A Financial Advisor is your financial planning partner

The Many Roles of a Financial Advisor

A financial advisor is your financial planning partner. Let's say you want to retire in 20 years or send your child to a private university in 10 years. To accomplish your goals, you may need a skilled professional with the right licenses to help make these plans a reality; this is where a financial advisor comes in. Together, you and your advisor will cover many topics, including the amount of money you should save, the types of accounts you need, the kinds of insurance you should have (including long-term care, term life, disability, etc.), and estate and tax planning. The financial advisor is also an educator. Part of the advisor's task is to help you understand what is involved in meeting your future goals. The education process may include detailed help with financial topics. At the beginning of your relationship, those topics may include budgeting and saving. As you advance in your knowledge, the advisor will assist you in understanding complex investment, insurance, and tax matters. Step one in the financial advisory process is understanding your financial health. You can’t properly plan for the future without knowing where you stand today. Typically, you will be asked to complete a detailed written questionnaire. Your answers help the advisor understand your situation and make certain you don't overlook any important information.

The Financial Health Questionnaire

A financial advisor will work with you to get a complete picture of your assets, liabilities, income, and expenses. On the questionnaire, you will also indicate future pensions and income sources, project retirement needs, and describe any long-term financial obligations. In short, you’ll list all current and expected investments, pensions, gifts, and sources of income. The investing component of the questionnaire touches upon more subjective topics, such as your risk tolerance and risk capacity. Having an understanding of your risk assists the advisor when it’s time to determine your investment asset allocation. At this point, you'll also let the advisor know your investment preferences as well. The initial assessment may also includes an examination of other financial management topics, such as insurance issues and your tax situation. The advisor needs to be aware of your current estate plan, as well as other professionals on your planning team, such as accountants and lawyers. Once you and the advisor understand your present financial position and future projections, you’re ready to work together on a plan to meet your life and financial goals. 

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.

What Is a Financial Advisor?

A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors (sometimes spelled as advisers) can provide many different services, such as investment management, tax planning, and estate planning. Increasingly, financial advisors are acting as a "one-stop-shop" by providing everything from portfolio management to insurance products.

Registered advisors must carry the Series 65 license to conduct business with the public.1 A wide variety of other licenses and certifications may be required depending on the services provided by a given financial advisor.

KEY TAKEAWAYS

A financial advisor is a professional who provides expertise for clients' decisions around money matters, personal finances, and investments. Financial advisors may work as an independent agent or they may be employed by a larger financial firm. Registered advisors must pass one or more exams and be properly licensed in order to carry out business with clients. Unlike stockbrokers who simply execute orders in the market, financial advisors provide guidance and make informed decisions on behalf of their clients.

Understanding Financial Advisors

A financial advisor is a generic term with no precise industry definition. As a result, this title can describe many different types of financial professionals. Stockbrokers, insurance agents, tax preparers, investment managers, and financial planners can all be considered financial advisors. Estate planners and bankers may also fall under this umbrella. Still, an important distinction can be made: that is, a financial advisor must actually provide guidance and advice. A financial advisor can be distinguished from an execution stock broker that simply places trades for clients or a tax accountant who simply prepares tax returns without providing advice on how to maximize tax advantages.

Furthermore, what may pass as a financial advisor in some instances may simply be a product salesperson, such as a stockbroker or a life insurance agent. A true financial advisor should be a well-educated, credentialed, experienced, a financial professional who works on behalf of his clients, as opposed to serving the interests of a financial institution by maximizing the sales of certain products or capitalizing on commissions from sales. Generally, a financial advisor is an independent practitioner who operates in a fiduciary capacity in which a client’s interests come before their own. However, only Registered Investment Advisors (RIAs), who are governed by the Investment Advisers Act of 1940, are held to a true fiduciary standard. This fiduciary standard mandates that an RIA must always unconditionally put the client's best interests ahead of their own, regardless of all other circumstances.2 There are some agents and brokers who elect to practice in this capacity, as a fiduciary, as a way of attracting clients. However, their compensation structure is such that they are bound by the contracts of the companies where they work.

The Fiduciary Distinction

Since the enactment of the Investment Adviser Act of 1940, two types of relationships have existed between financial intermediaries and their clients. These are the reasonableness standard and the stricter fiduciary standard. These relationships characterize the nature of the transactions between registered representatives and clients in the broker-dealer space. There is a fiduciary relationship that requires advisors registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors to exercise duties of loyalty, care, and full disclosure in their interactions with clients.2

While the former is based on the principle of "caveat emptor" guided by self-governed rules of "suitability" and "reasonableness" in recommending an investment product or strategy, the latter is grounded in federal laws that impose the highest ethical standards. At its core, the fiduciary relationship relies on the necessity that a financial advisor must act on behalf of a client in a way the client would act for himself if he had the requisite knowledge and skills to do so.2

Financial Advisors vs. Financial Planners

The financial planner is one particular type of financial advisor who specializes in helping companies and individuals create a program to meet long-term financial goals. A financial planner might have a specialty in investments, taxes, retirement, and/or estate planning. Further, the financial planner may hold various licenses or designations, such as Certified Financial Planner (CFP) designation. Financial planners may specialize in tax planning, asset allocation, risk management, retirement planning, and/or estate planning.

Courtesy: financial advisory services in Saudi Arabia