What Does a Financial Advisor Do?
- By Kyle Rolek, Fiduciary Financial Advisor and Certified Financial Planner
What do financial advisors do? This article was written from our own retirement planning experience. What a financial advisor does will vary widely among practitioners depending in part on their area of expertise, the depth of service provided, and their experience. The purpose of this article is to give you a sense of what a financial advisor should be doing if you work with them for retirement planning. This can help you identify whether the advisor is any good or not. This is important because the advisor’s ability, or lack of ability, can ultimately impact your long-term financial security.
#1 - Lifestyle Planning – A financial advisor’s role in this area is the help you clarify your goals to the extent possible. It’s understood that part of the enjoyment of retirement is having flexibility, and it’s not expected that you have your day-to-day lifestyle mapped out in any great detail. However, discussing some big picture items that are important to you can help you get the most out of your time during your retirement. Further, it can also help you with estimating your retirement expenses, which is the next area.
#2 - Expense Planning – A good retirement financial advisor will help you estimate what your retirement expenses will be, either on a monthly or an annual basis. The process to do this is to start with your current expenses as a baseline, add new items that will come into the picture during retirement such as medical costs and travel, and subtract expenses that will be removed such as a mortgage payment. To do this effectively, the retirement financial advisor will help you estimate how retirement healthcare costs, taxes, and inflation will impact your expenses over time.
#3 - Income Planning – After retirement expenses are estimated, the next step is to determine how much of the expenses will be funded by non-investment income sources such as Social Security, pension income, and part-time work. The retirement financial advisor will help create a detailed, yet simple and easy to understand, retirement cash flow statement that will compare expenses against income sources. The purpose of the retirement cash flow statement is to determine whether there will likely be an “income shortfall”, meaning you’ll need supplemental income from investment accounts or other sources to fill the shortfall, or whether there will be an “income surplus”, meaning investment income can continue to be deferred until later on in retirement if you chose to defer it.
#4 - Investment Planning – Now that there’s some clarity around how much income the investment accounts will need to produce each year during your retirement, the retirement financial advisor will help you create an investment plan. A portion of assets should be kept in FDIC insured bank accounts for safety and liquidity. A portion should usually be kept in high-quality bonds, though this isn’t always necessarily the case. A portion should be kept in high-quality stock and stock funds for long-term growth and inflation protection. The retirement financial advisor helps you determine who much to deploy into each type of investment vehicle given your retirement income needs. Very importantly, a good retirement financial advisor will also advise you on what specific investments to select, and they’ll monitor the investments on an ongoing basis so that your investment allocation remains appropriate over time. Finally, a retirement advisor will also help you setup income distributions from your accounts when income is needed, and they’ll explain the pros and cons of setting up a fixed monthly retirement income distribution versus living on dividend and interest income only.
#5 - Tax Planning – Once your initial investment allocation is determined, a retirement financial advisor will provide guidance on which types of investments to hold within which accounts. For example, does delaying the Roth IRA for as long as possible to maximize tax free growth make sense in your situation? If so, would it make sense for the Roth account to be mostly or all stock? A retirement financial advisor will help you determine answers to these questions for your specific situation. A good retirement financial advisor will also help you set up Required Minimum Distributions from your IRA accounts at the appropriate time (failure to take the correct amount results in a tax penalty equal to 50% of the amount that should have been but was not distributed!). Further, the retirement financial advisor will also help you consider which types of investments to pull your RMDs from so that they don’t become disruptive to your investment allocation.
#6 - Healthcare Planning – Healthcare expenses can derail an otherwise solid retirement plan, especially if someone does not enroll in the correct type of Medicare Supplement Plan. A good retirement financial advisor will introduce a Medicare Planning specialist at the appropriate time to make sure you have the right type of Supplement Plan. Traditional Medicare (Parts A & B), Part D for prescription drugs, plus a good Medicare Supplement Plan will cover most medical costs during retirement. However, the one major category of potential healthcare costs that remain a threat is long-term care expenses. A retirement financial advisor will advise on the pros and cons of buying long-term care insurance (their advice may differ from the non-fiduciary advisor who gets paid a commission to sell you a policy). They’ll also help you consider ways to shield assets from long-term care expenses if that is appropriate in your situation.
# 7 - Estate Planning – A good retirement plan is not complete unless estate planning is addressed as well. A retirement financial advisor will work in coordination with an estate planning attorney to help you with updating wills and powers of attorney, setting up trusts when appropriate, identifying ways to minimize estate and/or inheritance taxes, weighing the pros and cons of asset protection trusts, and other items that may be applicable to your situation.
Finally, a good retirement financial advisor will proactively communicate with clients on an ongoing basis to make sure adjustments are made to the plan as needed over time.
Adjustments may be driven by changes to your personal goals, changes in the investment environment, changes in tax rules, and many other items that pop up from time to time. For example, as part of the CARES Act, RMDs are not required for 2020. A good retirement financial advisor would not only inform clients of this, but help them shut off the RMDs from IRA accounts in 2020 if that is appropriate. Will there be significant changes to healthcare coverage for retirees in the future? Clients of a good retirement financial advisor will be among those who find out in time to plan accordingly.
A fiduciary financial advisor with retirement planning expertise will help you address all of the items mentioned above, among many other things.
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