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What is a financial advisor

If you have little time or little interest to devote to the financial markets and investment products, you will need professional advice to help you make the right decisions. The way in which financial advisors do their work varies according to whether they are independent or whether they work for a bank or other financial institution. Furthermore, from country to country there are differences in the context in which they operate.

Financial advisors are qualified personal finance experts who will help you decide which products in the market are suited to your needs. Their role is to determine your particular investment needs on the basis of your financial situation, lifestyle and goals, and then recommend suitable products. These are often investment funds but may also include insurance policies, pension plans or mortgages that offer the best solution for you.

In some countries most financial advisors work for financial institutions such as banks or insurance companies; in other countries financial advisors who work for their clients independently, rather than on behalf of a financial institution, are the norm. In this context the term IFA (independent financial advisor) is often used. Especially in the UK, the term has a specific meaning and reflects the local regulations there. Fund management companies can also serve an advisory role by providing information about the investor types for which its respective funds are suited.

Advisors employed by banks and other institutions come under the supervision of local financial supervisory authorities. Independent financial advisors are generally supervised by the organisation responsible for regulating the financial services industry in their home country. Advisors in Europe are also subject to the EU-wide Markets in Financial Instruments Directive (MiFID), which sets out very specifically the duties of advisors to provide advice suitable for their clients’ needs. The MIFID guidelines also require advisors to have the necessary qualifications, knowledge and experience to fulfil their responsibilities.

Advisors may specialise in a specific area of financial services such as pensions, investment or mortgages. There can also be major differences in the way they are compensated. Some may receive a salary or also commission payments (including trailer fees) based on investments made by their clients. They may also receive a fixed or hourly fee from investors in the same way that lawyers do, for example. They may also charge a fee based on the total amount of assets under their management. In some cases advisors are not paid by the investor, but receive a commission from the provider of the fund or another financial product. Regardless of the case, you should always be clear about the remuneration policy before you select a financial advisor.

Do I need a financial advisor?

There are thousands of different investment funds to choose from, and finding those that best suit your specific needs takes time and knowledge. Professional advisors, working independently or as employees of financial institutions, have the resources, experience and skills to select the right funds for you. Before making any recommendations, advisors should put together a comprehensive picture of your investment needs and your attitude to risk. Advisors can help you draw up a personalised financial plan and select a fund or portfolio of funds that matches your investment profile.

The big picture. An advisor should gather all the relevant information needed to ensure that the right decisions are made in your best interest. The first step is to analyse where you are and to set your financial goals.

Objective assessment. An advisor should objectively analyse your financial situation and financial goals. He or she should make an impartial assessment, uninfluenced by the pressure and emotion you might feel when thinking about, for instance, educational expenses, retirement or buying real estate.

Resource allocation. Most investors have more than one investment objective. An advisor can help you invest your resources in line with what you would like to achieve. Should your situation change, your advisor can help you decide how to reallocate your resources accordingly.

Tax planning. Advisors may also advise you on tax questions and can recommend tax-efficient solutions appropriate to your home country’s tax legislation.

Asking questions

Do not be afraid to ask your financial advisor any of the following questions before you seek advice. They are professionals and are required respect professional standards and demonstrate certain core skills and capabilities.

  • Are you authorised by your country’s financial regulator?
  • Do you work for an independent firm, or for a bank, insurance company or other provider of financial products?
  • Do you provide advice on all products in the market, or just a limited selection?
  • How many clients do you advise? Can you provide references?
  • Do you specialise in investment funds?
  • What qualifications do you have?
  • How long have you been working as a financial advisor?
Updated on 04/06/13  
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