Managing your finances can be challenging as one has to figure out their financial goals, how to best save for retirement, manage their taxes and more. As per Northwestern Mutual’s 2019 Planning and Progress study, 92 percent of the participants said they feel safer, happier, and more confident when their finances are in order.
Managing your finances can be overwhelming. Creating an appropriate strategy for reaching your financial goals and retirement can leave you confused as to where to begin. Here’s where a financial advisor or a financial planner can assist in the financial planning process. They can answer your queries or any concerns related to your financial plan as well as educate you about the pros and cons of different investment options you are best suited to invest in as per your current finances. If you’re looking for assistance in managing your finances, consult with a financial advisor who can help meet your unique financial needs and goals. Engaging the services of a certified financial planner can be a wise decision for you no matter whether you have just started your wealth accumulation process, have questions about your current finances, are nearing your retirement, or are living paycheck-to-paycheck. 66 percent of participants in Northwestern Mutual’s 2019 Planning and Progress study said they felt financially secure due to having hired a financial advisor. In addition, around 85 percent of the survey participants revealed that they were satisfied that their finances were moving in the right direction after having sought professional financial consultation.
Read on to know who a financial advisor is, what they do, and how they can help you manage your finances.
Who is a financial advisor?
A financial advisor is a professional who evaluates your financial needs and offers financial guidance on various money-related matters. They help you save time, minimize financial risks, and build wealth in the long term. A competent financial advisor can guide you and provide several different financial services ranging from goal planning, debt management, investment management to tax planning, retirement planning, estate planning, and more.
A financial advisor is an umbrella term used to refer to professionals belonging to diverse backgrounds and educational qualifications. Financial advisors include investment advisers, tax planners, wealth managers, financial planners, etc. who provide specialized or generalized financial planning services to their clients based on their requirements. Some advisors specialize in retirement planning support. Some advisors offer a vast array of services that cover tax management, estate planning, portfolio management, etc. Each kind of financial advisor holds different certifications, educational qualifications, and professional licenses. Thus, you must assess each advisor and find out if they are qualified to offer the particular financial advice that you require to meet your goals.
8 Financial Planning Matters An Advisor Can Help You With
A financial advisor is a skilled professional with years of training, education, and experience in financial matters. Here are 8 things that a financial advisor can help you out with:
- Budgeting
- Debt management
- Investment and portfolio management
- Retirement planning
- Tax management
- Education Planning
- Estate planning and wealth management
- Health and long-term care risk planning
The foundation for every financial plan is a realistic and foolproof budget that enables you to achieve your financial goals and objectives. A financial advisor can assist you with designing an effective budget that enables you to save more, spend meticulously, and reach your financial goals such as purchasing a car, first home, paying for your child’s education or wedding, setting up a business, or creating a retirement corpus for you. The advisor sets attainable savings targets and advises you on how to best use your money without having to make any compromises to your present standard of living. The budget is prepared after taking into account your present income, liabilities, and dependents. The advisor helps in dividing up your expenses by setting aside a specific sum for your non-discretionary expenses (like rent, electricity/water bills, etc.) and discretionary expenses (such as online subscriptions, eating at restaurants, etc.). The primary purpose of the financial advisor is to enable you to spend your money wisely and optimize your savings. The advisor also acts as a motivator where he encourages you to achieve your savings targets and goals and stick to the set budget.
Debt can act as a significant hurdle when it comes to reaching your financial goals. Not only can it negatively impact your future financial security but the interest due on debt can eat away your savings, and if not paid off, can make a serious dent in your retirement corpus later on. A competent financial advisor can help minimize your interest burden, assist you with effective management of your debt, and enable you to create additional streams of income to ensure you remain debt-free in the future. With a financial advisor to guide you, you would be able to manage your financial liabilities and steer through the complex debt management process without adding to your debt.
Investing your money is as important as saving it which is why undertaking efficient portfolio management is critical for achieving financial success in the long run. To create a sound investment plan for you, your financial advisor will work to understand your financial goals, risk tolerance, and risk capacity, life stage, and investment time horizon. The aim here is to lower risk, maximize gains, and optimize asset allocation to incentivize wealth accumulation in the long run. The advisor helps you restructure your portfolio in the event of a major life change. For example, if you are still a decade or so away from retirement, your advisor may suggest a more aggressive investment profile focusing on securities like stocks. However, as your retirement nears, the objective changes from wealth accumulation to capital preservation. At this juncture, your advisor may recommend investing in securities that offer stable returns having low volatility, such as municipal bonds. He could also go for annuities for creating a dependable income stream in retirement. Apart from portfolio restructuring, your financial advisor may also provide other portfolio management services such as monitoring the performance of the portfolio and implementing effective strategies to ensure market volatility doesn’t affect your portfolio and put your long-term goals at risk. Moreover, if you wish to engage in impact investing, the advisor can create a suitable strategy wherein you can generate financial returns alongside creating a positive social or environmental impact.
Having a good retirement plan in place goes a long way in ensuring that you live a comfortable, safe, and secure retired life. Your financial advisor can help you create a foolproof retirement plan based on your present income, financial liabilities, years left to retire, expected standard of living in the future, the number of dependents, etc. He can encourage you to stick to your savings targets and advise you how to maximize different retirement savings plans such as a 401(k), an IRA (Individual Retirement Account), a Roth IRA, etc. The financial advisor can help you manage and maximize your contributions to these accounts while ensuring you meet IRS guidelines. In addition, the advisor can help you minimize your taxes and avoid penalties when making a withdrawal from your retirement savings account. Moreover, the advisor works with you to identify and create additional streams of income during retirement such as Social Security benefits, pensions, etc. Furthermore, your advisor can also give you pointers on how to maximize your Social Security benefits, optimize government aid such as Medicare, or leverage home equity during retirement.
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Your financial advisor can assist you with creating a tax strategy wherein you can minimize your tax liability and only pay the least possible taxes on your income. This can be done through sponsorship of your kids’ and grandkids’ education, creating a trust, making donations to a charity, and more. The financial advisor will help you minimize your tax liability through investing in tax-saving investment accounts, deploying tax-loss harvesting strategies and mechanisms for offsetting capital gains. Not only this, the advisor can prove to be an asset and help reduce your tax implications if you have received an inheritance or a gift having a substantial monetary value.
Due to the rising costs of higher education, you need to prepare for how you are going to fund your child’s college fees. Education planning is essential as quality education forms the bedrock for a child’s future success. You need to strike the right balance between saving for your multiple financial needs as well as putting aside enough funds for your child’s higher education. Consult with a financial advisor for guidance on which education plans to invest in, how to incorporate your college savings goals with your retirement savings goals along with other financial needs and requirements.
Estate planning is another important aspect where a financial advisor can be of great assistance. Apart from creating an infallible estate plan, the advisor can help you map estate assets, estimate the estate’s value, draft a will, appoint executors, streamline foreign investments, and more. Your advisor plays a critical role in estate planning wherein he monitors your assets, and ensures that your heirs receive your estate without attracting hefty estate taxes and penalties. In addition, he helps create a trust, assign a power of attorney, and more. Moreover, if you are a high net worth individual having investible assets worth more than $1 million, a skilled financial advisor can also provide sound wealth management services. Your financial advisor works with you to understand your unique financial needs, maximize your investments and assets, design a foolproof estate plan, and minimize your risk and tax liabilities.
A competent financial advisor can be of great help when it comes to planning for your medical needs and preparing a strategy for long-term care risks. The advisor can design an exhaustive health care plan that takes care of your medical expenses without making a hole in your savings. Moreover, your financial planner can help you invest wisely and help you pick the right option from healthcare insurance, Health Savings Account (HSA), Medicare, Medicaid, health insurance exchanges, COBRA (Consolidated Omnibus Budget Reconciliation Act), etc. to tackle your healthcare expenses in the future.
How much do financial advisors charge for their services?
There are several types of financial advisors based on the method of compensation they use. Let’s go through them one by one:
- Fee-only advisors
- Commission only advisors
- Fee-based advisors
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Some advisors combine elements of both commission and fee-based models to charge for their services. These advisors, known as fee-based advisors, charge a specific percentage of your AUM for their investment services as well as a per hour fee or a commission-based fee for the investments they recommend you to buy. The fee charged by fee-based advisors tends to vary based on the services that they provide and the kind of cost structure they use to charge for any services offered by them. Do keep in mind that you need to know the fee structure before hiring a financial advisor and see if he fits your budget or not.
A fee-based advisor charges a predefined fee that can either be a flat retainer charge (usually between $500 to $10,000) or an hourly rate (around $120 to $300 an hour). In the hourly rate model, you typically hire the advisor for their services for a specific number of hours, if you require additional help then you’d have to pay them more. Apart from this, the AUM (Assets Under Management) method is quite widely used. Herein, the advisor charges a specific percentage (usually 1-2%) of your overall AUM. For instance, if you have assets worth $100,000, then you can expect to pay between $1,000 to $2,000 as a fee under the AUM model. Do note that the exact fee that you will be shelling out depends upon several factors such as the skills and experience of the professional, as well as the firm they work for. The AUM method is beneficial for investors in the long run as it works on a sliding scale. With an increase in the value of your AUM, the percentage fee charged by the advisor decreases. Some advisors set a benchmark from where their fees will fall. As per experts, if the advisor is charging 1 percent for AUM worth $1 million, then the percentage charged will drop to 0.50% at $10 million AUM and 0.10% after the next milestone. A significant benefit of engaging a fee-based advisor is that these professionals receive compensation directly from you and do not work on a commission basis model. This means that their advice is more likely to be unbiased and transparent. Moreover, fee-only advisors are ruled by fiduciary standards meaning that they are obligated by the law to put your interests before theirs and minimize all possible areas of conflict.
Commission-based financial advisors do not charge a fixed or hourly fee nor a percentage of your AUM since their main source of income is from the financial products (insurance packages, mutual funds, stocks, etc.) you buy through them. These advisors usually charge between 3 to 6 percent commission on the insurance packages or mutual funds they sell to their clients.
Say, for example, your advisor suggests that you invest $2,000 in a mutual fund that levies a 5% commission, then you will pay $100 as commission to the advisor and invest the remaining $1900.
In certain situations, commission-based advisors can prove to be more cost-efficient compared to fee-based financial advisors as these advisors work as independent contractors and offer a varied assortment of financial products that a fee-based advisor may not have access to (or cannot offer due to restrictions placed on them by their firm). A commission-based advisor can also execute the purchase and sale process of an investment product meaning that you do not have to actively manage your investments.
That said, you may not always be able to trust them fully concerning the advice they offer or the financial products they sell as they do not follow any fiduciary standards. Hence, the advice they offer can be useful but may not be the best for your needs. Since commission-based advisors earn commission as per the products they sell, their counsel could be biased, with a high probability of conflict of interest.
To summarize
A financial advisor acts as a custodian of your finances and can help you secure your financial future. Hence, it is in your best interest to select a competent advisor with the requisite qualifications and financial expertise to help you manage your financial affairs. So, if you need help in planning for retirement, savings, building an investment strategy, tax planning, and more, consider hiring a professional financial advisor for your needs. Use the free advisor match tool to get connected with 1-3 financial advisors that are suited to meeting your financial requirements.