What is a Financial Advisor?

What is a Financial Advisor?

A Financial Advisor is a finance professional who provides consulting and advice about an individual’s or entity’s finances. Financial advisors can help individuals and companies reach their financial goals sooner by providing their clients with strategies and ways to create more wealth, reduce costs, or eliminate debts.

1. Financial Advisor
2. Financial Advisor Role

A financial advisor can help individuals or companies meet their financial objectives, as follows.

Creating The Financial Plan

The financial advisor synthesizes all of this initial information into a comprehensive financial plan that will serve as a roadmap for your financial future. It begins with a summary of the key findings from your initial questionnaire and summarizes your current financial situation, including net worth, assets, liabilities, and liquid or working capital. The financial plan also recaps the goals you and the advisor discussed. The analysis section of this lengthy document will provide more information about several topics, including your risk tolerance, estate planning details, family situation, long-term care risk, and other pertinent present and future financial issues. Based upon your expected net worth and future income at retirement, the plan will create simulations of potentially best- and worst-case retirement scenarios, including the scary possibility of outliving your money. In this case, steps can be taken to prevent that outcome. It will look at reasonable withdrawal rates in retirement from your portfolio assets. Additionally, if you are married or in a long-term partnership, the plan will consider survivorship issues and financial scenarios for the surviving partner. After you review the plan with the advisor and adjust it as necessary, you’re ready for action.

Individuals

In the case of an individual, a financial advisor can provide insight into how they can save more and build their wealth. This is often done by constructing a portfolio of investments that are well suited to the client’s risk attitude. Some clients are more willing to take on risk if the prospect of a potential greater reward is more compelling to them than the prospect of potentially losing money.

Conversely, there are also clients who are more risk-averse, and that would like a lower-risk portfolio, even if it means potentially lower returns. Determining an individual’s risk attitude may be difficult since an individual’s risk attitude can depend on a great number of factors. Thus, a financial advisor may ask about things like the individual’s age, income, marital status, indebtedness, or savings in order to gather a solid understanding of their client.

Companies

In the case of companies, financial advisors can help provide a second, neutral perspective on corporate development projects. For instance, if a company is considering expanding its operations by building a new factory, financial advisors can help assess the profitability of the project independently. Once the advisor’s assessment is concluded, they can present their findings to the company’s management with the goal that their analysis will provide the company’s leadership with a valuable second opinion.

Financial Advisor Salaries

In Canada, compensation ranges are very wide for financial advisors, with base salaries starting at low at $30,000 and going up to over $100,000. Most financial advisors are also compensated with bonuses paid out if certain performance objectives are reached. Some advisors are also compensated on a commission basis if they invest their client’s money in certain managed funds. As with many other finance-related professions, relevant experience is rewarded. This means that managers who have been practicing for many years are typically the ones who end up at the higher end of the income spectrum.

Obtaining designations such as the CFA charter or an MBA can help expedite an individual’s progress up the career ladder. Many financial firms also require a certain minimum GPA cut-off for new graduates, meaning that excellent grades are a must.

The Future of Financial Advising

As technology continues to progress, there’s been an increasing number of “Robo-advisors” that are being used by companies. Robo-advisors are automated programs that interpret user information using advanced algorithms and create investment portfolios geared toward the client’s specific financial goals.

Such programs automate the process of collecting and interpreting information, meaning that they can complete the job of a financial advisor in a fraction of the time and at a fraction of the cost. Robo-advisors can constitute a real threat to financial advisors if technology continues to progress and algorithms become increasingly accurate. Nonetheless, there is a great deal of concern over how trustworthy Robo-advisors can be. Many individuals would still like to know that their money is being managed by a real person that they can talk to and communicate with, rather than by a computer. However, in a world where financial advisors and investment managers seldom beat market indices, it is becoming less of a concern.

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

1. Demographics
2. Personal Banker Job Description
3. Personal Finance
4. Return on Investment

Considering a Robo-Advisor

A digital financial advisor, also called a Robo-advisor, is a tool that some companies provide for their customers. A Robo-advisor uses computer algorithms to manage your money based on answers to questions about your goals and risk tolerance. Robo-advisors don’t require you to have much money to get started, and they cost less than human financial advisors. Examples include Betterment and Wealthfront. These services can save you time and potentially cost you less money.

However, a Robo-advisor can’t speak with you about the best way to get out of debt or fund your child’s education. It also can’t talk you out of selling your investments out of fear or help you build and manage a portfolio of individual stocks. Robo-advisors typically invest clients’ money in a portfolio of exchange-traded funds (ETFs) and mutual funds that provide stock and bond exposure and track a market index. It's also important to keep in mind that if you have a complex estate or tax issue, you will likely require the highly personalized advice that only a human can offer. Some firms, however, combine digitally managed portfolio investment with the option for human interaction at an additional cost. One such service is Personal Capital. Some people call these services digital advisors because interactions happen by phone or video chat instead of in-person; others use the terms “Robo-advisor” and “digital advisor” synonymously.

The Bottom Line

Not all financial advisors have the same level of training or will offer you the same depth of services. So when contracting with an advisor, do your own due diligence first and make sure the advisor can meet your financial planning needs. Check out their certifications as well, and be sure you understand, agree with, and can afford their fee structure. Also, investigate their regulatory history with your state regulatory agency, FINRA’s BrokerCheck, and the SEC’s Investment Advisor Public Disclosure database. Finally, be aware that finding an advisor who is the right fit for your personality is key to developing a successful, long-term relationship. An advisor can have all the experience, credentials, and success stories in the world. However, if you don’t like someone, you won’t enjoy working with them. And it's possible your financial plan may suffer as a result. 

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