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There are two basic types of financial advisors: a Financial Planner and an Asset Manager. Do you know which of these two types you need? The first step is to define the two types.
Financial Planner
This type of advisor creates a written plan for literally every aspect of your money and finances ranging from a cash-flow budget, to savings, to insurance, to funding of your retirement, tax minimization, saving for education expenses to how much you can afford to spend in retirement. If you spend money on something, a good financial plan will cover it.
Asset Manager
For these financial professionals, they focus only on investing a sum of money with the goal of maintaining the sum of money and keeping pace with some benchmark, be it inflation or market index. An asset manager can invest the money in any type of security be it individual stocks, bonds, mutual funds, exchange traded funds, real estate, alternative assets or all or a combination of the above.
If you do not have a sum of money to invest, then the decision is easy, you need a financial planner. To be clear, there are advisors these days that have no asset minimums and there are on the other side of the spectrum there are advisors that have minimums of $1,000,000 dollars. In addition, there are “Robo Advisors” that will take any amount of money and invest in some pre-determined allocation, but these usually don’t have assigned, dedicated advisors to work with. To reiterate, if you literally do not have a sum of money to invest, then a financial planner is what you need.
Planner & Manager
If you have money to invest, then you will benefit to have both a financial planner and asset manager and these days many financial advisors offer both services. It is common for those with a significant investment portfolio to not have a formal, written financial plan. The common thought is “If I was smart enough to build enough savings and cash to invest in the market, I do not need a financial plan.” However, this thinking is fundamentally flawed. In fact, often the biggest financial gains an investor can enjoy come from the impact of the financial plan implementation be it expense reduction, tax optimization and risk mitigation with insurance.
Another way to visualize the benefit of a financial plan is to imagine building a home. Could you build a new home without an architect and blueprints? Technically, sure. But your contractor, if you can hire one without blueprints in the first place, will assuredly take much longer, charge you much more and the finished home will simply not look or function nearly as well. Moreover, your local building inspector may make you re-do parts of the work when codes are not followed the first time.
By understanding the two basic types of advisors, you can then search more effectively and screen your financial advisor candidates and find the ideal advisor for you, at this moment in your life.
Related: What Should You Do When Your Advisor Changes Firms?