3 Key Factors Financial Advisors Use to Build Your Plan

You’ve scheduled your first meeting with a financial advisor. Maybe you’ve already shared some details about your income, expenses, assets, and financial goals. But what does all that information mean, and how does your advisor use it to build a meaningful plan?

One of the first things an advisor does is work to understand your client profile, both personally and as an investor. To do that, they assess three foundational factors: your risk tolerance, time horizon, and goals.

In this article, we’ll outline how financial advisors use these elements to shape and customize financial plans. You’ll hear the insights of industry professionals with real experience using these characteristics when working with diverse clients.

1. Risk Tolerance: Comfort With Volatility

A primary factor a financial advisor, and especially an investment manager, will try to understand is your approach to risk. That is, how comfortable are you with the idea that your investments could lose some or even most of their value during periods of market volatility? Ultimately, this plays an essential role in determining how your plans and portfolio come to life.

Your risk tolerance might fall on a spectrum, being either conservative, moderate, or aggressive. Several factors could influence it, including your age, personality, emotions, and goals. Advisors may assess your preferences with questionnaires, asking you about them in conversation, or reviewing your holistic financial picture and drawing hypotheses from decisions you’ve already made.

“Risk tolerance is an emotional and psychological threshold. It tells me how much risk someone thinks they can handle before discomfort turns into panic,” says Carson McLean, CFP^®, founder of Altruist Wealth Management. “But because it is based on feelings rather than facts, it tends to shift. I can ask the same client identical questions a year apart and get completely different answers, often depending on recent market experiences or current headlines.”

While tolerance can be a good behavioral touchpoint, it’s not the only measure. Rather, McLean explains that it “must be paired with risk capacity,” which reveals “how much risk a client can actually afford to take without jeopardizing their long-term goals.” He continues, “Tolerance matters for behavioral reasons, but capacity is the anchor.”

Identifying risk tolerance and capacity helps your financial advisor structure your plan more effectively and avoid overexposure to market volatility. For instance, if your professional helps you structure and manage a portfolio, this can dictate the types of investments they use and how often you should make trades to stay aligned with your goals.

2. Time Horizon: The Clock Behind Your Plan

The next critical aspect in the financial advisor-client planning process is your time horizon, referring to the amount of time you have before you accomplish your goal, whether it’s a short-term, mid-term, or long-term one.

For example, if your goal is to retire at 60 years old and you’re 35, your time horizon would be 25 years. This would be a long-term goal and, therefore, a long horizon. A mid-term goal, conversely, might involve purchasing a home or paying off student loans within a few years.

According to Clint McCalla, CFP^®, Senior Client Advisor at Meira Wealth, “Investment time horizon is very important to any advisor managing wealth on behalf of clients.” Like risk tolerance, professionals use your time horizon to determine investment choice, saving and investing strategies, and liquidity needs.

“If someone has an exceptionally short time horizon, or has a particularly large liquidity need near term, these situations can impact the allocation decision between more and less volatile assets,” McCalla continues.

Time horizon also has a close relationship to your risk tolerance and capacity. Per McLean, “Time horizon defines how long the money needs to last, which directly shapes risk capacity.” He adds, “A longer horizon increases the ability to take risk, even if it does not feel that way to the client.”

The timeline for hitting your objectives is a crucial factor that helps your advisor build a plan tailored to your needs. Alongside risk tolerance, it informs investment decisions you make and how your savings and budgeting strategy take shape as you work toward your goals.

3. Financial Goals: What You’re Working Toward

Your goals are the third, and arguably most important, foundational piece of your financial plan. They’re your “why,” and directly influence how you approach investing, saving, budgeting, and managing risk. From the beginning of your relationship with an advisor, your goals will be a primary focus that they’ll help you identify, prioritize, and track.

As mentioned, you and your financial advisor might categorize your goals as short-term, mid-term, and long-term. Here are some examples:

• Short: paying off debt, building an emergency fund, setting a budget, beginning to invest, etc.
• Mid: Buying a home, paying off a longer-term loan, saving for children’s education.
• Long: retirement, building wealth, achieving financial independence.

If you’re unsure of how to define or set your goals, a professional will often work with you to clarify them. To do this, they’ll ask thoughtful questions and make observations about your values, behavior, and financial decisions.

“I know this sounds simple, but I like to know my clients on a personal level,” shares McCalla. “Understanding motivations, family history, and personal priorities in a client’s life can help reveal financial goals in a way that a simple intake form can never achieve.”

Once both you and your financial advisor understand your goals, they’ll design an actionable blueprint surrounding them. As with your risk tolerance and time horizon, they’ll help map out targets, monitor progress regularly, and explain what success looks like after you reach your goals.

“The more an advisor asks questions and probes deeper into a client’s situation, the better they can work together to achieve the financial goals of the client,” says Brad Clark, founder and CEO at Solomon Financial.

How Advisors Use These Three Inputs Together

Risk tolerance, time horizon, and goals are closely intertwined and all work together as your financial advisor assembles a comprehensive plan. Each of the three elements impacts the other. Advisors often need to balance multiple goals simultaneously, all of which have the potential to influence your risk tolerance and time horizons, even for seemingly unrelated, larger objectives.

“There is a layering that occurs between these factors as you may have certain goals with specific time horizons and funding requirements, such as helping pay for a wedding, or buying a vacation home,” McCalla describes. “These operate within the overall plan, accounting for funding and timing considerations within retirement projections,” he continues.

Depending on the characteristics and timing of your competing goals, your financial advisor may recommend different investment and saving strategies, as noted. For example, achieving long-term goals might give you a higher risk tolerance with more growth-oriented investments and assets, whereas nearer goals might require a lower risk tolerance and, therefore, less volatile assets or aggressive saving methods.

As McCalla underlines, a professional helps navigate these complex, moving pieces by including both short-term and long-term goals and their often-different strategies into a holistic plan. This is often something you and your advisor must adjust and discuss over time to keep current, whether annually, semi-annually, or even quarterly.

“I meet with my clients regularly throughout the year so these shifts tend to naturally come up in those conversations. These shifts often occur after certain life changes such as retirement, divorce, the loss of a loved one, a health event, or receiving an inheritance,” says McCalla.

When regularly reviewed and aligned, your risk tolerance, time horizon, and goals mold your financial plan.  A financial advisor can bring meaningful value in helping you reassess these details and maintain your plan, keeping it on track.