Ultimate Guide to Financial Advisors - CentSai

Ultimate Guide to Financial Advisors

Brynne Kyle
7 minutes read
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The term “financial advisor” may send a shiver of apprehension down your spine. For some, the finance world can be seen as a tricky, perilous place that is difficult to navigate — and even more so when it comes to your own finances.

There’s no shame in having no idea what you’re doing — a measly 21 out of the 50 states require finance to be taught in high school, according to a survey by The Council for Economic Education.

Whether you’re struggling to plan for the future, or even if you have a firm grasp on your personal finances, there may be times when you need a helping hand along the way. Enter stage right: the financial advisor. But what is a financial advisor?

Lack of comprehensive financial knowledge costs each American $1,389 in 2021, revealed a survey by The National Financial Educators Council. Unsurprisingly then, the demand for professional help continues to grow — employment of financial advisors is set to expand by 5 percent between 2020 and 2030, according to the Bureau of Labor Statistics.

What Is a Financial Advisor?What Is a Financial Advisor?

For all intents and purposes, a financial advisor does exactly what she says on the tin: advises you on how best to manage your finances. While that’s a core truth of the role, if it were that simple, your mom would be a financial advisor every time she chastised you for spending all your money on coffee. (I’ll never stop!)

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Sadly, there is no universally accepted definition of a financial advisor. Oftentimes stockbrokers, insurance agents, and other experts in the financial field may adopt this title. And though financial advisors do consult with their clients on a range of topics including mortgages, investments, taxes, and estate planning, there’s a bit more to it.

A true financial advisor is someone you hire who, although they might specialize in one area — such as education planning — should be qualified and in a position to guide you on all aspects of your finances.

You’ll meet with them in person or communicate remotely (as more and more companies are offering virtual financial advice for a lesser fee) and receive comprehensive financial advice specific to you.

What Does a Financial Advisor Do?What Does a Financial Advisor Do?

As mentioned above, a good financial advisor is invested (pun intended) in your financial well-being. They assess your current financial situation, try to understand your personal needs and goals, and then make recommendations or lay out a plan on how best to achieve them.

Here is a typical rundown of what a financial advisor does:

  • Meets with clients in person or virtually to evaluate the client’s current financial health and establish financial goals
  • Determines the risk tolerance of their clients to help recommend a suitable plan
  • Gives a thorough explanation of the services available in relation to those goals
  • Educates and answers clients’ questions relating to their financial goals and needs, as well as the risks involved
  • Recommends investments or invests on the client’s behalf with prior approval (this is known as discretionary trading)
  • Researches or reports on investment opportunities for the client
  • Establishes a plan —short- or long-term — for specific events such as education expenses, property ownership, and retirement
  • Consistently monitors client’s accounts and adjusts the plan as goals and markets shift and as the client’s priorities change

Once a relationship between client and advisor has been established and a plan put in place, the advisor will continue to monitor accounts, investments, and so on. The client and advisor should meet at least once a year to update and adjust the plan, which may happen due to new investment opportunities or a change in the client’s circumstances.

It is important to note that many financial advisors are licensed to buy and sell financial products, such as stocks, bonds, and insurance. As such, if your advisor isn’t a fiduciary, they may try to sell you products that could benefit them more than you, as they receive a commission on what they recommend.

Not all advisors partake in discretionary trading, as mentioned above. “Discretionary trading is limited to securities traded on the secondary market — stocks, bonds, funds,” says Peter Neeves, Ph.D.

“Things that you would be locked into wouldn’t be held in a brokerage account and wouldn’t be part of discretionary trading,” Neeves adds.”You have to delegate that power to your advisor, who would be acting as your broker. Common for brokers (but not universal), less so for advisors (without being uncommon).”

WTF Is a Fiduciary?WTF Is a Fiduciary?

A fiduciary is a financial advisor who is legally required to put your financial best interests first. Yes, that means what you think it means — a person you put in charge of your money may be in it… for the money. All fiduciaries are financial advisors, but not all financial advisors are fiduciaries.

The term fiduciary came into being in the 1940 Investment Advisors Act. Brokers, however, serve the broker-dealers they work for and are required to believe only that recommendations are suitable for clients. This suitability standard is set by the Financial Industry Regulatory Authority.

There are many qualifications financial advisors can have that do not enforce a strict code of ethics (see glossary of terms below).

For example, a non-fiduciary financial advisor adheres to the suitability standard, in which they can recommend a product or service that may not be the best or most cost-effective for you, as long as it can be deemed “suitable.” As such, they’re not giving you incorrect advice per se, but their advice may be skewed more toward their own interest than yours.

As resident expert at CentSai Peter Neeves once said, “People are people, whether they’re fiduciaries or not.” So even a non-fiduciary advisor may still have your best interests at heart.

How Do I Know Who Is a Fiduciary (And Who Isn’t)?How Do I Know Who Is a Fiduciary (And Who Isn’t)?

Financial advisors who can claim to be fiduciaries are certified financial planners (CFPs) and registered investment advisors (RIAs). Their fiduciary status is underwritten by the Certified Financial Planner Board of Standards and the Securities and Exchange Commission (SEC), respectively.

If a financial advisor is registered with the SEC, they are legally bound to operate under the fiduciary standard. You can request this information from a potential advisor should you wish. In order to choose the best financial advisor for your needs, this may be crucial.

Why aren’t all financial advisors required to follow the fiduciary standard of working in their clients’ best interests? There was a rule proposed by the Department of Labor that would have required all financial advisors to follow the fiduciary standard as opposed to the suitability standard.

Unfortunately, this rule has not yet been enforced, and so many financial advisors are not legally required to follow the fiduciary standard. This doesn’t mean that fiduciaries are guaranteed to be honest. Thorough research should still be done even if potential advisor is a fiduciary.

Do I Need a Financial Advisor?Do I Need a Financial Advisor?

Well, yes I might … but enough about me. There are many things to ask yourself when thinking about hiring a financial advisor.

If several of the following statements describe you, it might be high time to consider it:

  • You are struggling to prioritize financial goals
  • You aren’t sure when, where, how much, or how often to save
  • You want to invest, but have no idea where to start
  • You want or need help with investment management
  • You have money, but don’t want the responsibility of managing it

If you are considering an advisor because you are in financial trouble, however, you may want to look for other resources. Financial advisors can be expensive, and while they may help you with a plan to manage your debts, the money you have dished out for this information may not be worth it.

Where your money is concerned you should take your time, do your research, and ask about what services you will receive in return for any fees. Decide if you are comfortable with what you are being offered.

Financial advisors can help with debt, but consider the cost of hiring one versus putting that money toward paying off your debt. If you’re still not sure what applies to you, Andrew Chen, CFA and founder of Hack Your Wealth, gives a breakdown of the pros and cons:

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