From the moment you got your first job and began making money, you had to figure out what to do with your finances. At first, the answer was easy: spend it! Buy all the fun things! However, you eventually realized that you have responsibilities and bills to pay, and you have major purchases for which to save. You also realized that you want to retire someday.
Where do you start? Sure, you could go it alone. You could read the latest tax code (all 73,954 pages of it), check the stock market daily, research the various types of investments, read about all the rules for retirement accounts; or, you could hire an expert in all these things to manage your money for you and bring you the highest return to help you meet your financial goals. That expert is a Financial Advisor.
What Does a Financial Advisor Do?
A Financial Advisor makes decisions about what to do with your money on your behalf. He or she helps you reach financial goals such as saving for a new home or your child’s education or saving as much as possible so you can have a comfortable retirement. The advisor not only determines what kinds of savings accounts would be most beneficial to you and makes investments, he or she also makes sure you have appropriate insurance, provides estate planning and ensures that you’re taking advantage of any available tax breaks and not paying more than you should.
When it comes to managing your portfolio and investment guidance, your Financial Advisor determines how much risk you should take. Riskier investments usually have a better payoff, but if you only have a few years until retirement, the risk might be too high because you wouldn’t have enough time to recoup losses. Alternatively, you may have many years until you retire but you just don’t have the constitution to handle the stress of seeing your investments fluctuate wildly. Your Financial Advisor gets to know you and gets to know how you’d like your money invested.
If you have debt, a Financial Advisor will include paying off your debt as part of your long-term financial plan. The sooner your debt is paid off, the sooner you can begin meeting your financial goals.
Your Financial Advisor helps you make the most of your money so you can have the most money!
Questions to Ask Your Financial Advisor
Whether you’re searching for a Financial Advisor for the first time or you have one and you don’t know the answers to the following questions, it’s time to get answers!
What are your qualifications?
Hiring a Certified Financial Planner (CFP) is best. The certification requires many hours of class work, an extensive test, and experience, and in order to keep the certification, he or she must complete 30 hours of additional education every two years. A CFP focuses on helping clients achieve large financial goals such as home ownership and retirement.
A Chartered Financial Analyst (CFA) is a Financial Advisor who’s highly trained in investments, focusing mainly on your investment portfolio.
Accredited Financial Counselors (AFC) primarily work with lower income people who have a lot of debt. They work with them to pay off debt in order to achieve a greater financial standing, but they don’t invest money for clients.
Any of these types of financial professionals could hold an MBA (Master of Business Administration). A CFP will help you with your complete financial life. One of the most important attributes that your planner should have is the duty of a fiduciary. When someone is a fiduciary, he or she must act in your best interest. By agreeing to the Fiduciary Rule, it’s his or her responsibility to give you the highest standard of financial care by being transparent, removing and avoiding conflicts of interest, and delivering advice based on facts and expert experience. While the Fiduciary Rule was rolled back in 2018, most Certified Financial Planners have vowed to continue to follow the rule, so you should be sure to choose one accordingly.
How much will I pay?
Financial Advisors are paid in various ways, so it’s important to get a clear understanding of what financial services will cost you and choose an advisor that charges you in a way that’s most beneficial to you. If you do a lot of investing, it may be cheaper to choose an advisor that charges a retainer rather than one that charges a commission on each investment.
Commission: Your Financial Advisor will charge you a portion of the money he or she invests for you. This is different from a commission on products. If your Financial Advisor earns a commission on selling you products, you can’t be sure who benefits most. If your advisor offers you a product, ask if he or she earns money by selling it to you.
Fee-only: Your Financial Advisor may charge an hourly fee for the time spent with you or working for you. If your CFP charges a flat fee, you choose a bundle of services from a list of services, each with a corresponding cost.
Retainer: This is an upfront fee for a specified amount of time for specified services. If you go over that time, you’ll be charged for the extra time.
Commissions and fees: Some Financial Advisors charge a combination of commissions and fees. For example, they’ll charge a commission on investments and fees for other services.
Remember, your Financial Advisor is working for you to manage your finances, and thus deserves to be paid fairly for services.
How often should we meet?
Initially, you should meet with your Financial Advisor often, until your financial plan is well established and moving along the way you feel it should. Certainly, you should meet every year for an annual review. There will be times when you need to meet more often, such as when you’re doing your estate planning or there have been major changes to your financial situation such as marriage, a job change, divorce, serious illness, or your spouse passes away.
It’s important to ask your Financial Advisor how often he or she meets with clients and is available to you for phone calls. You need to understand that your advisor is busy, but should be able to return your calls within a reasonable timeframe. The advisor may charge fees for your meetings, so if you’re meeting a lot, it could be quite costly.
How will my money be invested?
Your Financial Advisor will look at your current finances including any debt and the amount that you currently have invested or on hand for your retirement, your age, and your tolerance for risk in determining how your investments should be made. He or she will weigh it all and come up with a plan for your investments in stocks or bonds. Stocks tend to have better returns but be more of a risk, which may be better when you have many years before retirement age. Bonds are less volatile and have more certainty. Typically, a combination of the two is recommended, but the ratio is more dependent upon the age and risk tolerance of the investor.
Your Financial Advisor’s job is to help you meet your financial goals. If you’re thinking about buying a house sometime in the future, or you want to help pay for your child’s college education, your advisor will help you make the appropriate investments to meet those goals. What type of mortgage should you have? Should you refinance your current mortgage? Maybe your kids are grown; is it time to downsize? Your advisor can help you decide.
Retirement is the biggie. It’s something that we all should be saving for during our entire working lives, but rarely do we think about it when we’re young. No matter what your age, your Financial Advisor will help you get on track. Having enough to retire isn’t having enough money to go on lavish vacations all over the world as television commercials might have you think. Sure, that would be nice, but few have the money to do that. The retirement goal for most of us is to maintain our current standard of living when we finally retire.
A good Financial Advisor will help you make the right investments to get the returns you need to save as much as possible for retirement. He or she will look at how much you’ve saved in retirement and non-retirement accounts and consider how long it would last taking into account your monthly living costs along with savings and all sources of income including pension, annuities, rental properties, 401 (k), etc. The advisor can instruct you on which retirement accounts you should be investing in: IRA, Roth IRA, 401 (k), etc. The advisor will not only get you there, but also help you once you do retire by answering questions for you:
- “Should I take my pension as a lump sum or an annuity?”
- “How should I withdraw from my accounts?”
- “When should I file Social Security?”
Your investments should be re-evaluated often. As you get closer to retirement, you may want to be more conservative with your investments and make less risky ones. Or, there may be changes in your life that might affect how much you invest, such as a newly obtained medical bill that you need to pay.
A Financial Advisor can also advise you on the right amount of life insurance you should purchase. It may seem strange that your Financial Advisor would be involved in something that you’ll never personally benefit from, but nothing could be further from the truth. Life insurance helps you keep your wealth intact. If you die, your family will be responsible for paying the mortgage or any other lingering debt, cutting into the money and security that you’ve worked so hard to obtain. Because your Financial Advisor knows your finances well, including your desires for the future, buying life insurance should be part of your estate planning.
However, it may not be the best idea to buy insurance through your Financial Advisor if it’s offered, because he or she may be driven by a big commission on a big policy. Go through an insurance professional with the guidance of your Financial Advisor on how much life insurance and what kind you actually need. You need enough so that your family won’t sustain a big hit financially when you die, but not so much that you’re getting a big hit financially paying for the policy. A good Financial Advisor will be able to advise you on what’s appropriate.
How can you help me save on taxes?
No one wants to pay more taxes than the law requires. Your Financial Advisor can tell you what changes you should make now that’ll lower the amount of money you have to pay in taxes, and should be making investments that help you save on taxes as well. Is the advisor recommending tax-free municipal bonds? How do you take your retirement disbursements in a way that’s most beneficial to you in terms of taxes? What types of charitable deductions can you claim? Can you reduce your taxable income by making a charitable contribution?
Your Financial Advisor can inspect your tax return to ensure that you’re taking all the deductions you’re allowed. He or she can help you put money away for college in a way that minimizes taxes, so more money can go toward your child’s education. Home office expenses for self-employed individuals, dental and medical expenses, and health insurance premiums may all be valid deductions for your situation.
He or she may not be a tax preparer, but your Financial Advisor is in a unique position as an expert in your individual financial details and can find deductions that your tax professional may have missed.
As with most things in life, good communication is the key. Just as your Financial Advisor needs to be transparent and upfront with you with all the actions taken with your finances, you need to be upfront with all your financial information, life changes, and expectations. With clear goals and expectations, your Financial Advisor can help you throughout your entire financial life.