The term “financial advisor” is commonly used for someone and is not limited to someone who is an expert who can offer financial advice related to investments.
Who is a financial advisor?
A financial advisor is a qualified professional who use their expertise to help build a personalised financial plan for their client based upon their risk appetite and financial goals. These plans include all important aspects of financial planning process including budgeting, savings, investments, tax planning, etc. Financial advisors can be of various types like Robo-advisors, tax professionals, and wealth managers offering services according to the needs of the client.
How do financial advisors get paid?
Advisors use different remuneration schemes. Some of the common forms of advisory fees are discussed below:
Commission-based plan – Several financial advisors claim that they offer advisory services for free but in fact earn commissions from financial products like mutual funds or insurance products that clients purchase through them. One should be careful of such advisors as they may not keep the clients’ best interests at heart. They may offer an investment plan that may not be suitable for them but could be the most profitable financial product in terms of commissions earned.
Based on Assets under Management – Advisors manage clients’ money and may charge a percentage of total assets or portfolio under management. Typically, this percentage ranges from 1 – 2.5 percent.
Based on returns generated – Some financial advisors charge a percentage of returns generated for clients on their portfolio which is managed by the advisor. This model of attaching fees to returns enables clients to derive better returns on investment from them.
Hybrid model – Financial advisors also have a hybrid fees structure where they charge a flat fee for their service and an additional percentage fee on the returns generated for the client.
Flat fee plan – Some financial advisors charge a flat fee for their service – which is not dependent on the total amount of investment or assets being managed. This fee-based model ensures that financial advice is based on an unbiased assessment of client needs and not driven by commissions to be earned from investments.
What are the roles played by an advisor?
Create a financial plan
The financial advisor first analyses the client profile, current financial situation, current assets and liabilities, and liquidity condition. The advisor also analyses the risk appetite of the client and lays down client’s short-term and long-term financial goals. The advisor then synthesizes all of this information into a comprehensive financial plan which will form the basis of all the investment decisions to be taken.
Help identify the right asset allocation for your portfolio
There is no one-size-fits-all portfolio that can exist as the needs of each investor varies and is subject to change with time. An advisor prepares a financial plan and then devises a suitable asset allocation strategy to meet the financial goals of the clients. The asset allocation in the client’s portfolio may change over time depending upon the performance of the underlying instruments and should be reviewed by the advisor on an ongoing basis.
Minimize tax liability
Taxes are an unavoidable levy on the income of individuals by the government and are often considered a burden. However, through a sound tax planning strategy, advisors can help reduce the tax liability which is totally legal.
Help set up an estate and retirement plan
Although investors think of this as a morbid subject it is of utmost importance specifically when dealing with a sizeable sum of money. An advisor helps value an estate and can also act as a liaison for his client when distributing the assets of the estate.
Advisors help set up long-term care plans and help secure the health of the clients through insurance plans. They also help keep spending in line in the present to ensure that their client is secure in the future and is taken care of after retirement.
Financial advisors also help in managing the inheritance that their clients receive. The advisors ensure that the money is released on time and is wisely deployed as per the goals and risk appetite of the client.
Regular monitoring and rebalancing
An advisor constructs a financial plan based upon the individual’s income, expenses, savings, future financial goals and risk appetite of an investor. Advisor then constructs a portfolio of investments based upon the financial plan. However, these factors are dynamic and may change over time, impact the future investment returns. Regular reviewing and rebalancing of the portfolio makes sure that these changes are well accounted for in the financial plan and required changes in the asset allocation is done.
Why consult a SEBI Registered Investment Advisor (RIA)?
A person or organisation that provides investment advice to individuals and who are registered with the Securities Exchange Board of India (SEBI) is called a Registered Investment Advisor (RIA).
RIAs provide financial planning assistance to their clients for a fee. They must offer investment advice in the client’s best interests. They consider the client’s current financial position and future goals before advising them about investments. All the RIAs have to pass certification exams conducted by SEBI.
You must exercise caution in selecting a financial advisor who will meet your financial needs. A good financial advisor helps the clients develop a healthy relationship with their finances and assist them in achieving their financial objectives in the most effective manner . A bad advisor on the other hand may lead to the client losing faith in the financial system. It is best to take help from trusted SEBI registered investment advisors who are competent and provide unbiased investment advisory services.
Disclaimer: This write up is solely for educational purposes.
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