One may wonder why anyone would hire someone to take care of their money. After all, everyone is an expert on money and can make financial decisions without bias and personal conflict, right? Well, wrong! No matter who you are, where you are from, and what your net worth, salary, and financial goals are, you always need an expert financial advisor who can tell you how to make the most of your money.
While we might think that we know everything about money, the truth is, we all have felt perplexed while selecting between the various investment options. Sometimes, it’s difficult to understand if we should invest at all or save.
So who exactly is a financial advisor and how you can get help?
A financial advisor is an individual or firm/body corporate that has a team of experts trained to help you achieve your financial goals, whether they be short-term goals or long-term. A financial advisor is usually a person from a finance background having completed their bachelor’s in finance or an equivalent specialization in finance and accounting. They may also be a CFA (Chartered Financial Analyst) or CPA (Certified Public Accountant).
These professionals are generally having years of experience in estate planning, financial advisory and consulting risk management, and investment and portfolio management. Apart from helping you out with advising on high-yielding investments and managing liquidity as per your preference, financial advisors also manage taxes for you and offer other financial solutions you may require.
How does financial advising work?
Different people depending upon their circumstances have different financial goals and objectives. These mostly depend on age, income, risk-taking capability, and financial goals.
Usually, a financial advisor will have a first touchpoint where a preliminary assessment of your financial health will be done. A broad picture of your assets, liabilities, incomes, and expenses will be taken to understand where you stand. It is difficult to map your journey unless you know where you stand. Ideally, a questionnaire is required to be filed that will ascertain your risk appetite, financial goals, and the asset allocation that is suitable to your needs.
Creating a Financial Plan – Asset Allocation
Your financial advisor will compile all the information from your first interaction and questionnaire and provide an asset allocation or portfolio suitable to your needs. Asset allocation broadly covers three major kinds of assets (in ascending order of risk) :
- Government bonds and Certificate of Deposits (CDs)
- Company stocks (equity and/pr preference) and bonds
- Alternate Assets like real estate and other tangible assets
The cost-benefit analysis of hiring the help– Can you afford financial advisor in your salary?
Usually, one is suggested to hire a financial advisor if the benefit they provide you monetarily is greater than the fees you pay to them.
You should hire a financial advisor if :
- You do not have the skills or resources to pay attention to your financial health
- Your investments are lying idle and are not earning interest above the inflation rate
- You have high expenditures and negligible savings
The advisor can then help you with their diverse skillset and resources that comes through years of experience. They can devote their time and energy to make sure that you are able to manage your daily expenses as well as maintain a steady stream of income in the future and post-retirement.
The cost of hiring a Financial Advisor
Financial advisors mostly have 3 ways of earning their salary through consulting their clients:
1. Fee-only model– The fee-only model is a highly-recommended model for payment to your financial advisor. This model ensures minimum bias from the point of view of the advisor since they get no commission based on the investment that they suggest to you. Their only income is agreed upon in a written contract and usually, they charge about 1% of the total Asset Under Management (AUM) annually. They may also charge an hourly fee.
2. Commission model– In this model, advisors work on a commission-model where they are given a commission of the value of products they sell to their clients. In this case, there are always chances that your financial advisor might suggest you make an investment involving the high cost to earn himself a fat-check. You might be left with doubt about the quality of the asset you put your money in.
3. Combination model– This model includes a fee structure where the advisor gets both a fixed fee and a commission of the sale of financial products.
Ensure you enquire about the exact fee structure that your financial advisor quotes and make sure that you go through the agreement and scrounge any hidden fees that may be included in the document.
What are Robo Advisors??
A new trend in portfolio and fund management is the growing use of Artificial Intelligence (AI) and pre-programmed software that help one to allocate their money into the asset classes based on their financial goals and liquidity of their money. Also called Digital Advisors, Robo Advisors eliminate the need to interact with a human counterpart and get live up-to-date reports wherever and whenever they may need them. It is a quality-of-life change that is backed by data analytics and financial models that have worked through generations.
Some firms prefer having a mix of digital advisors and human intuition and consultation which can provide an ideal mix of unbiased decision-making common to computer software and intuition and relationship building that is not possible without human intervention.
You should choose as per your needs
In the end, you should always go with the option that suits you the best and is ideal for your specific situation. One should understand that fees paid for expert advice are immaterial compared to the benefits that it may help you reap. So do your research on choosing the right fit for you, ensure you get reports on how your investments are doing on a regular basis, and hold regular meetings to change-up asset allocation if needed. There is no wrong time to approach an expert to help you grow your money.
For other information and financial tips, check out the money section on our website.