getting a promotion), and adjusting your portfolio.
Reporting on your financial situation to you.
Financial advisors need to understand markets, regulatory changes, economic trends, and—most importantly—your goals. They should also make you feel comfortable. You should trust that they have your best interests in mind. They should be available to answer your questions and explain difficult topics.
What a Financial Advisor Will Do
Your financial advisor will look at how much money you have, where you have it, and your goals. They’ll make recommendations to help you build wealth over time. Then they’ll guide you as you put money in the right places. They might manage the whole process for you (depending on the kind of service you choose to buy).
The most important thing a good financial advisor will do is listen. They’ll delve into your financial profile (debts, income, taxes, etc.) and help you determine what you want for your future. They’ll probably send you a form or worksheet for you to document everything.
Once the advisor knows what your finances look like and what you want them to be, they’ll recommend accounts, products, and securities to get you from point A to point B. They’ll also help you structure your finances to take advantage of tax savings.
Once you’ve executed the financial advisor's plan, they’ll help you control your behavior. They’ll stop you from diverting cash from safe funds to trendy stocks, and they’ll help you deal with those feelings of panic when your portfolio takes a little dip.
Over time, the financial advisor will help you rebalance your portfolio. They’ll help you maintain the right mix of investments to save on taxes. They will also modify your risk. For instance, they might reduce your stock holdings increase your bond holdings as you get closer to retirement. (It’s worth noting that robo-advisors can do this automatically.)
A financial adviser will do one other thing that you should definitely understand: They will charge you fees. Since they handle your finances manually, they will charge a hefty price tag: as much as $2,000 for the initial plan and 1% per year (or more) to manage your portfolio.
Certified vs. Uncertified Financial Advisors
Anyone who helps you with your financial matters can call themselves a financial advisor, but not everyone can legally call themselves a Certified Financial Planner. A CFP has a fiduciary duty to serve your interests. This means they are legally required to place your interest above all others. It also means they can’t make commissions from managing your assets.
CFPs are required to study financial concepts and pass tests to prove their knowledge. They also need to have several years of relevant experience and a bachelor’s degree, and adhere to a code of ethics.
Should you only use a CFP? Not necessarily. There are plenty of non-fiduciary advisers who will responsibly advise you. But it's important to keep in mind that they may consider their own interests when making recommendations. For instance, they might steer you toward a fund they manage or convince you to buy a financial product where they get a commission.
Do I Need a Financial Advisor?
Creating a smart financial plan is more involved than simply selecting your favorite mutual fund or ETF. You need a firm budget and an investment plan that balances growth and risk. Most importantly, you need to understand what’s happening with your money. This is why most people benefit from the help of a financial advisor.
If your financial assets are small (perhaps you’re just starting out), a financial advisor can help you set goals and explain what you need to do to achieve them. If your financial assets are substantial (perhaps you have an inheritance, you were gifted money for college, or you’re a determined money saver), a financial advisor can show you how to make your money work for you. They can also manage the whole process if you want to be hands-off.
Robo-Advisor vs. Regular Advisor
You can hire a human financial advisor manage your portfolio, or you can use a robo-advisor. Robo-advisors (like Wealthsimple) are online services that use algorithms to handle your investments. They require little human interaction. You set some parameters and let the algorithm do the work.
Robo-advisors are helpful if you don’t know much about investing, don’t have the time or inclination to learn, or don’t care what you invest in as long as you make money.
Since robo-advisors automate much of a financial adviser's work, they are more affordable. They charge a half or a quarter of what human advisors charge. They usually don’t require much to open an account, either. For example, you can open an account with Wealthsimple for $0.
Do human advisors perform better? You might think so, but that isn’t the case. Advisors who try to beat the market with clever picks often do worse than robo-advisors who invest passively using low-cost funds.
When should you use a human advisor? Algorithms can buy and sell assets to meet pre-set goals, but they can’t help you determine what those goals are. For instance, you may need a human advisor to help you decide if you can afford to purchase a house, when you should have the next baby, or how to structure your debt.
Fortunately, these one-off questions don’t happen too often, so you can comfortably invest with a robo-advisor and speak to a human advisor as needed. This is a far less expensive approach than using a human advisor to manage your portfolio all the time.
