I’ve answered your questions. You wanted to know rates. I told you about financial advisor rates. You asked me how to grill a financial advisor. I gave you 40 curveball questions for a financial advisor. And then co-contributor Austin wrote a post on how to choose a financial advisor in ten questions. You wanted something to read. I gave you 7 must read financial advising websites.
I even gave you 31 powerful financial advising posts.
But I’ve overlooked something.
I haven’t even told you what it is that a financial advisor does. You know how much they cost, you know what to ask them, you even know how much financial advisors earn in South Africa.
But you don’t know what it is that we do.
What does a financial advisor do?
As I mentioned in my post on how much financial advisors earn in South Africa, financial advising is extremely broad. So much so that we can even think of some members of primitive tribes as financial advisors — if a chieftain told a member of his tribe to save his tubers because they’ll be more valuable in the winter, hey, that’s financial advice.
But I suspect that this is not really the sort of thing that readers are after when they ask, “What does a financial advisor do?” You want to know what a financial advisor can do for you and, presumably, you don’t have a bunch of tubers available for trade.
No problem. As co-contributor Austin mentioned in his post on who needs a financial advisor, most people can use a financial advisor — especially those with money problems. And by money problems, I just don’t mean debt — there are a lot of Americans who are in great financial shape, and still have money problems.
What do I mean by that? You could be fabulously wealthy, and still have money problems, if:
- You avoid thinking about your finances, and put off paying bills, etc.
- You haven’t sat down and thought through the structure of your investment portfolio.
- You haven’t systematically considered how much risk you’re willing to take on.
- You haven’t started planning for retirement.
- You’re uncertain how to invest your money.
All of these are something that financial advisors can and do help with. But there is one thing you need to keep in mind…
Types of financial advisors
As I mentioned in my post on financial advisor rates, there are a couple different types of financial advisors:
- Flat-fee advisors
- Active money managers who charge a % of assets
- Commission-based advisors
You want to avoid commission-based advisors — they’re not so much interested in helping you with your money, as they are with selling you something. After all, that’s how they get paid. (If you are looking for a financial advisor, check out my post 40 curveball questions to ask a financial advisor, which covers asking about commissions and a lot more.)
Instead, the main two types of financial advisors that you want to consider are flat-fee advisors and active money managers, and both of these depend on your needs.
You want a money manager if:
- You want to pay someone else to deal with your finances
- You’re okay with an advisor getting a cut of the money you make
- You’d rather spend your time thinking about something other than investing and finances
- You prefer a hands off approach
On the other hand, you want a fee-only advisor if:
- You want someone to put together a financial plan that you’ll personally implement
- You need advice about a specific query — you have some question or problem in mind
- You enjoy dealing with your own money, but would still like some help
- You prefer a hands on approach
Okay, but what does a financial advisor do specifically?
The value proposition for a financial advisor is pretty straightforward. Say that, right now, after fees, you’re making a 4% return on your investments. If you then hire a good financial advisor, who helps you restructure your investments, which then doubles your average return, you’re going to be making a lot more money — especially in the long-haul.
So, in such a scenario, even if you have to pay a financial advisor 1% each year, you’re still making a lot more money than you would be otherwise. By paying someone money, you’re making more money than you would be otherwise.
Seriously. Try to find deals so reasonable anywhere else. It just makes sense.
With that out of the way, the job of a financial advisor is pretty straightforward: you meet with one, go over your finances, and then they custom tailor a plan to your specific monetary circumstances. If you’re a young person, they might restructure your portfolio to take on more risk — if that’s what you want. They might move your assets from bonds into stocks. For older people, they might help you do the opposite.
The beauty of a financial advisor is that they have done the research and have the expertise, all so that you don’t need to.
Or, for instance, if you don’t have life insurance, but are supporting a family, a financial advisor may recommend that you get some (generally, most people are not properly insured) — often, an advisor will be aware of interesting financial products that aren’t even on your radar, and them pointing out these products to you can be very valuable, and something you’d never discover on your own.
So, all together then, a financial advisor can help you with:
- How much you need to be saving
- Where and how to bring down expenses
- Recommendations on good accountants
- What you can afford
- What debt to pay off, and when
- Explanations of different financial tools (example: index funds)
- Reducing systemic risk to your portfolio
But be sure to hire the right kind of financial advisor, as I covered in my page on financial advisor rates and, once you’ve narrowed down what kind you need, use my 40 curveball questions to ask a financial advisor to make sure that you pick the right one.
I hope this dive hasn’t been too deep for you — to exit the quarry, just keep right.