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Who are Financial Advisors and What Do They Do?

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Several studies conducted over the years have found that people feel happier and more confident when their finances are in order. However, this is not a simple task to accomplish by oneself. A professional financial advisor may be able to help you achieve this goal by understanding your financial situation and providing you with the appropriate knowledge, guidance and financial vehicles to do so. Whether your financial goal is to build wealth, or prepare for retirement, hiring a financial advisor may be the right choice for you.

In this article we will try and help you understand who a financial advisor is and what they do. The objective is to enable you to identify the type of financial advisor you need to achieve your specific financial goals.

Who is a financial advisor?

A financial advisor is a professional that evaluates your financial situation and offers financial advice and services based on your needs. These advisors hold expertise in money-related matters and help mitigate risks, manage money, and enable you to plan and build wealth in the long term. Financial advisors provide a wide range of financial services such as investment management, financial planning, retirement planning, succession planning, tax management, estate planning, and much more.

The term “financial advisor” is, however, an umbrella term that covers several kinds of financial professionals from diverse backgrounds with different educational qualifications and professional licenses. These include financial planners, tax planners, investment advisers, wealth managers, etc., who offer generalized or specialized financial planning services. Thus, it is vital that you assess each financial advisor type and check if they are qualified to offer the kind of financial service you require to meet your needs.

But, before we go into the types of advisors, let’s get an understanding of what a financial advisor does.

What does a financial advisor do?

A financial advisor is someone who has amassed years of training, education, and experience in several areas of finance. They offer a multitude of services to their clients such as choosing investments, budget creation, retirement planning, debt management, tax management, estate planning, and more.

Here are 7 things that a financial advisor does:

1. Financial advisors help you in creating a suitable budget as per your unique financial situation

A realistic and foolproof budget helps build the foundation for all financial plans. A financial advisor can not only guide you through how to create an adequate budget, but also help you to increase your savings, reduce your expenses, and attain your financial goals. This may include starting a new business, building a significant retirement fund, saving for your child’s college tuition, etc. With the help of an advisor, you may be able to set realistic savings goals without having to compromise your current standard of living. 

A suitable budget for your unique financial needs is formed after assessing your present income, financial liabilities, and the number of dependents. The advisor can allocate specific sums for your discretionary (such as online subscriptions, dining out, etc.) and non-discretionary expenses (like rent, electric & gas bill, etc.). The objective is to ensure each dollar is spent purposefully to allow you to optimize your savings in the long run. Further, your advisor can also help ensure that you are on track with your budget and in meeting your goals and savings targets.

2. Financial advisors suggest suitable investments that fit your financial needs and goals

A financial advisor works closely with their clients to ensure that they invest their money optimally based on their risk appetite, life stage, monetary goals, and investment time horizon. They also help in reducing your exposure to risk, in maximizing your profits, and ensuring that you invest in a diverse asset class to build a well-diversified investment portfolio. In addition, financial advisors can also help you restructure your portfolio in case a major life change occurs or may occur in the near future. For example, suppose you are five years away from retirement, the financial advisor may consider switching from a wealth accumulation to a capital preservation strategy, and may divest your stock holdings to invest more in bonds, target-date funds, annuities, certificates of deposits (CDs), etc., that offer stable returns at low risk. Your advisor can also help monitor the performance of your investment portfolio, take steps to reduce your exposure to market volatility, and ensure you stay on track to attain your long-term financial goals.

3. Financial advisors help you plan for retirement

A financial advisor can help design a foolproof retirement plan to ensure you live comfortably in your golden years. They evaluate factors such as your present income, standard of living, the number of dependents you have, the number of years you have left to retire, and more, to help devise a suitable retirement plan. They can help you stay focused on reaching your savings target and maximize your contributions to your retirement savings accounts like a 401(k), Roth IRA, etc. Moreover, your financial advisor can help assist you when it comes to identifying and cultivating secondary sources of income during retirement, such as Social Security benefits, pensions, etc. They can guide you through how to leverage your home equity, apply for government aid such as Medicare during retirement, and how to derive the maximum benefit out of your Social Security benefits.

4. Financial advisors help you plan for your child’s college education

Due to the rise in college tuition, it is important to plan and invest in your child’s higher education to ensure their future success. To do so, you need to identify and employ effective strategies to save for your child or grandchild’s higher education expenses. You also need to be mindful of striking a balance between your expenses and saving for your other financial needs such as retirement, purchasing a home, etc. A  financial advisor can help ensure that you invest in the right education plans and that your college savings goals are not affected by your other financial goals.

5. Financial advisors help you with debt management

Debt accumulation can prove to be a significant roadblock to achieving future financial security. High-interest debt not only chips away your savings but can also make a significant dent in your retirement fund, if not paid off. A financial advisor can help manage your debts through consolidation of your low-interest loans, paying off high-interest loans first, and generating new streams of income to help ensure you remain debt-free in the future.

6. Financial advisors assist you in managing your taxes

Your financial advisor can help you lower your taxability by deploying strategies such as tax-loss harvesting, donating to charitable organizations, through the sponsor of your kids' and grandkids’ education, creating a living trust, etc. He can also identify tax-saving investment accounts for you to invest in and offset your capital gains to reduce your taxes. In addition, the advisor can also reduce any tax implications arising from receiving an inheritance or gifts of high value.

7. Financial advisors assist you in creating an estate plan for your heirs along with an attorney

It is vital that you have an infallible estate plan in place in case of your untimely demise or physical or mental incapacitation. A financial advisor can help map your assets, make an estimate of your estate’s value, draft a will, appoint executors, and more. He can also monitor your estate assets and ensure that they are passed on to your beneficiaries without incurring hefty estate taxes and penalties.

8. Financial advisors help with your long-term healthcare and risk planning

A financial advisor can help ensure that your medical and long-term care risks are adequately planned for by creating a suitable financial plan to take care of your healthcare related expenses. They can also guide you through investing in different investment instruments such as healthcare insurance, Medicare, Health Savings Account (HSA), health insurance exchanges, COBRA (Consolidated Omnibus Budget Reconciliation Act), Medicaid, etc.

[See: How to Find a Financial Advisor]

To conclude

Hiring a financial advisor is an important decision and will be a vital part of an overall plan to secure your financial future. Thus, it is critical that you choose an advisor that you trust, and also one who also holds the necessary qualifications and expertise to guide you and help manage your financial affairs. If you’re looking for a vetted and trusted financial advisor who can guide you on your financial journey, you can use the free advisor match service to find highly qualified and vetted fiduciary advisors. Answer a few questions about yourself and get matched with 1-3 financial advisors that are suited to meet your financial requirements.