Five ways financial advisors earn their keep
Managing finances can be tricky. A financial advisors has all the right tools to help you through it.
Navigating your finances can be emotional, complex and confusing. One way to stay on track is to work with an experienced financial advisor. Hiring one may not be cheap, but it’s well worth it — especially when you need to set goals or understand how major life decisions impact your finances.
Here are the top five things a financial advisor can do for you.
1. Help you establish goals and create a plan
Sometimes people fall behind on preparing for retirement or other life goals because their objectives aren’t specific enough. You have to spend time envisioning your future and thinking about your timeline so you can save an adequate amount.
A good financial advisor will prompt you to think deeply about many aspects of your life, such as family, community involvement, fun and leisure activities, and the legacies you want to leave. And if you’re in a relationship, your advisor can help you and your partner get on the same page about what you want and how to achieve it together.
2. Educate you
Many people think of their finances as a black box. They know they have to put money in to retirement accounts, for example, and that more money comes out at the end, but how they got from point A to point B is less clear. A financial advisor can help demystify how your financial choices affect the outcomes that you experience. Together, you’ll look at the bigger picture and see how the pieces of your financial plan work together to reach your goals.
He or she can also help you understand technical aspects of your finances, such as determining the best asset allocation or retirement income strategy, and more big-picture issues, such as how to approach your career or work-life balance.
For instance, I’ve seen many clients assume that they were locked into a particular career path. I help them think creatively and view each spouse’s career as one asset within a portfolio, removing the pressure on just one person’s earning power.
3. Ensure you invest wisely
It’s important to maintain an appropriate amount of risk in your portfolio. You can’t afford to be overly cautious when investing for far-off goals, such as retirement, because you’ll miss out on many years of potential compounding returns. At the same time, choosing high-risk investments could lead you to lose more than you can afford.
A good advisor will consider how much volatility your portfolio can withstand and your emotional risk tolerance when helping you pick investments.
4. Provide objectivity and discipline
It’s only natural to react poorly to market volatility, but you shouldn’t allow “fight or flight” responses to drive your investing process. When you want to change course, your financial advisor should be there to remind you why you’re using the strategy you have in place.
You should leave each meeting with your advisor feeling that you’re making progress on the aspects of your plan that you can control.
5. Anticipate how life transitions will affect your finances
Because your advisor works with lots of clients, he or she will have seen scenarios similar to yours many times, and have insight into the different choices you can make and outcomes you can expect. An advisor’s input can be valuable during important life transitions, such as starting a family, changing careers, navigating a big stock option event, refinancing a home, or entering retirement.
A financial advisor can point out options you may not have considered and let you know what other decisions could be coming down the road. The better you understand your options, the more informed your decisions will be.
Hard work is worth it
Working with a financial planner is not unlike working with a personal trainer — when you have someone holding you accountable, you’re much more likely to show up at the gym and work hard.
And the hard work can pay off. Two of my clients are a couple, Matt and Stephanie, who were both working full time when we first met. Matt had been the primary breadwinner, but he took some time off when they had children. During this period, Stephanie’s career flourished and Matt found that he really enjoyed being a stay-at-home dad, so we considered different options. We decided to leverage Stephanie’s highest-earning years so that Matt could stay home awhile longer. The plan also allowed Stephanie to take an early retirement, at which point Matt would go back to work.
A financial planner can be tremendously helpful over the course of your financial life, earning his or her keep in a variety of ways.
This article first appeared at NerdWallet.
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