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Your Financial Advisor: Guide On How to Choose the Most Effective

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financial advisor

Your relative who likes to talk about money is not your financial advisor.

Your colleague who offers stock tips at the water cooler is not your financial advisor.

Your stockbroker is not your financial advisor.

Most people manage their own money without having someone to hold them accountable. You can undoubtedly go solo if you have the time, knowledge, and the right temperament for it, but if you want to go pro… A financial advisor is an expert who helps you understand the demands of your financial situation, lays out the process for achieving your financial goals, and guides you along the way.

Hiring a financial advisor makes life easier if:

  • You have complex financial needs
  • You are too busy
  • You want a second opinion from an experienced professional
  • You act based on emotions during market volatility

According to a survey, almost 70% of millionaires in the US have taken the help of a financial advisor or an investment professional. The right financial advisor is worth it. But how do you hire a good advisor? Let’s find out.

What type of financial advisor do you need?

The duties and responsibilities of a financial advisor are much more diverse than you think. Some advisors act as your financial coach, while others manage the investments of high-net-worth individuals (HNWIs).

Let’s take a quick look at seven different types of advisors and how they can help you with your finances.

Personal banker

A personal banker is someone who works in retail banking. They help customers open savings and checking accounts, take out loans, invest money in the bank’s products. Unlike investment bankers, this type of advisors works with the average Joes of the world.

Your banker could also help you decide how to save for your children’s college or your retirement.

Insurance advisor

Insurance advisors are professionals who specialize in providing you advice and guidance regarding insurance needs. They work with you to assess your assets, liabilities, future responsibilities, income stability, etc., to help you decide how much insurance cover you need.

They also analyze your existing insurance policies to identify gaps and suggest relevant policies.

However, the insurance advisors often pitch products on which they earn the highest commission. So not all of them have your best interest when trying to sell you insurance products.

Investment advisor

An investment advisor is a professional registered with a state securities regulator or the Securities and Exchange Commission (SEC). 

The investment advisor has a good understanding of stocks, bonds, real estate, and financial markets overall. They also know about the market condition and investor behavior, helping you decide where to invest your money for maximum risk-adjusted returns.

Financial planner

A financial planner takes a holistic view of your economic life ranging from saving, budgeting, taxes, insurance, retirement, investments, and more. They help you identify the leaks in your budget, answer specific questions, and plan for significant life events such as weddings, retirement, etc.

The CFP board regulates a Certified Financial Planner (CFP). Sometimes they also work with your estate lawyer and accountant to help you find the best solutions to your financial problems. Most financial planners charge a flat fee or a percentage of the money managed.

Tax and legal advisor

A tax and legal advisor helps you strategize your cash inflow and assets to minimize the taxes you pay without violating any rules. Tax planning is entirely different from preparing your taxes, for which you can use software or hire a CPA. They can also help you in estate planning if you are thinking of transferring your wealth to future generations or giving it away to charity.

Accountant

An accountant is different from a financial planner. A Certified Public Accountant (CPA) maintains the records of a company’s financial transactions. They help you in preparing your taxes and ensuring that all the tax forms are correctly processed. The CPAs also work for third-party firms that audit financial statements.

Robo-advisors

Robo-advisors are online tools that use algorithms and your financial data to provide financial planning and investment management services at a low cost. 

But suppose you think you also need a human to help you as a guide. In that case, many robo-advisory firms offer a hybrid model where you get virtual access to an experienced financial advisor to evaluate your financial situation and help you out.

Robo-advisors are good for planning your long-term goals, such as retirement. They charge as little as 0.25% of your balance.

Which type is the best for you?
TYPE SERVICES
Personal banker
  • open savings
  • checking accounts
  • take out loans
  • help to invest in bank’s products
Insurance advisor
  • assess the liabilities, assets, responsibilities, income stability, etc.
  • analyze insurance policies
Investment advisor
  • help with stocks, bonds, real estate, etc.
  • help with money investing for max risk-adjusted returns
Financial planner
  • help to identify the leaks in budget
  • work with an estate lawyer
  • help to find the best financial solutions
Tax & legal adviser
  • help to strategize cash inflow and minimize the taxes
  • help with estate planning
Account
  • support in preparing taxes and tax forms
Robo-adviser
  • providing financial planning and investment management services
  • planning the long-term goals
  • invest clients’ money in a portfolio of ETFs and mutual funds

How to choose your financial advisor wisely

Now that you know what type of advisor you need for your specific situation, it’s time to find the right person. The simplest way to look for financial advisors is to tap into your network or visit the National Association of Personal Financial Advisors (NAPFA).

You don’t have to hire the very first advisor you speak to. Get to know them better and look at their track record before hiring them.

Follow these steps before deciding whether you want to work with a financial advisor:

  • Run a background check. Speak to some past clients. Ask the former clients how their experience was with the advisor. Look into the advisor’s track record to see if they have compromised their integrity or the client’s trust in the past.
  • Ask the advisor whether they charge a fixed fee or a percentage of the money managed? Who you decide to hire depends on your net worth and their fee.
  • Please don’t get carried away by personality or charisma because it’s their knowledge, experience, and track record that will help you. Their charm is of little use once you start working with them.
  • Ask them if they are financial fiduciary. A fiduciary holds the highest ethical standards in the money management business. Financial fiduciaries are bound by law to act in the best interest of their clients. Registered investment advisors are an example of fiduciaries.

Bottom line

Most people don’t seek the help of a financial advisor. But if you feel you need an expert’s opinion on your economic well-being, taxes, retirement, insurance, or investing, look for an advisor. An advisor could be even more helpful if you have been reckless with money in the past or you have little understanding of a complex situation.

 

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