How To Choose A Financial Advisor

It’s important to choose a financial advisor that can help you make the right choices with your finances and help guide you on the path to reaching some of life’s biggest goals.

From budgeting and investing to preparing for retirement and estate planning, a professional can help provide you with the financial advice you need to make smart decisions with your money.

Choosing a Financial Advisor

Here are our top tips on how to choose a trustworthy financial advisor:

1. Establish Your Financial Needs
2. Understand the Different Types of Financial Advisors
3. Make Sure You Work with a Fiduciary
4. Consider the Cost of Different Financial Advisors
5. Research the Advisor’s Background and Credentials
6. Keep Evaluating Your Advisor

1. Establish Your Financial Needs

There are several types of financial advising services to choose from, and each one has its perks. To choose the right one, it’s important to evaluate your financial situation and decide what areas of your finances you need help with.

Some advisors provide investment advice, while others provide more comprehensive financial planning. Before you find a financial advisor, consider some of the following aspects of your personal finances:

• Budgeting
• Savings goals
• Investing
• Retirement planning
• Taxes
• Estate planning

2. Understand the Different Types of Financial Advisors

Once you’ve pinpointed some of the financial services you need, you can choose the right type of advisor. Here’s a quick overview of your options:

Robo-advisors

The simplest and most inexpensive type of financial advisor uses an algorithm to build and manage a diversified portfolio of low-cost funds based on your financial goals, time horizon, and risk tolerance.

It factors in unpredictable forces like market volatility and asset class performance and automatically rebalances your portfolio for you. Some robo-advisors require very small account minimums and in some cases, no minimums at all, meaning you can start investing with just a couple of bucks.

Learn More:

• Best Robo-Advisors in 2024

Virtual Financial Advisors

Virtual advisors communicate with clients through video chats, email, or phone. Because everything happens online, it’s less expensive than hiring a traditional, in-person advisor.

Companies like Vanguard and Personal Capital offer online financial planning services and charge a percent-based advisory fee. Others, like Facet Wealth, charge a flat annual fee based on the services the client uses, rather than assets under management.

If you’re looking for more than automated portfolio management but can’t afford a traditional financial advisor, this is an excellent “in-between” option.

Traditional Financial Advisors

The highest-cost option is a traditional financial advisor. They can help with a range of financial decisions, from retirement planning to choosing life insurance to navigating annuities. Here are the types of advisors you can work with:

• CFP: These professionals have completed specific education, training, and exams to earn a CFP certification. They’re held to a fiduciary standard, meaning they’re legally required to act in your best interest.
• CFA: A chartered financial analyst (CFA) is globally certified to assist with wealth management and investment advice. The CFA designation means the advisor is held to a fiduciary standard and has undergone extensive training, with stringent exams and requirements.
• Registered investment advisor. Registered Investment Advisors, or RIAs, are also held to a fiduciary standard and must meet qualifications, including passing an exam and registering with the SEC or state authorities. RIAs are more focused on investment management.
• A broker primarily buys and sells stocks, bonds, mutual funds, and other securities for you. They’re required to register with FINRA, pass specific tests, and be licensed by the state securities regulator. But brokers are sales-oriented and often earn commissions.
• Hybrid: Many professionals are dually registered as both brokers and investment advisors. To find out if an advisor is an RIA, broker, or both, look them up on BrokerCheck. If they’re a broker or dually registered, make sure you understand exactly how they get paid.

Learn More:

• Best Financial Planners for Millennials

3. Make Sure You Work with a Fiduciary

The fiduciary duty is a legal requirement. It requires your advisor to put your interest first and disclose potential conflicts of interest.

You don’t want an advisor who recommends an investment to you because he or she would get a higher commission from it. You want an advisor who is focused on what is best for you and who is completely transparent.

To be sure you’re working with a fiduciary, ask your prospective advisor directly: “Are you a fiduciary? Are you legally required to act in my best interest?” Ask how they get paid and have them explain the fees and/or commissions he or she is earning.

You can even ask them to sign a fiduciary pledge. If they refuse, that’s a sign they don’t want to be held accountable at a higher standard.

4. Consider the Cost of Different Financial Advisors

How much you’ll pay depends significantly on what type of advisor you hire. Here are the three main options, in order of least to most expensive:

• Robo-advisors: Many robo-advisors charge you based on how many assets they manage for you. Expect annual management fees between 0.25% and 0.50%, though some don’t charge a fee at all.
• Virtual financial advisors: Virtual advisors cost more than a robo-advisor, but less than a traditional advisor. Expect to pay a flat subscription fee or a percentage of your assets (or both) for a virtual advisor.
• Traditional financial advisors: Expect to pay between 1-2% of your assets under management with a traditional advisor, though some may charge a flat fee (between $1,000 and $8,000) or hourly fee(between $100 and $400).

Some advisors also earn commissions when they sell you certain securities, annuities, or other financial products. Their earnings, which can be anywhere from 1-6% of your investment, come straight out of your wallet.

Most advisors who are paid on commissions today are known as “hybrid advisors,” as they may receive a commission on insurance products they recommend, for example, and charge a flat fee on assets they manage.

Keep in mind that, regardless of the advisor you choose, you still have to pay the expense ratio of the funds you’re invested in (all mutual funds and ETFs charge investors an expense ratio to cover operating expenses).

5. Research the Advisor’s Background and Credentials

Finding the right financial advisor takes time and research. Start by trying to get a referral from a friend, colleague, acquaintance, accountant, or attorney.

Ask why they like their advisor, how long they’ve worked together, how often they meet, and how they pay their advisor.

If you can’t get a referral, do your own research. Start by looking up advisors in your area using the resources below:

• The Financial Planning Association. The FPA’s website allows you to search by zip code for an advisor who has qualified as a certified financial planner.
• The National Association of Personal Financial Advisors. This site allows you to search by zip code for financial planners who operate on a fee-only basis.
• The Certified Financial Planner Board of Standards. The CFP board website lets you search for CFPs in your area.
• Important information about licensed brokers and advisors is available to the public at BrokerCheck, a site run by FINRA (Financial Industry Regulatory Authority). Type in the name of the advisor or firm you’re considering to see their education, business history, licensing, and disciplinary actions like ethics complaints or criminal prosecutions.

6. Keep Evaluating Your Advisor

Hiring a financial advisor is just the first step to building a successful financial life. You can’t meet with him or her just once and think you’ve taken care of business.

Before you leave your initial appointment, schedule a review meeting no later than six months down the line. At a minimum, you should meet with your advisor twice a year. Some advisors schedule meetings quarterly.

If you haven’t heard from your advisor within the last 12 months (statements don’t count), it might be time to start interviewing for a new one.

Ideally, you hire someone who you can see yourself having a long-term relationship with, maybe even the rest of your life.

Take the hiring process seriously, but keep in mind that if you hire someone and it doesn’t work out, you’re not stuck with them. You can start the process over again and continue your search. It may take a few tries to find the perfect advisor, but it’ll be worth the effort.

Questions to Ask a Financial Advisor

To make sure your potential advisor is qualified and professional, here are five smart questions to ask.

How long have you been a financial advisor?

This is a very simple, often overlooked question. Ask potential advisors how long they’ve worked at their firm. If they worked at another firm previously, ask why they moved.

What makes you a good financial advisor?

Let them tell you in their own words why they think they are a good financial advisor. Listen carefully to what they say and how they say it.

You can also ask about their educational background and what licenses and other certifications they have. Licenses they may or may not have to include Securities, Insurance, Commodities, RIA, CFP, and CPA.

What type of clients do you specialize in?

Some advisors specialize in a very specific niche. They may focus their entire practice around doctors, corporate retirees, women divorcees, or business owners, for example. If the advisor is more of a generalist, ask them to describe a typical client to you (age, assets, job, etc.).

What’s your investment philosophy?

Make sure to ask the advisor about his or her philosophy on financial planning and money management. A serious professional should have no trouble explaining his or her approach to planning and investing simply and coherently. If yours can’t do this, that’s a red flag.

How do you charge your clients?

It’s important to understand a prospective advisor’s fee structure. A fee-only advisor doesn’t earn commissions. They get paid by charging an AUM fee or a flat fee (or both).

A fee-based advisor, on the other hand, charges a fee but can also earn commissions based on your investment selections. And then there’s a commission-only advisor, who makes money when they buy or sell an investment for you.

Find the Right Financial Advisor for You

Finding the right fit all boils down to what you need and want. If you’re a new investor and only need help with your investment portfolio, a robo-advisor might be enough for now.

If you’re planning to have a family and don’t know how to prioritize short-term expenses with long-term goals, have questions about your IRA, or need help with tax planning or estate planning, you’ll probably want to work with a human advisor who can help with several aspects of your financial future.

The type of advisor you settle on also depends on your budget and net worth. If you don’t have a ton of assets, you may not qualify to work with a traditional financial advisor but could afford to work with a virtual advisor.

If you go the traditional advisor route, find a professional you can trust. This will take time and research. Start by trying to get a referral from a friend, colleague, acquaintance, accountant, or attorney if you have one.