What Does a Financial Advisor Do?

    In this article, you will find out what does a financial advisor do, the many roles of a financial advisor, and who needs a financial advisor for their personal finance.

    What Does a Financial Advisor Do?

    Table of Contents

    1. The Many Roles of a Financial Advisor
    2. Financial Advisors and Investments
    3. Financial Advisor vs Mortgage Broker
    4. Who Needs a Financial Advisor
          a. Not Knowing How to Invest
          b. Investments are Performing Poorly
          c. Not Having an Estate Plan
    5. The Costs of a Financial Advisor
          a. Commission-Based Model
          b. Fee-Based Model
          c. Fee-Only Model
    6. How to Become a Financial Advisor in Singapore?
    7. Financial Advisers Act
    8. The Bottom Line

    The Many Roles of a Financial Advisor

    A Financial Advisor is someone who has strong expertise and knowledge of finance and the general economic market. Financial Advisors generally create financial plans for their clients to aid them in achieving their financial objectives, and consult regularly with clients to evaluate and adjust their financial plans.

    A Financial Advisor may take on many different roles, such as a financial planning partner or a financial educator. In the former case, the Financial Advisor will first understand the goals of their client, such as retiring within a certain time frame, or saving towards a university fund. A licensed Financial Advisor serves to bridge the gap between the client and their investment goals by providing financial advice. This includes recommendations on the amount of money the client should save, what kind of accounts the client should use, suitable types of insurance, and assets and tax planning.

    A Financial Advisor can also take on the role of a financial educator, teaching the client about different financial topics to understand how they may affect their financial plans. Firstly, the Financial Advisor would cover preliminary topics such as saving and budgeting money, which is involved in everyday financial decision-making. When the client has a firm grasp of the basic saving and budgeting principles required, the Financial Advisor would move on to discuss more advanced financial concepts like investing, insurance, and taxes to complete the overall financial plan.

    Financial Advisors and Investments

    When working with a Financial Advisor, the Advisor would first prepare an asset allocation plan based on the client’s risk tolerance and capacity. The asset allocation plan establishes how a client’s financial assets would be distributed across different asset classes to form their overall portfolio. The Financial Advisor would also take into account the investor’s age and time until retirement when making any recommendations for asset allocation.

    An investor with a lower risk tolerance is likely to have a suggested portfolio consisting of a higher proportion of safer investments, such as government bonds, certificates of deposit (CDs) and money market holdings. On the other hand, investors with a larger risk appetite are more likely to be recommended riskier investments, such as stocks, corporate bonds, or real estate.

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    When receiving investment advice, clients should be mindful of any fees they are paying to their Financial Advisor, or to any funds, and whether the Financial Advisor is receiving a commission for getting clients to invest in certain funds as this may indicate a potential conflict of interest.

    After investing with a Financial Advisor, the Financial Advisor should provide the client with frequent updates on their portfolio, and schedule regular meetings to review and adjust the portfolio accordingly. Apart from these meetings, the client should also inform their Financial Advisor of any major life changes that are likely to impact their finances, for example a job promotion, home sale, or the birth or expectation of a child.

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    Financial Advisor vs Mortgage Broker

    Financial Advisor vs Mortgage Broker

    A Mortgage Broker connects mortgage lenders and borrowers, and ensures that the borrowers and lenders are best fit based on the borrower’s financial situation. Mortgage Brokers tend to specialise in a subsection of loans, for example home loans, and have an in-depth understanding of mortgages. Their understanding and expertise allows them to provide advice to borrowers on all aspects of their debt, such as interest rates or loan structure.

    A Financial Advisor, on the other hand, has a much broader focus. Financial Advisors draw up plans covering all aspects of their client’s financial life, which may include mortgages and other forms of debt, and take a long-term approach in helping their clients achieve their financial goals.

    Hence while both Mortgage Brokers and Financial Advisors can provide financial advice based on their client’s needs, Mortgage Brokers’ advice focuses specifically on their client’s mortgage needs, while Financial Advisors focus on their client’s long-term financial needs.

    Who Needs a Financial Advisor

    Anyone can get help from a Financial Advisor at any time, regardless of age, net worth, or stage of life. Individuals may be more in need of a Financial Advisor if they do not have time to properly manage their finances, if they are uncertain about how to deal with their finances, or simply to make sure they are on the right financial path or to get a second opinion.

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    Common reasons for clients requiring a Financial Advisor include:

    Not Knowing How to Invest

    Beginning to invest may be difficult to manage at the start, especially with the effect of inflation on the value of assets and investment returns. However, investing is the most important part of individuals being able to grow their money and accumulate enough wealth for future retirement.

    Investments are Performing Poorly

    Having one’s investments perform poorly is not necessarily a sign of a bad investor. Even experienced investors may take a loss in a market downturn or from a poor decision. However, this may indicate a need for an independent Financial Advisor to provide objective feedback on investment strategy and asset allocation.

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    Not Having an Estate Plan

    A Financial Advisor also handles the formulation of estate plans, which are an indication of an individual’s wishes for how they want their assets handled after death. In addition, a Financial Advisor can also provide advice on suitable insurance policies based on the client’s health and financial situation. Financial Advisors may also be more suitable for discussing insurance options with than traditional insurance agents, since Financial Advisors do not typically have incentives to get their client to select a particular insurance plan or go with a particular insurance provider, allowing them to provide more objective advice.

    The Costs of a Financial Advisor

    Financial Advisors charge fees for their services. These fees may vary depending on the fee model used by the Financial Advisor and the standards used - the fiduciary standard or the suitability standard.

    Commission-Based Model

    Financial Advisors under a commission-based model typically use the suitability standard for their clients. This means that the client may not directly bill the client, instead receiving a commission based on the products sold to the client.

    However, this has its drawbacks, since the client may end up with financial products with higher fees than other similar products, benefitting the Financial Advisor with a commission, while disadvantaging the client.

    Fee-Based Model

    Financial Advisors under the fiduciary standard charge fees using a fee-based model. In this case, the advisor usually charges a per hour rate, or an annual percentage of the client’s total Assets Under Management (AUM), typically 1% of the total AUM. Financial Advisors using this fee-based model may also receive commissions for selling their clients a particular financial product.

    Financial Advisors may also offer lower rates for individuals with a lower net worth who are starting out with their financial planning journey, or offer a free first consultation to gauge the fit of the Financial Advisor and client.

    Fee-Only Model

    Under the fee-only model, Financial Advisors do not earn a commission from selling financial products to their clients. Instead, the only fees they receive are from their clients. Relative to the other models, Financial Advisors using the fee-only model are least likely to have a conflict of interest, since they are not incentivised to promote a particular financial product over another because of the commission, and hence can best serve their client’s needs.

    Fee-only Fee-based Commission-based
    Earns money when you
    buy specific investments
    No Yes Yes
    Earns money when you
    buy a specific insurance
    No Yes Yes
    Earns money based on how
    well your Investment
    portfolio performs
    Yes Sometimes No
    Has potential conflicts
    of interest
    No Yes Yes
    Source: Investopedia

    How to Become a Financial Advisor in Singapore?

    How to Become a Financial Advisor in Singapore?

    It is relatively simple to become a Financial Advisor in Singapore. Financial Advisors in Singapore just have to meet a few requirements to be allowed to work as a financial advisory representative.

    An individual has to meet the minimum age requirement of 21 years old. The individual also needs to meet the minimum educational requirements - a GCE ‘A’ Level certificate with passes in at least three H2 subject and one H1 subject, an International Baccalaureate (IB) diploma, a polytechnic diploma, or other equivalent qualifications.

    In addition, a Financial Advisor needs to pass certain modules in the Capital Markets and Financial Advisory Services (CMFAS) examination to be eligible to practice in Singapore. The modules are:

    • M5: Rules and Regulations for Financial Advisory Services
    • M6: Securities Products and Analysis
    • M8: Collective Investment Schemes
    • M9: Life Insurance and Investment-Linked Policies
    • M9A: Life Insurance and Investment-Linked Policies II

    After meeting these requirements, the individual can then log a notification with the MAS and start work as a Financial Advisor.

    Financial Advisers Act

    Financial Advisers in Singapore are governed by the Financial Advisers Act (FAA), regulated by the Monetary Authority of Singapore (MAS). Under the FAA, Financial Advisers refer to the entities licensed to conduct financial advisory services and other financial products, while the individual Financial Advisor is referred to as an appointed representative.

    The Act covers the roles and regulations for Financial Advisers, appointed representatives, the types of business they are allowed to engage in, as well as any audits or inspections they are required to undergo.

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    The Bottom Line

    Overall, not all Financial Advisors may be suitable for a particular client. Therefore, the client should perform their own research on the Financial Advisor’s level of expertise, specialisations, and services provided to ensure that they can assist the client in achieving their financial goals. In addition, the advisor’s personality can also have an impact on the relationship between the client and advisor, so the client should consider a trial consultation before working with a Financial Advisor.

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    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.