Understanding what financial advisors do and how they help clients better manage their money

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Understanding what financial advisors do and how they help clients better manage their money
How much a financial advisor costs will depend on what you’re looking for. Ariel Skelley/Getty
  • A financial advisor is a professional who gives advice about managing your money to reach financial goals.
  • Financial advisors are not regulated, though ones who provide investing advice and services must register with their state or federal regulatory bodies.
  • Financial advisors offer a wide variety of services, such as portfolio building, tax and estate planning, budgets, and more.

Do you plan to retire one day? Maybe get married or go to college? How about paying down some debt? These are all reasonable and attainable financial goals. For many of us, however, it's not always clear what we have to do to make these dreams come true. And that's when it might be a good idea to enlist some professional help.

A financial advisor can be a valuable asset if you have financial goals you want to reach, but aren't sure how to make that happen. They can also educate you about financial products, tax advantages and insurance options you may not have known could help you build and protect wealth. Here's a closer look at what a financial advisor is and what they can offer you.

What is a financial advisor?

A financial advisor is a professional who provides their clients with guidance pertaining to financial goals, mortgages, insurance, retirement, investing, and general financial management. The term is often used interchangeably with "financial planner" and can cover a very broad scope of expertise. While some financial advisors offer a variety of services, many specialize only in making and managing investments.

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"I became a financial advisor to mentor my clients through all financial aspects of their lives," says John Stoj, investment advisor representative and founder of Verbatim Financial. "This can include investments, but also questions surrounding careers, business ownership, estate planning, insurance, and taxes ... essentially anything that can benefit from planning."

Types of financial advisors

These days, you'll find a variety of types of financial advisors available to you. Some of the most common include:

  • Robo-advisor: A robo-advisor is an automated platform that makes investment recommendations based on information you input to the system. It uses algorithms and often artificial intelligence to determine your risk tolerance and what investments may be good to make. These kinds of services are generally low-cost, but limited in what they can offer.
  • Online financial-planning services: These services go a step further than robo-advisors, often offering a broader scope of options. Online financial-planning services are usually automated and can help you build financial plans and budgets, in addition to portfolio building, goal setting, and reporting.
  • Traditional financial advisors: These include Certified Financial Planners (CFP), brokers, Registered Investment Advisors (RIA), and wealth managers. Traditional financial advisors usually provide comprehensive, personalized advice regarding your financial life. They can provide product recommendations based on your specific situation and goals, make investments on your behalf, and help ensure you stay on track.

What does a financial advisor do?

Financial advisors can offer a wide array of services. Some focus only on investments and portfolio building/management. Others provide comprehensive services for everything from saving for college and retirement to tax strategies and budgeting.

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"In an ideal world, a financial advisor should look at your overall financial picture and help you build a plan to get to and through retirement," says Mary Lyons, financial advisor and founder of Benchmark Income Group. "That includes investment portfolio management, but it also includes reviewing your insurance coverage, working with your estate attorney, communicating with your CPA, helping you determine the structure of your mortgage, and budgeting. A good financial advisor should be able to answer any questions you have about your finances."

There are no specific licenses or certifications that make one a financial advisor. They will usually have some kind of background related to finance, such as a degree in business, economics, or accounting. To trade or advise on investments, financial advisors are required to take and pass the NASAA Investment Advisers Law Examination - also known as the Series 65 exam - and register with state and/or federal regulators. If they want to sell insurance and other financial products, they may have to hold additional licenses to comply with regulations.

If you're in the market for a financial advisor, it's a good idea to shop around to find someone who offers services that are the right fit for your situation. Also take note of how they make money. Working with a fiduciary, such as a CFP or RIA, is often preferred. These financial advisors usually have a fee-only business model, which means they charge clients directly for their services and don't receive any kind of commission.

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Quick tip: According to the National Association of Personal Financial Advisors, a fiduciary is a "professional entrusted to manage assets or wealth while putting the client's best interests first at all times." RIAs are legally bound to act as fiduciaries. All CFPs are obligated to be fiduciaries by their board's Code of Ethics.

On the other hand, financial advisors may work on a commission basis. John Hagensen, founder and managing director of Keystone Wealth Partners, explains that "many financial professionals who will claim to be financial advisors are contracted by insurance companies and/or broker-dealers and thus be compensated to sell products of those companies." This type of compensation can influence the kinds of products such advisors recommend and actions they suggest taking.

Just about anyone can benefit from working with a financial advisor. Some of the more common services they offer include the following:

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1. Portfolio building

Portfolio building is all about ensuring you have a balance of investment assets that are growing efficiently with minimal risk. Financial advisors can help you understand what you already own in assets, what your options may be for making further investments, and what kinds of risks you may face with your investment choices.

"A financial advisor should help you determine how much fluctuation you can tolerate in your daily balances as well as during outlying events like 2008 or even the first part of 2020," Lyons explains. "They should address concepts like maximum drawdown and the amount of return you can expect for the risk you are taking."

2. Tax planning

Many financial advisors provide tax-planning services. This doesn't mean they'll help you file your tax returns or are fully trained in tax law like a certified public accountant (CPA) is. Instead, they can help you manage tax liability that results from your investment strategies and help you build wealth by taking advantage of rules that can lower your tax liability.

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Not every financial advisor offers or is qualified to offer these kinds of services, but some are also CPAs. At the very least, a financial advisor should be willing to work with your accountant or tax attorney to ensure your financial plan is keeping your tax liability at a minimum and not creating new issues.

3. Estate planning

A financial advisor can help you plan for what you want to pass on to your heirs when you die. They may be trained in estate planning or be willing to work with you estate attorney to determine what kind of insurance you need, what kinds of financial products you might want to set up to pass on (such as a trust or giving fund), what should be done with your investments, etc.

"It's critical that all of your team - CPA, attorney, banker, advisor - is communicating at least annually," Lyons says. "If not, they could be working against each other instead of all pulling in the right direction."

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4. Long and short-term financial planning

Financial advisors work with clients to create and execute plans designed to achieve goals both in the short term and over a long period of time. For example, you might work with a financial advisor to review your debt and create a plan to reduce the amount you owe this year.

At the same time, you may also want to create a college savings account for your new baby. A financial advisor could work with you to create a month-to-month budget that targets reducing your debt while funneling deposits to a 529 college savings plan.

Quick tip: Investing in a life or disability insurance policy can be a good strategy for reaching long-term financial goals. Many financial advisors are licensed to sell insurance. Be sure to ask if your advisor offers this service and how insurance might enhance your long-term financial plan.

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The financial takeaway

Consulting with a financial advisor is a smart way to make headway in achieving both short-term and long-term financial goals. You should always research what options are available to you and ask questions about what services are offered and how they are compensated.

Since there is no education or experience requirement for someone to be a financial advisor, it's also a good idea to look into the background of anyone you're considering working with regarding your money.

Some advisors will focus only on a handful of services, while others offer more comprehensive planning and management options. New technology has also given way to automated financial tools. It's up to you to investigate and determine what's the right fit for your situation.

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