The Role of a Financial Advisor
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.
A financial advisor is a professional who has strong expertise and knowledge of finance and the general economic market. Financial advisors generally create financial plans for their clients to help them achieve their financial objectives. Financial advisors regularly consult with clients to evaluate and adjust their financial plans, where required.
A financial advisor may assume varying roles, such as a financial planning partner or a financial educator. For the former, the financial advisor will first seek to understand the goals of his 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 his investment goals by providing sound financial advice including recommendations on how much the client should save, the type of accounts the client should use, suitable types of insurance, as well as assets and tax planning.
A financial advisor can also take on the role of a financial educator, teaching the client on all matters relating to finance to better understand how they may affect their financial plans. 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, the financial advisor would progress to more advanced financial concepts like investing, insurance and taxes.
Financial advisors and investments
The financial advisor would first prepare an asset allocation plan based on his 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 his overall portfolio. The financial advisor takes into consideration his client’s age and time left until the client’s retirement while making 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. Conversely, an investor with a larger risk appetite is more likely to be recommended riskier investments such as stocks, corporate bonds, or real estate.
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Before receiving investment advice, clients should be mindful of the fees they are paying to their financial advisor, or to any funds, and whether the financial advisor is receiving a commission for recommending 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 his portfolio, and schedule regular meetings to review and adjust the portfolio accordingly. Apart from these meetings, the client should also inform his financial advisor of any major life changes that are likely to impact his finances, for example a job promotion, home sale or the birth of a child.
Financial advisor versus mortgage broker
A mortgage broker connects mortgage lenders and borrowers, ensuring the best fit between borrowers and lenders, 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 enable 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 broader focus. Financial advisors draw up plans incorporating all aspects of his client’s financial life, which may include mortgages and other forms of debt, and take a long-term approach towards helping his clients achieve their financial goals.
Hence, both mortgage brokers and financial advisors can provide financial advice based on their client’s needs. However, mortgage brokers specifically focus on their clients’ mortgage needs whilst financial advisors focus on their clients’ long-term financial needs.
Who needs a financial advisor?
Anyone can seek assistance from a financial advisor at any time, regardless of age, net worth or stage of life. Those who do not have the time to properly manage their finances, uncertain about how to deal with their finances or simply to make sure they are on the right financial path or to seek a second opinion may require the services of a financial advisor.
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Why do you need a financial advisor?
1. Do not know how to invest
Embarking on an investment journey could be perceived as challenging in the beginning, especially with the effect of inflation on the value of assets and investment returns. However, never underestimate the importance of growing your money and accumulating enough wealth for future retirement.
2. Investments are performing poorly
Having one’s investments perform poorly is not necessarily a sign of a bad investor. Even experienced investors may suffer a loss during a market downturn or after making a bad decision. This may indicate a need for an independent financial advisor to provide objective feedback on investment strategy and asset allocation.
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3. Not Having an Estate Plan
A financial advisor also handles the formulation of estate plans, which indicates an individual’s wishes on how assets are to be handled and distributed 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 to discuss insurance options with, compared with traditional insurance agents, since the former do not typically have incentive to advise their client to select a particular insurance plan or commit with a particular insurance provider, allowing them to provide more objective advice.
Costs of a financial advisor
Financial advisors levy a fee 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.
Financial advisors under a commission-based model typically use the suitability standard for their clients. This means that the financial advisor may not directly bill the client, instead, he receives a commission based on the products sold to the client.
However, this model has its drawbacks since the client may end up with financial products with higher fees compared with other similar products. This benefits the financial advisor and places the client at a disadvantage.
Financial advisors under the fiduciary standard charge fees using a fee-based model, at 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 and just starting out with their financial planning journey or offer a free first consultation to gauge the fit between the financial advisor and the client.
Under the fee-only model, financial advisors do not earn a commission from the sale of 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 clients’ needs.
|Earns money when you buy specific investments||No||Yes||Yes|
|Earns money when you buy a specific insurance product||No||Yes||Yes|
|Earns money based on how well your Investment portfolio performs||Yes||Sometimes||No|
|Has potential conflicts of interest||No||Yes||Yes|
How to become a financial advisor in Singapore?
It is relatively simple to become a financial advisor in Singapore. Financial Advisors in Singapore 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 minimum educational requirements - a GCE ‘A’ Level certificate with passes in at least three H2 subjects 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 practise 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
Upon meeting these requirements, an individual can log a notification with the Monetary Authority of Singapore (MAS) and start work as a financial advisor.
Financial Advisers Act
Financial advisers in Singapore are governed by the Financial Advisers Act 2001 (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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Not all financial advisors may be suitable for a particular client. Therefore, the client should perform his own research and due diligence on the financial advisor’s level of expertise, specialisations and services provided to ensure that they can suitably assist him in achieving his 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 appointing his 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.