What is a Financial Advisor and How Can We Choose the Most Suitable for Us?
At times, you may want to invest, but you don’t have enough knowledge and are in need of professional opinions. During this situation, advice from financial advisors is something you can benefit from.
What exactly is a financial advisor? How do they work? Do we really have to be extremely well-off to be able to hire them? Read the explanation below to learn more!
What are Financial Advisors?
Simply put, financial advisors are professionals who offer their advice to help you make decisions regarding what you should do with your money. Just like you need the help from an architect to build your house, the advice from a financial advisor can help you build your plan for a better future.
The service that they offer can be implemented across various stages of our lives, from making a present budget, organizing a financial plan for your children’s education, to helping you prepare a retirement plan.
The advice that they give varies, from tax payment, investment, estate planning, to debt management.
Financial advisors fall into two categories, fiduciary and non-fiduciary advisors. Fiduciary financial advisors operate based on fees. They do not receive commissions from the sales of any investment. Hence, they must put their clients’ interest as the biggest priority.
Non-fiduciary financial advisors, on the other hand, receive incentives from selling particular investment products. Hence, they might advise you to take the most suitable investment, but not necessarily the lowest cost.
Types of Financial Advisors
Due to a wide range of services that they offer, there are several types of financial advisors based on their specialization. Adapted from Forbes, below are three kinds of financial advisors that you can hire based on your personal needs.
Certified Financial Planner
A Certified Financial Planner (CFP) is someone who has been formally recognized in the areas of financial planning, taxes, insurance, estate planning, and retirement. Due to their wide scope of work, a CFP might start the process of managing your finances by assessing the assets that you have, including cash and investments, as well as the liabilities that you bear such as debts and mortgage.
After evaluating the above aspects, they can begin managing your finances and organizing financial plans that can help you achieve your goals. However, to do this, they need to possess a certain level of expertise that is formally recognized through a certification process.
To be a CFP, one has to meet four requirements: formal education, experience, performance on certification exam, and proven professional ethics.
The job of an investment advisor is to make recommendations to their clients regarding investments. They also conduct research and analysis for a fee. They can either manage their clients’ assets directly or through written publications.
Investment advisors have a fiduciary responsibility, meaning that they must work in their clients’ best interest. Therefore, the investment advice that they give is tailored to your specific goals and risk tolerance.
A wealth manager is a professional financial advisor who offers financial advice similar to those given by a CFP. However, the service that they offer is typically more holistic because they cater to more prosperous clients.
A CFP typically gives advice on lifestyle planning, including saving for college or retirement as well as cash flow management. A wealth manager, on the other hand, also offers advice on other aspects that are typically faced by individuals with high net worth such as risk management, estate planning, philanthropic planning, and capital gains planning.
What to consider before hiring financial planners
If you decide that you need a financial advisor to manage your money, the first thing you should pay attention to is make sure they are certified. Since anyone can claim to be a financial advisor, a formal recognition is a good standard to evaluate a financial advisor’s track record.
The next thing you want to consider is if they are fiduciaries. A fiduciary financial advisor works with your best interest in mind. A non-fiduciary financial advisor may make financial advice that gives them profits because they receive commissions from selling certain financial products like insurance and investments. This does not necessarily mean that the advice that they give is bad for you.
Lastly, before making a deal with financial advisors, understand how they will get paid. Many CFP prefer to receive fees, whether it is a flat fee, hourly rate, or percentage of the assets whom you have trusted them to manage. Others may receive commissions from the products that they sell you. Make sure you have evaluated your budget.
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