The Basic Functions of Advisors

Individuals or companies we loosely refer to as advisors fulfill the following basic functions:

Investment Advisors

Investment advisors are companies or individuals who receive compensation for providing investment advice to clients. Based on indicators such as a client’s age and risk preferences, they recommend purchases of financial products such as stocks, bonds, mutual funds and other investment alternatives. (They function as a coach would, providing advice on how to play the game by suggesting which combination of game pieces you should hold and how, and when, to change them).

Asset Managers

Asset managers construct and maintain portfolios, some of which may be mutual funds. These portfolios or funds are made available to investors as investment choices. (These advisors provide and manage game pieces, which the investor may elect to purchase.)

Financial Planners

Financial planners take a comprehensive view of the client’s financial situation and develop a plan meant to achieve the client’s intended overall objectives. Rather than focusing only on investing, their advice may encompass investments, insurance products, educational trusts and, in some cases, taxation and wills. (They provide a game plan, but don’t execute it).

Brokers

Brokers execute financial transactions on behalf of clients. They primarily buy and sell stocks and bonds based on client instructions. (They provide the game equipment or infrastructure that allows players to get their hands on game pieces).

Insurance Brokers

Insurance brokers are those who assist you, your family, and/or your business in identifying and purchasing various necessary types of insurance. The relevant insurance may include, among others, liability insurance, car insurance, renters insurance, homeowner’s insurance, long term disability insurance, professional insurance, etc.

Legal Advisors: Estate Planners

Legal advisors (lawyers) are tasked with protecting you from legal liabilities. They are the ones who should be drafting and reviewing legal documents on your behalf. These documents include wills and powers of attorney agreements, among others. If you already have a lawyer before you seek to hire a financial advisor (which is recommended), the lawyer can help you to examine the agreements an advisor will expect you to sign. A word of caution: lawyers charge by the hour. Don’t send financial consulting agreements to your lawyer from each and every advisor you interview. If the lawyer reviews each of them, you’ll be charged for all that time. Instead, first identify the advisor you most wish to work with, and send the lawyer just that agreement. If the lawyer raises serious concerns about the agreement which cannot be addressed successfully, move on to the next advisor on your list of highly-ranked ones.

Tax Advisors: Accountants

Accountants (CPAs) are the professionals who will help you navigate the nation’s complex tax code and most likely the one’s assisting you with filing your tax returns. Different types of investment income are subject to different taxation rules. The timing of profits or capital gains are also relevant (for example, short- versus long-term gains). Based on your unique circumstances, the accountant should be able to provide advice about which of your investment alternatives are most advantageous from a tax liability perspective at any given point in time.

Advisors are characterized by three fundamental characteristics: their alignment or allegiance to client interests, the fees they charge and their professional credentials.

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