Every so often almost every one of us tries to be a do-it-yourself expert. Lots of us have tried to change the oil in our cars ourselves. The one time I tried that, it cost me $241.95. Most of us have tried our hand at carpentry. Some of us have been brave enough to hold a book in one hand and a wrench in the other as a leaky pipe spit water on our foreheads. Generally, however, we call in the experts. But sometimes, we don't make that call until we have done the damage.
One area in which many people feel they have the expertise to replace a professional is in the management of their investment portfolios. While it looks easy enough on the surface, saving a few dollars by avoiding an investment professional often times creates more problems than trying to stop a leak with a patch of chewing gum.
The role of a professional Financial Advisor is extensive. First of all, he or she is backed by the resources of a large firm with experienced analysts, researchers, traders, and due diligence personnel. Each of these people, and more, add their expertise to that of the Financial Advisor, research specific investments and seek efficient execution of transactions.
Although clients only spend a relatively short amount of time with their Financial Advisor, the Financial Advisor dedicates a good deal of time to a client's account. The investment process usually begins with the Financial Advisor helping the client determine his or her objectives, goals, risk tolerance, time horizon, and future needs including college expenses for children or grandchildren, caring for aging parents and more.
Next, depending on the client's previous investment experience, the Financial Advisor may spend time educating the investor about the investment process - how securities are bought and sold or how a mutual fund portfolio is structured and managed - and about specific investments such as listed and over-the-counter stocks, bonds, mutual funds, asset management portfolios and unit investment trusts. Here is where the investor would learn about the inherent risks of each investment alternative and the associated costs of the transaction or portfolio management.
The third step is to help the client determine an asset allocation model for his or her portfolio. While every investor has different needs, no investor can place all of his or her eggs in one basket. If that was the investment strategy and the individual investment declined in value, the investor would face serious consequences. Asset allocation allows the investor to diversify a portfolio among various asset classes including stocks, fixed income, cash and cash equivalents, and tangibles and real estate. Once that allocation is made, further diversification is made within each class. For example, rather than owning one stock, the Financial Advisor may recommend four or five stocks, each within a different industry. While not every portfolio is large enough for to be fully diversified, some diversification is possible for nearly every portfolio. The Financial Advisor next recommends more specific investment alternatives within the agreed upon asset allocation model, allowing the client to make the final decisions.
But, that is not the last service the Financial Advisor provides. Every portfolio needs to be continually monitored, and period conferences scheduled to discuss performance with the client. Again, this service is covered by the commission or fee charged at the time the investments were made.
In many instances, investors may need additional planning services, such as tax planning. A Financial Advisor may work with a heavily taxed investor to help reduce his or her tax burden through the selection of tax-free or tax-deferred investments, investments in growth stocks and/or annuities. A Financial Advisor may uncover ways to save on taxes that the common person would never know about!
As the investor approaches retirement, the Financial Advisor can assist in the development of a retirement plan with the objective of providing the necessary income to maintain a desired lifestyle. The Financial Advisor can also help the client with estate planning in an effort to maximize the amount that will be passed on to his or her heirs.
While some of these services can involve consulting fees, they are generally low in comparison to the possible tax savings gained and the comfort of knowing that a plan is in place.
By and large, the amount of support an investor receives from a trained Financial Advisor is disproportionately high in comparison to the commission or fee charged and much easier to accept than the alternative of doing the research, monitoring, planning and trading yourself, without the benefit of a support staff.
Yes, so as you can see, your Financial Advisor can also have one more role in your life...that of a good friend.