Financial Advisor – Definition, Types and Role

Financial advisors are experts in managing the money of an individual. Right from devising an emergency fund plan to constructing complex investment portfolios, they do it all. They also play the role of educators by educating their clients about the financial products available in the market. Moreover, financial advisors charge a small fee for their services. For individuals who do not have market knowledge or enough time to manage their investments, can take help of financial advisors.

Who is a financial advisor?

A financial advisor plays multiple roles from planning and constructing a portfolio to monitoring it continuously. Also, financial advisors use their market knowledge to device a proper portfolio that fits their client’s requirements and goals. From planning savings and insurance to investments and tax planning, they do it all. They also keep a tab on clients’ investments to revisit the portfolio regularly.

Financial advisors educate their clients about the market and the financial products available in the market. Firstly, they tend to talk about lighter topics like savings and budget. Later on move to complex topics like insurance, taxes and investments. Financial advisors also tend to understand their client’s financial health, their requirements and financial goals before suggesting them investments. Financial advisors often take help of financial questionnaires. This is to know what are the assets, liabilities, financial responsibilities, incomes and expenses of their clients. Therefore, using the questionnaire, they infer the risk taking capacity of a client. Based on this, financial advisors advise their clients.

What does a financial advisor do?

A financial advisor helps in strategizing investments by managing and minimizing risk and building wealth in the long term. Financial advisors curate a plan that is personalized to meet the financial goals of the investor.

Moreover, they are qualified and certified advisors with a diverse background. Hence, they help investors in understanding where their investments are directed and why.

In other words, a financial advisor can do complete financial planning. Financial planning includes everything from budgeting, investing, and saving for retirement. 

What are the types of financial advisors?

Following are the different types of financial advisors

• Investment advisors
• Investment representatives
• Mutual fund investment advisor
• Financial planner
• Personal banker
• Insurance advisor
• Customer service representative

Investment Advisor

An investment advisor is a person who is capable of managing all your investments. He can also provide investment suggestions on any financial instrument. Investment advisors are part of registered Portfolio Management companies. Also, investment advisors either charge a flat fee for their service. Or an annual fee depending on the size of the portfolio.

Investment Representative

Investment representatives are popularly known as stockbrokers. They help investors in buying and selling different investments. For example, stock, mutual funds, bonds, etc. Investment representatives are part of brokerage firms and are registered investment dealers. They earn a percentage commission on every buy and sell transaction.

Mutual Fund Investment Advisor

Mutual fund representatives are certified agents that help you in buying and selling mutual fund units. The dealers earn a commission from the asset management company for every sale.

Financial Planner

A financial planner works closely with you to identify your financial goals and help you realize them over the long term. The financial planners also help you in financial planning, investment planning, retirement planning, tax planning, risk management and many more. They try to strike the right asset allocation to help you reach your goals.

Financial planners earn by charging service fees or asset-based fees or sales fees and commissions.

Personal Banker

Personal bankers are agents that are employed by trusts and banks. These bankers help you in buying and selling savings schemes such as bonds and some government offerings. Some personal bankers sell mutual funds too.

Personal bankers get a salary from their employers. The cost of advice is absorbed by the service fee that the bank or trust charges you.

Insurance Advisor

Insurance advisors are licensed representatives that advise on insurance products. They specialise in selling certain insurance products like life or property insurance. Or sell a range of all insurance products.

Insurance advisors earn money each time they make a sale on an insurance product.

Customer Service Representative

Customer Service Representatives often offer one-time service. They help you in opening a bank account or choosing a loan or credit card. They also help in comparing various mortgage and loan options. Additionally, they may advise on saving bonds and some government offerings.

They get a salary from the financial institution (employer). Also, these representatives recommend only the products that are sold by the financial institution they are employed by.

Is it worth it to get a financial advisor?

Yes, in case you do not have the knowledge about all the financial products. Typically, a financial advisor charges around 0.5% to 1% of the portfolio value. For investors who do not understand the range of financial products and want to invest, opting for a financial advisor is the best option.

However, investors who know about the products and do not have time to monitor them regularly can also appoint a financial advisor. They will help in periodic monitoring and portfolio revisions to keep up with the changing market scenarios.

What is the difference between a financial planner and a financial advisor?

Financial advisors are those who help their clients manage their money, including their investments and any other accounts. At the same time, financial planners are professionals who focus on devising a financial plan to meet financial goals.

Financial advisors manage investments, also help in the sale or purchase of securities by acting as a broker for the transaction, or they can even create a complete plan to meet financial goals.

Financial planners help companies or individuals to construct a strategy to meet financial goals. Also, these planners assess their client’s current situations and recommend how to improve it. A financial planner can have certain areas of expertise, like tax planning, retirement planning, or investment planning. There are various certifications to become financial planners. Therefore, to become a financial planner, one has to pass each of these certifications and obtain their licences.

Learn: Financial Planning vs Wealth Management