What Is a Financial Advisor and What Do They Do?
Your All-in-One, Last and Only Stop for Everything You Need to Know about Financial Advisor
If you’re hoping to get a clear understanding of what a financial advisor is without having to hop around the internet and open ten different tabs, this is the only page you need to look at.
We are writing this from our 30+ years of expertise and our perspective as a private wealth management firm which specializes in helping families with $5 million to $500 million in liquid investable assets. If you have liquid investable assets exceeding $10 million then you may wish to read this more detailed guide.
What follows is a complete and detailed guide into what financial advisors do, how to decide if you need one, and if so, how to choose the one that is best for you. You’ll also find many other resources connected to this one as you go. So feel free to read the whole thing, or use the quick links below to skip around to the parts most pertinent to you.
Table of Contents
Table of Contents
What Is a Financial Advisor?
What do financial advisors do? A ‘financial advisor’ is a person who guides your decisions about investments, financial planning, tax planning, and long-term wealth accumulation. Whatever goals and desires you have for your life and wealth, both short and long term, your financial advisor’s job is to help you achieve them.
For investors with over $25 million of liquid investable assets you might wish to request a free copy of our hard cover book The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Familes worth $25 Million to $500 Million.
An advisor should be an expert in all things related to finance, wealth, the stock market, bonds, economic volatility, debt, and planning. The better financial advisors also bring knowledge about estate planning and inheritance, life insurance, business exits, and real estate investing. And the very best advisors – in addition to all this expertise – also have developed their own processes for customizing portfolio planning around each client’s specific goals and needs.
Examples of Financial Advisors
Some financial advisors are mostly just transactional. These include money managers who shift money around between an array of mutual funds or plug money into various stocks, bonds, and other investment options. They may invest your money in commodities, or real estate investment trusts, or venture capital opportunities, and then let you know how it’s going now and then. Others sell products, like life insurance or annuities.
Here is a free guide you can download which should help you make smart decisions; Improving Portfolio Performance, The Shifts multi-Millionaires Must Make To Achieve Financial Security And Serenity.
These are all transactional financial advisors. They are not truly advisors, in the full meaning of the word.They are not what we might call consultative financial advisors. To be clear – some consultative financial advisors may include these sorts of transactions as part of their service. But that is not the primary reason you seek help from a financial advisor.
You seek help from a financial advisor because you want to effectively use your income, debt, wealth, assets, insurance, businesses, and real estate to achieve your short and long term lifestyle and financial goals and dreams. Here are five varieties of financial advisors, who what sort of investor is ideal for each type.
For instance, a wealth manager is a particular type of specialist who only works with high net worth or ultra-high net worth investors. Such investors have unique needs that require a different set of skills, and an understanding of what wealthy people need help with, financially.
But a robo-advisor, on the other hand, is ideal for a young person just starting out who has little savings, but wants to get help so they can do this right, and not fly by the seat of their pants.
No matter what type of financial advisor you end up working with, the motivation for getting one is the generally the same: Managing your wealth and achieving your dreams and goals is a lot easier if you have a trusted expert by your side. It’s hard to do this alone.
Understanding Financial Advisors and Their Approaches
Let’s explain further how a consultative financial advisor works. A financial advisor should begin working with you by asking a lot of questions. Their goal is to understand you. What do you care about? What do you worry about? What do you hope for out of life? Whatever your answers, your money will play a role in all of it.
For a much more detailed look you can download The Ultimate Guide To Choosing The Best Financial Advisor, For Investors With $5 Million To $500 Million In Liquid Assets.
If you care about your kids or grandkids having the best possible education, your money will play a role in making that happen. If you worry about your parents having costly medical complications and want to be prepared in advance, your money will play a role in making that happen. If you hope one day to start a charitable foundation that funds research into a particular disease, your money will make that happen.
A financial advisor begins with a consultation, because they want to know what matters to you before creating any plans for your investment portfolio. Once they know what you care about, then they can go about creating a customized financial plan that is tailored specifically to the goals and dreams you cherish most.
Every consultative advisor will have a slightly different approach for this. Here is Pillar’s approach to consultative financial planning.
The Fiduciary Question
Here is one place where differences between financial advisors become very, very important. The concept of ‘fiduciary’ dates back to ancient history. Ancient Rome defined the term
as follows: A person holding the character of a trustee, or a character analogous of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires.
The key term is ‘good faith.’ The idea is that the fiduciary is bound by oath to act on behalf of their client in the same way they would act for themselves. A fiduciary financial advisor therefore pledges that all their decisions, advice, and recommendations are truly and completely in the best interests of the client, to whatever extent is possible.
For financial advisors who are not fiduciaries, they follow what is known as the ‘suitability’ standard. In other words, is their recommendation suitable or reasonable for the client? This is a much broader standard, and allows the advisor to recommend almost anything. For instance, annuities are suitable for almost anyone. But they are hardly ever in a person’s best interests. There are several other unfavorable recommendations a non-fiduciary might advise that could cost high net worth investors millions.
So then, how would a fiduciary handle a client who asks about annuities? They would explain the pros and cons of the annuity, clearly spell out how it could help or hurt the client, and then make a recommendation that the client could accept or ignore. So, a fiduciary (or any financial advisor) does not force a client to do anything. They advise them. A fiduciary’s advice will always be in the best interests of the client.
Here’s a story of a client Pillar turned away, because accepting them would have put us at risk of not being able to fulfill our fiduciary duty, as we saw it.
The question of whether to seek help from a fiduciary financial advisor is, in our view, not even a question. Here’s another story of what one non-fiduciary advisor recommended to an ultra-high net worth client who had just sold a business for $200 million.
These sorts of stories are not hard to find. In fact, they are so common that one result of the 2008 recession was to mandate all financial advisors to act as fiduciaries. The abuse of clients was so rampant and played enough of a role in causing that recession, that this was considered one way to prevent another financial meltdown. Those regulations have since been relaxed a bit, however, so once again the choice is yours on which type of advisor you want to work with.
As a final resource, here’s a cautionary tale showing 7 ways a non-fiduciary advisor can permanently derail your portfolio’s performance.
Financial Advisors and Investments
How do financial advisors decide what to recommend for your investment portfolio? And how do you choose the financial advisor you want to work with?
This is where you find quite a disparity among different advisors. Here are a few areas where advisors can differ in their approach (and there are many more than what’s on this short list):
- Active vs Strategic Investment Approach
An “active” approach to financial planning believes that investment experts have both the ability and a reasonably good chance at outperforming the market. This approach looks for the highest returns, the best performing funds, and the hidden gems in the stock market that they believe are poised to accelerate and make big money.
The “strategic” approach has seen enough data to know that over 90% of active managers fail to outperform the market over a five year period, and that the numbers go down even further the longer you go. For anyone wanting long-term investment planning – meaning decades, not just a few years – the active approach will almost certainly lead to underperformance.
People simply aren’t wired to make smart investment decisions all the time, and financial advisors are no different. Emotions inevitably interfere, especially when you least want them to, such as in a market crash or right after you sell a business or get a large inheritance. 10 emotions that can wreck any size portfolio.
Many investors presume the professional money managers and financial advisors should be better at picking winners and losers, but the data suggests that the vast majority are not. What we have found is that many professionals are decent at knowing when to buy, but terrible at knowing when to sell. This leads to gains being wiped out for selling too late, or gains missed out on for selling too early.
If this is true, why do so many financial advisors use the active investment approach? Because they believe they are part of the small percentage who will beat the market. They aren’t. It’s little more than a baseless overconfidence.
- Frequent Activity vs Less Activity
Some financial advisors like to make or recommend frequent shifts with their clients’ money. Trying to jump on funds that are doing well, and getting out of ones performing badly.Buying commodities that are poised to increase in value.Shedding poorly performing stocks.
Other advisors recommend minimal activity, favoring targeted and consistent rebalancing over jumping in and out of equities and funds all the time. One major consequence of frequent buying and selling is that you trigger more and higher taxes in the form of short-term capital gains.
There is a lot to discover when choosing the best advisor and you can learn a lot more by downloading our free guide The Ultimate Guide To Choosing The Best Financial Advisor, For Investors With $5 Million To $500 Million In Liquid Assets
So, let’s put these first two philosophies together: If you have an active investment style financial advisor who also engages in frequent activity, not only will you likely perform worse than the markets, you will also pay higher taxes for the privilege.
- Wheeling and Dealing vs Data-Driven Processes
You’ve all seen the stereotypical Wall Street investor: The wild, crazy, impulsive risk-taker who does what no one else has the guts to do, sees what they don’t see, and comes out the winner in the end. It’s a fun fantasy.
If you talk with an advisor who appears to have that sort of philosophy about investing, our recommendation – as a fiduciary – is to run fast the other way.
A more trustworthy advisor will use some sort of data-driven process. Many such processes can be developed, and part of your task if you’re planning to hire a financial advisor is to find one that agrees and aligns with your values about money and investing. You need to believe in your advisor’s process. More on this in a bit.
- Open to Anything vs Specialization
Some advisors put the client in the driver’s seat, and just try to steer them so they avoid falling off the cliff. But they are more or less open to ideas and preferences. Other advisors specialize in something, and tend to camp there. This could be a specialized approach, or a specialized class of investment options. Investors who agree with their area of specialization will be drawn to them.
For example, an advisor who is open to ideas could conceivably invest one client’s portfolio 100% in stocks, another portfolio 100% in commodities, and another portfolio 100% in bonds. Their rationale would be that it’s what the client wanted. They might steer them away from particular stocks, commodities, or bonds that they believe are too high-risk or won’t perform very well, but they will let the client play a role in the final investment portfolio.
Another advisor might specialize in a particular area, such as gold, or tech stocks, or energy funds, and they would attract clients with similar leanings.
Other advisors don’t specialize in investment options as much as in types of clients. Some specialize in only working with retired clients. Others focus on business owners, or young couples, or people in certain careers like teachers or dentists.
Other financial advisors, such as Pillar Wealth Management, specialize in working with high net worth and ultra-high net worth clients.
How to choose a financial advisor
If you’re not sure what types of investment approaches you prefer, this is actually an indication of the type of advisor you are looking for. Look for someone who can effectively guide you, who has a clear data-driven process, and who you can trust. Here are 3 guideposts to steer you toward worry-free financial serenity.
And keep reading – we have many more resources to share about choosing the best financial advisor for you.
How to Know You Need a Financial Advisor
The longer you live, the more complicated life gets, financially speaking. And though many things simplify, managing your money in some ways gets even more complex during retirement.
This means that the older you get, the more likely you will need a financial advisor. Also, the less you know about wealth management, investment, and finances, the more likely you will need help to maximize your investment performance and achieve your most desired lifestyle outcomes – throughout retirement.
Another reason you might need an advisor is simply because you don’t have time for all this.
Here’s a list of life complications that tend to pile up on each other as life progresses:
– Real estate purchases
– Multiple investment accounts through work and other income streams
– Marriage, kids, eventually grandkids
– Start a business. Or two. Or three.
– Sell a business. Or two. Or three.
– Estate planning, life insurance, long term care, charitable giving
– More complicated and diverse investments
– Medical conditions increase in number and frequency
If you face a legal issue, you would seek legal help. If you face a medical issue, you would seek medical help. If you face a political issue… well, not a good example.
But if you face a financially complicating issue or set of issues, you would seek the help of a financial advisor. All of the above complications are examples of this. For high net worth and ultra-high net worth investors, this list would be even longer. We could add in tax minimization planning, company stock liquidation or conversion, wealth protection, and many more. 7 more ways a financial advisor helps.
The bottom line here is simple: If you have goals and desired lifestyle outcomes that you aren’t sure how to achieve as they relate to your finances, then you need a financial advisor.
How They Help You Reach Your Goals
Having goals and dreams is a good start. Far too many people don’t even have those. They just go through life reacting to it, rather than trying to make it the best they can. But once you list out a set of goals and desires, do you have a plan – financially speaking – for how you will achieve them?
Listing goals is the easy part. Making the plan is the challenge.
Your desired lifestyle outcomes and goals could relate to any or all of the following and more:
– Retirement (10 ultra-high net worth retirement mistakes to avoid at all costs)
– College for them or other relatives
– Philanthropy – from giving to starting your own foundation
– Business – investment, startups, exits
– Real estate
– Earning passive income
– Gaining influence in a particular arena
Smart financial planning also anticipates the things that won’t go well but that will still affect your finances if they happen. These can include any or all of the following and more:
– Early death of a loved one
– Medical crisis for you or a loved one
– Economic volatility
– Business failure
A financial advisor – particular one who works with high net worth clients – includes these potential future events in their planning process, and customizes it to you. For instance, if you are single, then divorce probably isn’t a concern. But if you have six siblings and 17 grandchildren, you can probably anticipate some ‘stuff’ happening.
Economic volatility? In the decades you are likely to spend in retirement, it is virtually guaranteed.
The point is – even for ultra-high net worth individuals – planning for and achieving your most desired lifestyle outcomes is a great challenge, and many fall far short of their own expectations, even if they have taken the time to think about them.
The people who are most unready for a financial advisor are those who, when asked what they want to see happen with their investments, just say something like, “I want them to do well.” Or, “I want to see a lot of growth.” Or, “I want to beat the market.” Why? For what?
What matters to you? What are you hoping to achieve in your life? What are your greatest concerns and worries? What do you want to protect? What should happen to your wealth after you die?
The more time you devote to seriously considering questions like these, the more you realize why you need a financial advisor’s help. And a good financial advisor will begin your planning process by talking about these sorts of questions. If they don’t know what your desired lifestyle outcomes are, they can’t help you achieve them!
So – what do financial advisors do to help you reach your financial and lifestyle goals and dreams? How do they create your plan?
That is THE question to ask any financial advisor you are considering working with. As you saw earlier, different advisors use very different processes and have different philosophies. There is no one answer to this question.
To learn more about Pillar’s 100% customized high net worth investment planning process, you can begin the consultation process with a simple 15-minute call.
For a more in-depth exploration, get our free Guide – Outstanding Portfolio Performance:The Shifts To Financial Security And Serenity For Successful Multi-Millionaires.
What It Costs to Hire a Top Advisor
You might be surprised by how many different ways financial advisors have come up with to charge their clients. Some of this is because different financial situations can arise that require additional work.
For instance, when a spouse dies, the process of shifting the surviving spouse’s finances back to ‘single’ status is quite complex – even more so if they are retired. You have to deal with IRAs, Social Security, life insurance, pensions, banks, mutual funds, beneficiaries, taxes, and all the processes and paperwork required of each of these.
Should an advisor who helps you navigate all this charge hourly or a flat fee? Should it matter if you’re an existing client or a new client? Certainly not simple questions.
On a basic level, you have three ways of being charged by any financial advisor:
– Flat fees
But within these, much more variety exists.
A flat fee, for instance, can mean a flat dollar amount for creating a one-time plan that you then go and implement for along as you like. You can then return to them later for additional help now and then perhaps, and pay an additional fee.
This one-time flat fee is what an advisor charges who is not going to remain part of your life on an ongoing basis, unless they plan to charge you hourly for any additional discussion you need to have in the ensuing years. This type of help also is limited in how much it can really impact your life, because whatever plan you develop at that time will be obsolete within five to ten years.
That’s why a flat fee can also be an ongoing percentage charged annually, monthly, or quarterly. For an advisor who will continually manage and update your plan as your life situation evolves, the one-time fee makes little sense.
And, if you add in products like annuities or life insurance packages, these often come with commissions on top of the advisor’s regular fees. And still other advisors make more money on ‘hidden’ charges, such as getting a small kickback for recommending a particular mutual fund with a certain bank or brokerage firm. To be clear – only a non-fiduciary would be able to do something like that without disclosing it.
Pillar Wealth Management charges a percentage-based flat fee that is all-inclusive. That means we do not charge for any other services, including all the work that goes into a scenario like the one described above. Even if we have to reach out to tax attorneys, accountants, estate planning attorneys, insurance brokers on your behalf – we do not charge anything extra for any of that time or effort. It is all included in a simple flat fee.
Our flat fee starts at 1%, and scales down as your net worth increases. We require a $5 million minimum investment amount.
How to Hire the Best Advisor Near Me
The final topic is about how to choose a financial advisor. Some people believe they need to find a financial advisor near them because they want to meet face to face. If this is very important to you, then you can certainly make that one of your criteria.
In our experience, proximity turns out not to be as important as some of our high net worth friends thought at first. See 6 reasons why the location of your advisor doesn’t matter. A seventh reason not on that list, in the era of COVID-19, is that doing your meetings online hasn’t just become much easier for most people, but safer.
So how do you find the best financial advisor for your life situation?
We have created several resources to help you answer this.
First, you need to clarify your own financial situation, your values and beliefs about wealth and money, and what you expect from an advisor. You can’t know if you’ve found the right one if you aren’t sure what you’re looking for. See 10 questions to clarify your beliefs and expectations.
Second, you need to find someone who is a good match, once you have more clarity on your own situation and preferences. Here are 10 tips for finding a financial advisor who matches with your preferences and needs.
Finally and most importantly, you need to find a financial advisor you can trust, and who has a planning process that inspires a high degree of confidence that it will help you achieve ALL your desired lifestyle outcomes. You need someone who understands you, cares about what you care about, and as a fiduciary, will use a well-honed customized process to help you achieve it. See 10 ways to assess the trustworthiness and expertise of a financial advisor