How Much Value Does A Financial Advisor Provide?
Whenever you learn a new skill in life, you need to hire a teacher or an instructor to guide you through the process. Whether you are learning to cook, ski, surf, or play a musical instrument, watching online videos or reading books can only take you a little further in your journey to learn that skill. However, a real difference in your understanding and knowledge can come from an experienced teacher. A teacher or guide can offer you a glimpse into the little details and nuances that make a big difference in your learning process. When it comes to managing your finances, a financial advisor does exactly the same.
If the question “Do I need a financial advisor?” lingers in your head quite often, the answer is most likely a yes in most situations. Investing is the foundation of a financially secure and stable life. Most people create their wealth through their investments and not their jobs. Regardless of how much salary you draw each month, your financial habits decide your wealth and financial status. Saving, investing, budgeting, being tax-efficient, etc., are some habits that can lead to financial freedom.
Unfortunately, none of these things are taught in schools or colleges. A majority of people pick saving or investing habits and knowledge from their parents. If you grew up watching financially aware and disciplined parents, creating budgets and investing and saving their money conscientiously, you would likely have the same level of financial discipline or at least an understanding of how important being financially aware is. However, if money was never the topic of discussion in your house or family, you may find yourself in a whirlpool of unknown financial jargons when you finally step outside of your home. In either case, hiring a financial advisor can help you. This article focuses on how financial advisors add value to clients and how you can find one for your unique financial needs.
What does a financial advisor do?
A financial advisor can do a lot of things. As mentioned above, most people are not taught to invest in schools, colleges, or at home. Therefore, DIY investors or Do It Yourself investors rely on advice from friends, peers, and colleagues most of the time. With the advent of social media, people these days also consult online videos, blogs, e-books, etc., for investing advice. All of these things can be helpful but only to a certain extent. A general blog or video aimed at millions of people cannot be used as personalized advice. These sources of information are helpful when you are making general investing decisions or learning the basics of financial discipline. But they are not useful in individual situations. For instance, if you are struggling with accumulating debt, falling short on your retirement goals, and facing a financial emergency at the same time, your situation would require personalized attention and measures that can get you out of it. This kind of value can be added by a financial advisor. Moreover, since the internet is often considered a combination of a boon and a bane, you cannot fully rely on it for your future financial security. It is hard to distinguish false information from accurate information, especially when you are a beginner. If you base your financial plan on incorrect or biased data, you would not be able to seek the kind of financial freedom you truly want. Therefore, hiring a financial advisor can be a sensible thing to do.
If you are wondering how financial advisors add value to clients, here are some ways in which a financial professional can help:
- They contribute to your financial growth in multiple ways: Money matters are a broad and all-encompassing term that includes a number of things under its umbrella. Right from your savings and investments to debt management, budgeting, education planning, tax planning, estate planning, and more, there are a number of heads that require professional assistance and management. Each of these heads can require planning and strategizing. They can even work in unison. For instance, if your goal is to create an asset, such as real estate, you may also need to take on debt in the form of a loan. Here, building wealth and adding debt go hand in hand. A financial advisor can help you navigate such situations by recommending ways to invest more money for down payments, thereby reducing your loan amount. They can also recommend ways to improve your credit score, so you get a low rate of interest on your loan. They can further recommend you to invest in high reward instruments, so you are able to clear the loan faster. All of these measures and more can help you fulfill your goals without them burdening your current and future financial wellbeing.
- They help with asset allocation and diversification: A financial advisor can help you build up a financial portfolio that aligns with your short and long term goals, risk appetite, objectives, and needs. They can help you pick the right asset classes as per your age and investment purpose, such as stocks, bonds, cash, commodities, real estate, and more. They can also help you rebalance your portfolio and shift from one asset class to another or change the percentage allocation to different asset allocation as per your changing requirements and personal and professional dynamics. The best example of this can be the shift to bonds before retirement. At a younger age, having an asset allocation with a higher percentage of stocks can be more advisable. However, a shift to bonds is crucial as you inch closer to retirement. However, this is a general strategy, and the precise allocation would depend on a host of factors. A financial advisor can help you set the ideal asset allocation strategy and rebalance it for you from time to time.
- They can reprioritize your finances as per your changing life situations: Wants and goals seldom remain the same all your life. Age, relationships, professions, grief, tragedy, and more contribute to your lifestyle, financial choices, and how you wish to live in the future. For a parent, the primary focus of attention could be their child and the child’s education and other financial needs. However, a divorce or tragic incident can bring about a change in this goal. In such a case, the financial goal may change to something else. For instance, if you no longer need funds for a child’s education, you can use the same for your retirement. Retirement goals can also vary for single individuals and couples. If you are saving for your spouse and yourself, you would need to save more. However, if you are saving for yourself alone, you would need to save less. Since life is unpredictable, you can never be too sure about what happens next. Therefore, having a flexible portfolio or using measures that can help navigate from one point to another is important. And a financial advisor can help you achieve this flexibility by adopting tactical and timely approaches.
- They help you rectify behavioral mistakes and do damage control wherever necessary: Behavioral mistakes like being spendthrift, not saving enough, not being mindful of your spending habits, depending on your credit card too much, living only in the present with no regard to the future, and more such habits plague many financial portfolios. No matter the progress of your investments, if you are not able to get your habits on track, you may likely struggle with money all your life. You can save 50% of your salary, but if you also accumulate debt equivalent to the same amount in the same month, then you would be taking a step back and not moving forward. Your debt will eat into your growing investments, and at the end of the day, you would be left with very little profits. Financial advisors not only suggest instruments for savings and investments but also target such behavioral errors to improve your financial situation as a whole. If you are highly dependent on a credit card and indulge in emotional purchases, you would likely have a low credit score. This can be detrimental when you actually need a loan for something big, such as a home. Financial advisors focus on such problem areas and help you change your habits gradually. They can also do damage control. For instance, if you are knee-deep in debt, the advisor can recommend a repayment schedule that helps you get rid of your debt, and at the same time, is doable and does not restrict your current lifestyle too much. The financial advisor may also recommend not putting all your money in debt repayment and instead put some of it towards a highly rewarding investment. This can offset the outflow of money and add some profits to your account, so you can continue to grow financially. The profits can also help you cover your expenses.
- They help you lower your tax liability both pre-and post-retirement: Taxes are unavoidable, but they can certainly be reduced. Tax outflows, both pre and post-retirement make up for a lot. The wrong choice of investment instruments, poorly planned withdrawals, not contributing to the maximum limit, and other similar mistakes can lead to increased taxes.
Financial advisors also reduce risk by diversification measures. Diversification refers to distributing risk across sectors by not putting all your eggs in one basket. It helps you lower risk and volatility and increases exposure to multiple growth opportunities. For instance, diversification across three industries – aviation, pharmaceuticals, and gold can be a good strategy. In 2020, the aviation industry crashed even though it was booming before. However, pharmaceuticals picked up sales due to an increase in demand. Gold, on the other hand, remained stable and consistently increased in value even amid economic turbulence. This is just one example, but hiring a financial advisor can ensure diversification in numerous other ways depending on the trending geopolitical conditions and the environment of the market.
Similarly, you may lose your job and may have to alter the pace of your goals. In some cases, a major business loss can also stall your progress. Such events and circumstances require immediate remedial measures. A professional piece of advice can control the damage and provide a way out. Hiring a financial advisor can enable you to always be financially secure, irrespective of your personal or professional situation.
Here’s an example: A major difference between Roth and traditional retirement accounts lies in their tax treatment, and a lot of people do not know this. In a Roth account, your withdrawals are tax free after the age of 59½. Moreover, the contributions are made from after tax dollars. However, in a traditional account, the contributions are made from pre tax dollars. So, your money grows tax deferred and is taxed when you withdraw it in retirement. Now, if your income is expected to be more in retirement than right now, a traditional account could be a better pick. However, if your tax liabilities are higher in the present scenario than you foresee in the future, you could benefit more from a Roth account. While you may or may not have the foresight to ascertain the right pick, a professional financial advisor would be better equipped to make a suitable suggestion.
Hiring a financial advisor can also help you save other types of taxes. There are many strategies like tax loss harvesting, gifting an estate instead of transferring it, planning withdrawals efficiently, using tax credits and exemptions, and more. The laws surrounding income tax, estate tax, state tax, etc., change often. It can be hard for you to stay up to date with these changes and newer policies. However, a professional financial advisor would always be more well-informed and can help you use these strategies to lower your tax liability legally.
How to find a financial advisor
Now that you know how financial advisors add value to clients, the next step is to know how to hire one. It can be overwhelming and perplexing to hire someone you do not know to manage your money. The fear is a common factor with most investors beginning their investing journeys. However, there are some ways in which you can ensure that you hire someone worthy and suitable:
- Check online feedback: Feedback from other clients can help you gauge the performance of the professional. You can visit the website of different advisory agencies or independent advisors or read Google reviews. You can also ask your friends, peers, or work colleagues for recommendations. Another thing that you can do when looking to hire a financial advisor is to search for a reliable and reputed advising firm. This offers better protection. A good advising firm will only hire experienced and well qualified individuals, so your portfolio will be in good hands. The scope of receiving biased advice is also greatly reduced. Moreover, the prices would be regulated to eliminate fraud or scams. In addition to this, advising firms also have online tools that make it easier to hire financial advisors close to your location, such as the WiserAdvisor’s Advisor Match Tool, which is quick and simple to use.
- Start small: You do not have to necessarily hire a full time financial advisor. You can start with a smaller arrangement like an hourly consultation fee. If you like the work of the professional and feel comfortable working with them, you can move to another, more permanent arrangement.
- Hire a fiduciary financial advisor: Fiduciaries are registered with the U.S. Securities and Exchange Commission (SEC). They have a legal duty to make decisions in the client’s interest and not their own. This adds more security and offers you peace of mind. Fiduciary financial advisors can provide you with increased transparency. Moreover, if things go sour or work against you, you can take legal action against the fiduciary.
Hiring a financial advisor can add great value to your financial planning routine and help you take advantage of the right opportunities at the right time. It can help you streamline your finances and make better decisions that can benefit you in the long run. It can also help you discard problematic behaviors that hamper your financial growth and instead incorporate lifestyle changes that promote your financial growth. Working with a financial advisor can be great for new as well as experienced investors. So, regardless of where you stand or what your concern or goal is, you can consult with a professional financial advisor and get suitable guidance.
To get in touch with a qualified financial advisor, use Wiser Advisor’s free matching tool. Our free advisor tool connects you with 1-3 background-verified financial fiduciaries. You may also set up a free initial consultation with them before deciding to hire one.