What is a financial advisor

Unless you are ready to dedicate a large amount of time to learning about and understanding what's happening in the markets and the investment products available to you, you will probably need professional advice to help you make the right decisions. The way financial advisors work varies according to whether they are independent or whether they work for a bank or other financial institution. There are wide differences in how financial advisors operate from country to country.

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

In some countries most financial advisors work for financial institutions such as banks or insurance companies; in other countries financial advisors who work independently for their clients and do not represent a financial institution are the norm. In this context the term IFA (independent financial advisor) is often used in the UK it has a specific meaning and reflects UK regulations. Fund companies may also provide guidance on the type of investors for which their funds are suitable.

Advisors employed by banks and other institutions come under the supervision of the local financial regulator. IFAs are generally supervised by the organisation in charge of regulating the financial services industry in their home country. Most advisors in Europe are also subject to EU-wide legislation known as MiFID (the Markets in Financial Instruments Directive), which sets out very specific rules about the duty of advisors to provide advice suitable for their clients' needs. It also sets out rules for the level of professional knowledge and qualifications required to be an advisor.

Advisors of all types may specialise in a specific area of financial services such as pensions, investment or mortgages. There can also be wide variations in how advisors are remunerated. They may receive a salary and/or commission payments (including trailer fees) based on investments made by their clients. They may receive a fixed or hourly fee from investors just like other professionals such as lawyers. They may also charge a fee based on the total amount of assets on which they are providing advice. In some cases advisors are not paid by the investor, but receive a commission from the provider of the fund or other financial product. Regardless of which structure is in place, you should always ask for confirmation of the remuneration policy before you select a financial advisor.

Do I need a financial advisor?

There are thousands of different investment funds to choose among, and finding those that best suit your specific needs takes time and knowledge. Advisors, whether independent or employees of financial institutions, have the resources, experience and skills to select the right funds for you. Before making any recommendations, advisors should build up a comprehensive picture of your investment needs and your attitude to risk. Depending on their level of qualifications, 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 will gather all the relevant information to ensure the right decisions are made on your behalf. An in-depth analysis of where you are and where you want to get to is the first step in drawing up a map to achieve your financial goals.

Objective assessment. An advisor will examine your financial situation and needs with clear-eyed objectivity. Their impartial assessment is not shaped by the pressure and emotion you might feel when thinking about school fees, retirement or property purchase, for example.

Resource allocation. Most investors have more than one investment objective. An advisor will identify how best to allocate your resources to achieve your goals. Should your circumstances change, your advisor can help you reassess how you use your resources accordingly.

Tax planning. Advisors may also advise you on your personal tax situation 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 questions such as these below before you seek advice. They are professionals and are required respect professional standards and demonstrate 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 advise on all products in the market, or just a limited selection?

• How many clients do you advise; can you provide any references?

• Do you specialise in investment funds?

• What qualifications do you have?

• How long have you been working as a financial advisor?