How to Choose a Financial Advisor

More and more Americans are choosing to use the services of a financial advisor to protect their savings, family, and assets. This post explores whether there is an option that’s right for you.

Just about anyone can benefit from some type of financial advice, whether you have $500 or $50,000 to invest. In 2021, about 38% of Americans. 

This is a significant increase from the previous year, used a financial advisor to help with a retirement plan, debt management, or portfolio diversification. 

Is it time for you to hire a financial advisor? 

If choosing a financial advisor seems overwhelming or confusing, we’ve narrowed down the process to five steps you can follow.

5 Steps to Choosing a Financial Advisor

1. Understand what advice you need
2. Choose the right type of advisor
3. Learn about your options
4. Research the costs
5. Do your research

1. Understand what advice you need

The first thing to consider when deciding on a financial advisor is why you might need one. Perhaps you are planning for your children’s education, received an inheritance that you want to invest in, or wish to pay off your debt. 

You may have more than one reason for needing an advisor. Take some time to write down where you are now with your finances, where you’d like to be, and what issues are in question. 

A good financial advisor can help with all aspects of your finances. However, if you have a specific issue you need to deal with, you’ll want to ensure the advisor has the knowledge, experience, and skills specific to that need. 

These are some areas to think about in which a financial advisor can help with: 

• Investing
• Tax planning
• Paying down debts
• Retirement planning
• Budgeting and saving
• Getting insured
• Estate planning

2. Choose the right type of advisor

Some financial advisors are experts in specific services such as stock investments, estate planning, or debt relief. And some financial advisors, whether individuals or a company, can offer packages of multiple services. 

Knowing what you are looking for can pare down your search. For example, if you are looking for help with tax planning, children’s college costs, and paying down your debts, you will want to look for someone with that particular experience and knowledge. 

One thing to understand about advisors is that some, but not all, are bound by fiduciary duty.  Fiduciary duty means the law requires them to work in your financial best interest. 

Others are only held to a suitability standard. This means they are only required to suggest products that are suitable for you. The problem is if they recommend more expensive products because they earn a higher commission if you purchase them. 

Always ask if they are fiduciary.  Educate yourself on the different types of financial advisors.  An investment advisor makes investment recommendations or conducts securities analysis. 

Investment advisors must uphold standards of fiduciary responsibility as they often have discretionary authority over their clients’ assets.

A Certified Financial Planner (CFP) is an expert in financial planning, taxes, insurance, estate planning, and retirement. A CFP must go through the strenuous process of being certified through the Certified Financial Planner Board of Standards, Inc. 

A robo-advisor is, as it sounds, a digital investment management service. It uses data and algorithms to suggest how much you should consider investing.

3. Learn about your options

Here are the options you should familiarize yourself with as your navigate your decision:

Robo-advisor

This is an affordable option for those just starting or with a limited budget.  One downside to a robo-advisor is that the recommendations come through an algorithm based on the information you provide. 

So you miss out on specific guidance based on your unique needs.

Online financial planning and advisors

These advisors are a step up from a robo-advisor but not quite to the CFP level.  With this option, you get automated investment management plus the opportunity to consult with a financial advisor online if you have questions. 

This service will cost more than a full Robo-advisor but less than the traditional CFPs. Some have high investment requirements, but some require no minimum investment, so researching your best option is critical.

Traditional advisors

This option has the highest cost. A fee of 1-2% of your assets under management is an average cost. High minimum balances, such as $250,000 in assets, may also be required.

If your situation is complex or you want specialized services and need to develop a long-term relationship, this is the best option.

4. Research the costs

There are a variety of ways in which a financial advisor can be compensated.  Some advisors may combine different payment methods, such as an annual rate and commissions.

It is a good idea to ask questions, so you are clear as to how they are remunerated.  You will need to weigh their fees against what you can afford.

Here are different ways in which a financial advisor may get paid:

• Retainer: An advisor may work on a retainer if you have a large and complex financial situation. This may be charged monthly, quarterly, or annually. This is a good option for someone who needs ongoing advice on various plans.
• Commissions: Having an advisor who works on commissions means that they collect payment on financial products they sell to you. You can understand how this may create issues in your relationship if you don’t trust their intentions completely. 
• Fixed-rate: If you want an advisor for a finite service, such as creating a complete financial plan, they could charge a flat rate for that service. This could be in the range of $1,000 and $3,000. 
• Flat or annual fee: This is a standard payment form in which advisors collect 1 to 2% yearly percentage of your assets under management. 
• Hourly rate: This is similar to how you pay an attorney hourly. This is a good option for you if you have a specific issue you want to work out and you aren’t looking for investment management or a long-term relationship.

5. Do your research

With many options and types of services and payments, it’s essential to understand what services you need and if the financial advisor you hire is up to the task. 

First, check out The National Association of Personal Financial Advisors (NAPFA) database. Here you can search for an advisor in your neighborhood through NAPFA, a professional association of fee-only (no commission) financial advisors. 

Once you’ve made your calls and set up appointments, prepare your list of questions. Here are some examples: 

• How do you get paid? 
• Do you collect a commission for recommending certain products?
• Do you have a fiduciary duty to your customers? 
• Can you tell me about some of your customers?
• Will we meet in person or online?
• How do you go about investments and products for clients? 

Also, ask questions that would relate to your specific situation, such as: 

• I’m a recently divorced working mother. Do you have clients in a similar case? 
• I own a small online business. Do you have experience working with clients who hold the same? 

You must feel comfortable with your advisor and feel they are honest and transparent about how they work. It is probably not a match for you if you have questions or concerns they won’t address. 

Now that you’ve interviewed prospective advisors, do your due diligence to protect your investments before making a final choice.

These institutions can help you feel secure in your decision: 

• Investment Adviser Public Disclosure (IADP) - The U.S. Securities and Exchange Commission (SEC) has a database that allows you to vet your investment advisor.
• BrokerCheck - This database is provided by Financial Industry Regulatory Authority (FINRA). It lets you check if your advisor has faced any disciplinary actions.

Hire a Financial Advisor

Once you’ve gone through the proper steps, you’ll be ready to hire your advisor and benefit from the security it can offer.

Decide what type of advisor you need

Look at your financial situation - where you are now and where you’d like to be. Choose whether you need a specific service, such as estate planning, or a holistic service that will help with multiple issues such as stock investments, estate planning, and insurance and learn about the various ways financial advisors get paid.

Find a reputable financial advisor

• Ask friends, family, co-workers, or professionals like your CPA for their referrals.
• Search the NAPFA database for your neighborhood.
• Research the IADP database to ensure the advisor is appropriately certified, and do a BrokerCheck on them to check their work history.

Interview prospects

• Ask them how they get paid, how you will communicate with them, how they approach investments, etc. 
• Ask if they are fiduciary. 
• Ask about their successes, other clients' referrals, or a sample financial plan. 
• You can ask for more formal information such as Form ADV, which tells you whether they have conflicts of interest

A risk-adjusted performance record. This tells you how much risk was required to get a return on previous investments.

Next steps

Once you have an overall picture of your needs, you can begin exploring whether financial advisory is for you and, if so, to what extent you need it.

Researching the various types of advisors and understanding how they work and how you will pay them will be essential before making your final decisions. 

Ensure they have the proper credentials and check out cleanly with the regulating agencies. Interview more than one to see how each of them works and how you feel with differing personalities and approaches. 

Most importantly, ask questions. If they don’t answer you clearly or in a way that feels good, walk away and try someone else.

FAQ's

Here are some of the most frequently asked questions regarding choosing a financial advisor.