8 Important Things to Discuss With Your Financial Advisor

A financial advisor is someone who helps you devise effective money management strategies that empower you to achieve your financial goals and objectives. As per a report by Vanguard, there is a quantifiable increase in investment returns if an investor works with a professional financial advisor. According to a separate study by Russell Investments, a good financial advisor could have a significant impact on investor returns and potentially increase them by 3.75 percent.

It is important to assess all parameters and select a professional that suits your needs and can help manage your money to attain your financial goals. You need to be open and forthright in discussing all financial matters with your advisor. Having conversations on other aspects of your life such as your marital status, kids, salary, retirement savings, etc. since it can have a significant impact on your financial decisions.

If you withhold information pertaining to your financial position, preferences, and goals, your advisor may not be able to take appropriate action to help you. You need to be transparent and truthful with respect to your current financial standing with your financial advisor as well as discuss your risk appetite, goals and values, financial mistakes, big and small financial decisions, and more. Honesty is needed to build a strong and successful relationship with your advisor.

Let’s go through some of the things you should discuss with your financial advisor honestly:

  1. Discuss your future financial goals and objectives:
  2. Financial goals aren’t limited to simply making money, retirement plans, or purchasing your dream home. They go deeper than that. Your financial goals should be focused on the future backed by good reasons. In order to make the most of your relationship with your financial advisor, you need to be honest to him/her and to yourself about different aspects, such as:

    • What is it that is most important to you?
    • What do you desire to do with your life?
    • What financial worries do you have?
    • What do you wish to do for your children with regards to their education?
    • How do you envision yourself spending your retirement?
    • What kind of security do you wish for your children?

    Your financial advisor should have a good understanding of your financial values and your relationship with money to better understand your financial goals and long-term vision. In addition, if your advisor knows about your background, it’ll help them paint a clearer picture of your goals and objectives. For instance, if you have suffered a big financial loss while investing in stocks, you might be a little uneasy when it comes to investing in stocks and securities again. However, you need to be upfront about it with your advisor so that he/she knows where you’re coming from and can take appropriate steps to clarify your doubts or invest in other kinds of financial products.

  3. Figure out your risk appetite:
  4. Your financial advisor should know about your risk tolerance levels and preferences. Depending upon your risk appetite, your advisor would suggest different assets and investments for your portfolio which would, in turn, affect your long-term financial goals and vision. In order to accomplish this, you must be aware of your ability to handle the effect of losing money on an investment. With age and time, your risk tolerance can change as well as you go through different stages of life. By stating your goals based on your risk appetite, your financial advisor can take a call on the kind of investments to make for you. For example, when you're young, you probably have a bigger risk appetite, in which case, your advisor would structure your portfolio in a way that it has more equities and fewer bonds. The objective here is to generate more returns for you by bearing a higher level of risk. On the other hand, if you're nearing your retirement age, your portfolio will most likely be bond-heavy, as the main objective is to preserve your capital and secure steady returns rather than aiming for risky investments or higher returns.

  5. Be honest about your financial situation:
  6. To help your financial advisor create a holistic financial plan for you that takes into account your annual expenses, income, main financial concerns, capital growth needs and personal vision of wealth, etc., you need to be honest about your financial situation. Your annual spending will help the advisor assess how much you need to save to live comfortably in your retirement. It also helps him devise a suitable investment strategy for you and the kind of asset classes he should invest in. In addition, apart from creating a suitable investment and retirement strategy for you, your advisor should be a trusted confidant with whom you can discuss wealth-related matters which align with your aspirations, spending habits, and lifestyle.

  7. Be upfront about your past financial mistakes, if any:
  8. You need to be honest with your financial advisor so that they’re better able to assist you. Do not leave out any details, especially the ones that you’re not proud of such as the time that you accrued credit card debt, paid a hefty tax duty or failed to meet your monthly/annual savings target. By doing so, your advisor would be able to analyze where things went wrong and take measures to ensure that these mistakes don't happen again in the future. Moreover, you should discuss all your financial decisions with your advisor, whether they are big or small, such as:

    • Whether to buy or lease a car
    • Whether to advance/loan money to your child
    • How to get insurance if you’re suffering from a debilitating disease such as Alzheimer’s
    • How to go about planning for retirement

    The main purpose here is to create a bond of trust between you and your advisor so that you’re comfortable sharing even the minutest details of your life.

  9. Analyze the fee model chosen by your advisor for their services:
  10. All financial advisors have a particular fee model that they use to charge their clients. The manner in which the fees are charged can have a major effect on the quality of the advisors' service as well as your budget. Hence, it is important to have a conversation with your advisor with respect to the fee model that they use. Typically, there are two ways in which financial advisors charge fees for their services:

    • Fee-only advisors
    • Fee-only advisors charge either a flat fee, an hourly charge, or a per-project basis fee. Except for the defined fee, they are not compensated in any other form. In addition, fee-only advisors do not receive any financial compensation through any financial products or services that they may sell. The main benefit of such models is that there is uniformity in fees irrespective of the size of your asset base. It should be noted that some of the fee-only advisors charge fees (usually between 1% and 2% of the AUM) based on a percentage of the assets they manage on your behalf.

    • Fee-based advisors
    • In this model, the financial advisors charge fees for the services provided by them as well as earn a commission on investments that you make through them. In certain cases, advisors levy a specific fee that is over and above the commission earned by them.

      As an investor, you need to understand the kind of fee model used by your advisor and the parts that make up the fee. If you have any queries regarding the fee model, do not hesitate to discuss them with your advisor.

  11. Ensure that your advisor is governed by the fiduciary standard:
  12. It is important to understand the difference between fiduciary financial advisors and non-fiduciary advisors. The first and foremost point of difference is that fiduciary advisors have to adhere to an ethical code of conduct where the advisors promise to act in your best interest at all times. So, rest assured that a fiduciary’s advice would be unbiased. Moreover, a fiduciary financial advisor has to ensure transparency in all financial matters and would work to disclose, minimize, and eliminate any disputes that may arise in the present or future.

  13. Disclose all relevant financial documents to help your advisor design a diversified financial plan:
  14. When you engage the services of an advisor you need to disclose all relevant financial information to them including any financial documents such as your account statements, tax returns, income receipts, debt certificates, and more. Other than this, you may be required to reveal information pertaining to your insurance or retirement account nominees to receive the best possible advice from your advisor. This enables your financial advisor to work towards achieving the best results for you by creating a strong, exhaustive, and diversified financial plan.

  15. Share your financial dreams as well as any recent life changes:
  16. If you want to have a strong relationship with your financial advisor, it is important that they understand what your financial dreams are so that they can assist you in achieving them. In addition, keep your advisor up to date with respect to any changes in your financial situation. For example, if you are thinking about getting a loan for a home or car, starting a college fund for your child, etc. Moreover, keep your advisor apprised of present and expected future lifestyle, as this will help them understand how your life looks like right now and how you envision your retirement lifestyle to be like in the future. If your advisor knows about your expectations when it comes to your retirement, it will help them ascertain the areas where you are willing to adjust and what you wish to achieve.

To conclude

When there is transparency between you and your financial advisor, it allows them to genuinely work towards improving your financial situation. It is essential that your advisor has the full picture when it comes to your future financial expectations, visions and goals, commitments, past mistakes, current risk tolerance, etc. By being honest and open about your financial situation, you are laying the foundation for a strong and fruitful relationship with your financial advisor.

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