The Profession of Financial Advisor Explained

 

What is a financial advisor? 

  A financial advisor provides financial advice to clients about their finances, enabling them to achieve their financial goals and to help them to be financially independent at retirement age.   

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Advisor or adviser? 

  Both terms are considered acceptable to indicate a person who renders financial advice. However, some linguists explain that adviser is the original and more commonly used spelling, and is sometimes considered more informal.    This article will use the term advisor, based on the explanation of the Merriam-Webster Dictionary: ‘There is no difference between adviser and advisor besides spelling, and both are acceptable for someone who gives advice.’   

Some essentials and prerequisites regarding the profession of a financial advisor 

  Academically, to become a financial advisor, a person is required to obtain a bachelor’s degree, preferably a Bachelor of Commerce (abbreviated BCom) degree, although not compulsory.   Furthermore, a potential financial advisor needs to pass the regulatory examinations set by an authorised and accountable institution.     In South Africa, all financial service advisors are required by law to obtain a license to practise from the Financial Services Board (FSB), as regulated in the Financial Advisors and Intermediary Services (FAIS) Act (Act 37 van 2002).    A financial advisor acts in a fiduciary capacity, putting the interests of clients first.  It is important to build long-term relationships with clients, based on trust, the welfare of clients, and knowledge about their financial situations.    A financial advisor must provide guidance and advice, guiding a client to make important financial decisions. This means that a financial advisor is not allowed to make decisions on behalf of clients.    Although financial advisors can guide clients to reach their financial goals by providing them with financial strategies and methods to create more wealth, mitigate and eliminate debts, and reduce costs.    

Services rendered by financial advisors 

  Firstly, a financial advisor typically performs a financial needs analysis (FNA) to determine the current state of a client’s financial position as well as his/her future financial needs. This is the most important step in the process in which a financial advisor gives financial advice to a client.     Someone once observed that ‘a financial adviser, who gives advice without doing a financial needs analysis, is like a doctor who does a diagnosis upon the first handshake.’  One of the advantages of an FNA is that it provides a client with a holistic view of his/her finances, enabling him/her to make informed decisions with the advice and guidance of a financial advisor.     A financial advisor needs to take the following information about a client into consideration when preparing an FNA: 

• Existing income and expenses are included in the client’s budget. 
• Assets, such as fixed assets like a home or other property, and current assets such as cash and cash equivalents, furniture, and paintings, to name a few. 
• Liabilities, including bonds, bank overdrafts, and credit cards. 
• All the financial products currently owned by the client. For example, life insurance policies, funeral policies, retirement annuities, and investments. 
• If employed, any employment benefits of the client, such as group life insurance, pension or provident fund, and medical aid benefits. 
• Marital status, for example, single, divorcee, widow or widower, customary marriage, same-sex marriage, or one of the three types of civil marriage, namely: 

1. Marriage in Community of Property. 
2. Marriage Out of Community of Property without the Accrual System. 
3. Marriage Out of Community of Property with the application of the Accrual System. 

• Number of dependants. 
• Current and future financial needs. For instance, provision for children’s education. 
• Financial goals, for instance, are to provide enough funds to retire at 65 or buy a new vehicle. 

  Financial advisors will use one of the FNA systems available to process the information obtained to develop personal financial plans for their clients. A financial plan will include, inter alia, the following information: 

• The amount of money required for the education of the client’s children. 
• How much money is needed to retire financially independent?  
• The money available to save as an emergency fund.  
• The amount of life cover needed to ensure that dependents can carry on with their lives without any financial constraints after the client’s death. 
• How much disability insurance will be enough to cover the client’s income when he/she becomes unable to earn an income due to an accident? 
• The amount of dread disease insurance required when facing critical health issues, for example, a terminal illness. 
• Enough financial coverage in case of retrenchment. 

  It is evident from the discussion about the importance of an FNA that financial advisors are able and equipped to render a variety of services to clients. These services can be summarised as follows: 

• Creating a budget: Providing clients with strategies and methods for preparing a budget, allowing them to keep expenses in line with income received. Also, to offer advice about savings that can be used for different goals, such as provisions for higher education of children, or to start an emergency account that can be used for unexpected and unforeseen crises.  
• Management of debt: Advising clients how to pay down debts and to differentiate between good and bad debt. 
• Investment advice: Financial advisors are able to provide advice regarding a client’s risk profile (risk tolerance), investment strategy, and investment goals. 
• Long-term and short-term insurance: Advisors will provide a client with insurance that will provide for long-term and short-term needs. 
• They will render advice about medical aid plans and guide clients to make the right choice.  
• Tax planning: This includes advice to maximise tax deductions, to manage the impact of capital gains tax (CGT), and to minimise taxes in retirement. 
• Retirement planning: A financial advisor will also help a person to financially prepare for retirement, enabling him/her to spend their retirement without financial worries.  
• Estate planning: Financial advisors can help clients to create a legal will or refer them to a certified service provider that will help them with a potentially difficult process to leave a long-lasting legacy.    

   

The importance of a financial advisor 

  There are various reasons why it is important to make use of the services of a financial advisor. Everyone can benefit from financial advice, not only rich people.    The following list includes some of the reasons why a financial advisor is important to help you with your financial decisions:    

• Protection of your family  

A financial advisor will guide you through the insurance products provided by service providers and help you choose the best option(s) to protect yourself and your loved ones.    

• To meet your investment goals 

Whatever your investment goals, a financial advisor can help you determine what is realistically possible and advise you on how to achieve your investment goals.    

• How to be smart with money 

This includes advice on how to plan your spending in order to start a savings plan, building your wealth as wisely and efficiently as possible.   

• Help you to plan for retirement 

It is estimated that about 50% of South Africans do not have a retirement plan, while only 6% are able to retire comfortably.    Retirement planning can be a complex issue, with various options available. A financial advisor will help you to create a portfolio that will allow you to retire comfortably.   

• Help you to find the right combination of assets 

Based on your risk profile, a financial advisor will help you to diversify between different asset classes. Simply put, he/she will advise you that you ‘do not put all your eggs in one basket.’    

• Help you to stay committed to your financial plan 

A financial advisor will typically schedule a meeting with a client once a year to review his/her financial needs analysis (FNA) and to suggest any adjustments if necessary.   Such a meeting will help the client to stay committed to his/her financial plan and goals.   Furthermore, a client can contact his/her financial advisor at any time to obtain financial advice regarding financial issues.    

• Bring calmness and peace of mind 

A trusted financial advisor will provide practical and specialist advice during turmoil in financial markets, helping you to stay calm, and preventing you from making irrational decisions based on emotions.   

How to choose a financial advisor 

  Before you choose a financial advisor, it is important to have a general knowledge of what financial planning entails. This will help you to be aware of what to expect from the financial advisor-client relationship, and what type of questions to ask a financial advisor, ensuring he/she meets your expectations.     The right financial advisor to accompany you on your financial journey, guiding and advising you under all circumstances, must be a person who, inter alia, possesses the following qualities:    

• Not just a seller of his/her services and financial products of service providers, but a provider of financial tools and resources, enabling you to make informed financial decisions on your own.  
• One who is educated and knowledgeable, who is aware of the latest updates and developments in his/her field and who is able to answer your financial questions about various topics.  
• An advisor who complements your style and financial opinions, and who has empathy with your emotions. For instance, one who understands your risk tolerance regarding investments, but encourages you to make well-informed and wise decisions. 

  Furthermore, you must make sure whether a financial advisor is a tied or independent financial adviser. A tied financial advisor can only sell financial products of a specific product supplier. An independent financial advisor is registered to advise on and sell financial products from different product suppliers.  Make sure also how often the financial advisor is prepared to meet with you and how he/she will communicate with you.    In South Africa, the financial advisor-client relationship is, inter alia, regulated by the Financial Advisory and Intermediary Act (FAIS) (Act 37 of 2002) and the regulatory framework, Treating Customers Fairly (TCF), set by the Financial Sector Conduct Authority (FSCA).  The purpose of the regulations is to protect the interests of the client and the advisor by ensuring that the advisor provides proper advice and sells financial products that are appropriate for the client’s needs.     A financial advisor is required by law to 'at all times render a financial service honestly, fairly, with due skill, care, and diligence.’ This must be done in the interest of the client and that of the financial services industry.  Under the subject, ‘Services rendered by financial advisors,’ we mentioned that a financial advisor will typically start with a financial needs analysis (FNA) to determine the current state of a client’s financial position as well as his/her future financial needs.    However, before carrying out an FNA, the financial advisor is required to establish and define the professional relationship between him/her and the client. In this regard, the financial advisor must provide the client with a disclosure letter informing the client of all his/her details, for instance: 

• Contact details (postal address, physical address, and telephone numbers). 
• The financial products he/she is authorised to sell. 
• Experience and qualifications. 
• Contractual arrangements with financial product providers. 
• Confidentiality and protection of personal information. 
• The contact information of all the relevant ombuds where complaints can be lodged by the client. As well as the contact details for the Council for Medical Schemes (CMS) and the Financial Services Board (FSB). 

 

Costs involved in using a financial advisor 

  Financial advisors are allowed to charge fees in two ways: 

• Commission-based fees are where a financial advisor will earn commission from the financial product providers for the products they sell to clients. 
• Upfront fees are charged on an hourly basis for the time spent with a client.  

  The purpose of this article is to provide information only. We recommend that you obtain professional advice before you make any decisions. 

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