A financial advisor is a professional who earns a living from offering financial, in-person advice to clients. Just as you would hire an architect to create a plan for your home, you can hire a financial advisor to create a plan for your finances.
Here’s a look at the types of financial advisors, and how to choose the right advisor for you.
Robo advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.
Good Robo-advisers typically blend efficient, low-cost passive investment strategies and high-quality digital advice algorithms.
These deliver a balanced risk and return profile from the capital markets (the share and debt markets) to help consumers achieve their investment goals.
Experts predict that by 2022 Robo-advisors will manage US$177 million in South African assets.
A typical Robo-advisor collects data from the client’s financial situation and future goals through an online survey.
It then uses this to data to come up with efficient, low-cost passive investment strategies. A good Robo-advisor offers easy account setup, robust goal planning, account services, portfolio management, security features, attentive customer service and comprehensive education investment.
The costs of Robo- advisors are generally much lower than those of other financial advisors. With good Robo advisors, the fees you pay should decrease the more you invest in them.
Typically, costs vary from around 0.25 to 1.5% (including the cost of the investment product, plus the cost of ongoing advice and administration).
The option of a Robo advisor is a great pick when you need help for investing goals and investment management, but not holistic financial planning.
It is also recommended for those who are new to investing and don’t know where to start or are not familiar with exchange traded funds or mutual funds.
This is true because you won’t have to worry about making complicated investment decisions. Robo advisors are convenient in that you just have to choose how much to save and the technology will do the rest.
This option is also a good choice for smaller investment amounts as Robo advisors may accept even as little as R100.
This, combined with lower fees, this opens up investment opportunities to those who were previously unable.
A traditional financial advisor works directly with clients to help them meet their short- and long-term financial goals.
They make recommendations on specific investments and insurance products and may provide tax advice.
With the option of a traditional financial advisor, you get more than just financial advisors. They also play the role of communicators, educators, planners, and coaches to their clients.
The advisor looks to understand why you’re investing as well as tries to grasp your short, medium and long-term goals.
The advisor, helps you set goals, learns your risk tolerance and develops a personalized plan. With a good advisor, you can be assured of personal advice that is tailored to your particular situation.
Traditional advisors typically charge 1% – 2% of the value of the investor’s investment portfolio on an annual basis.
The traditional financial advisor option comes with a personal human touch, however, comes at an extra cost, but it’s an option that many people find valuable and are willing to pay for.
The option of a traditional financial advisor is a better fit for those with complicated or ongoing planning needs.
It’s also recommended for wealthier, or technology-averse investors because a traditional financial advisor will provide more a personalized service.
Traditional advisors also provide a greater breadth of financial advice and a real person-to-person relationship in many cases.
Consumers have become quite acquainted with the idea of doing things online, from online shopping to online banking and even online education.
With life-changing so much due to technology and everything happening online, it was only a matter of time before we lived in the era of financial planners.
The idea of online financial planning is still pretty much new to South Africans but they are slowly gaining ground with time.
This option entails several online planning services that combine computer-⁷driven portfolio management with access to living, breathing financial planners.
An online financial planner may offer their dedicated services and a comprehensive financial plan.
Your contact with them is limited to digital means of communication like calls, video conferencing and emails.
Online planning services providers have automated investment management you’d get from a Robo-advisor.
Furthermore, you have the ability to consult with a team of financial advisors when you have questions.
The best online financial planners also roughly mirror traditional financial planners. This is because you will be matched with a dedicated human financial advisor who will manage your investments and work with you to create a holistic financial plan.
Due to their nature, they are also sometimes referred to as hybrids.
Online financial planners allow you to set specific goals for your retirement, education, investments, and spending and stick to them.
Ultimately, good online financial planners help you make wiser spending and purchasing decisions and cheer you on as you achieve your financial goals.
Online financial planning services will typically cost less than a traditional financial advisor.
But more than a Robo-advisor due to the human interaction involved. Services range from those relatively high investment requirements of R250, 000 or more while others require no minimum investment.
Online financial planning services are good when you’re looking for an affordable advisor to provide you with high-quality, customized advice.
Advice that takes into consideration your views and emotions but at an affordable rate available while also avoiding paying 1% or more in fees).
It’s also good for those who are always on the road, you can access your advisor from wherever you are.
Hybrids are also recommended for situations where you need help investing for financial goals.
These can include retirement but also in a case where you don’t want or can’t afford a complete financial plan.
If you’re looking for a holistic financial plan which ideally covers the full spectrum of financial planning including risk, retirement, estate planning, tax planning, cash flow, debt, budgeting and business planning. The more complex your financial situation, the more likely you are to approach a professional to assist with your needs.
Young professionals with lower net worth and levels of income who feel underserviced and overlooked by the financial services industry are likely to find Robo-advice an attractive solution.
The services of Robo advisors and online financial planners are best suited for tech-savvy individuals with uncomplicated financial portfolios.
Moreover, millennials who prefer to live online, lack of human interaction is regarded positively so these options are also favourable to those who would be better off receiving services without personal interaction.
At the end of the day, consumers will vote with their feet and follow the path that leads to the best advice for them.
Costs are a very important factor to consider when choosing a financial plan as your choice will be determined by how much you are willing to spend.
Personal services usually mean higher costs. Traditional financial advisors are more expensive and require larger starting amounts, and even though humans are prone to mistakes and implicit biases and errors, those costs and even those fallibilities can provide both value and solace.
Robo-advisors are a cost-effective way to invest if you know what you are paying for and what you can expect in return.
In a world inundated with corruption, you can never be careful enough when it comes to who you associate with, especially where the money is concerned.
All the evidence of fraud, self-dealing and pyramid schemes are a reminder to check, verify and also to review who you are working with.
Before you commit to a contract with an advisor, search for information on qualifications, history with prior clients criminal convictions, disciplinary actions by regulators and other details.
Don’t fall victim to the mentality that big companies are safer because, in this industry, bigger companies no guarantee for protection, it simply means they have deeper pockets.
Do your research. In South Africa, the responsible authority, FPI, allows you to search their database for active members so you can confirm the membership status of the advisor.
Draw up a list of questions that you would like to ask. It could be how they operate or anything else you deem important for you to understand everything clearly.
In the process, address any concerns that raise alarms for you and if you sense too many red flags, trust your gut instinct.
At the end of the day, you have to trust, like and respect the person you are working with.
You may view this process as similar to a resume viewing/interview stage with you, the consumer is the potential employer.
Don’t rush the process, take your time and make the best choice for you- your financial future depends on it!
Getting a financial advisor is a big step, make sure that you that the choice you make is the best possible option for you.