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How to Choose a Financial Advisor
By Jackie Lam MONEY RESEARCH COLLECTIVE
Working toward your short- and long-term financial goals can be a confusing chore. If you run a business, you probably have a CFO to help steer you toward the best financial decisions for your company. But when it comes to personal matters, you’re often tasked with managing your money and juggling different goals on your own.
That’s when working with a financial advisor might come in handy. Financial advisors are professionals who use their expertise, experience, and background to create financial plans for their clients. They can help steer you toward solid options, reliable information, and the resources you need to make the choices that best support your financial needs.
Some financial experts specialize in one area, such as investing, retirement solutions, or estate planning, while others offer more holistic planning that covers all aspects of your financial life.
Here are five steps to choosing the right financial advisor:
5 steps to finding the right financial advisor
Step 1: Choose which type of advisor is best for you
Some advisors specialize in only one area, while others offer comprehensive financial planning. Here are the most common types of financial advisors:
Investment advisors
As the name suggests, an investment advisor offers counsel on investment strategies and management. They’re also known as wealth managers or asset managers. Investment advisors will look at factors such as your risk tolerance and goals to develop an investment strategy. They create and manage investment portfolios, offer recommendations, and help to align their clients’ investments with their evolving needs and opportunities.
In order to work in a professional capacity, investment advisors must be registered with their state securities regulator. If they manage more than $100 million in assets, they’re also required to be registered with the Securities and Exchange Commission (SEC). Investment advisors who charge a fee for their services (and yes, almost all of them do) must also pass a Series 65 exam.
Fee-only investment advisors usually charge either a percentage of the assets under management, an hourly rate, or an annual flat rate. Some advisors may also earn commissions by selling financial products such as annuities or by executing stock and bond trades.
Certified financial planners
Certified financial planners (CFPs) offer financial advice and financial planning. After learning more about your situation, values, and goals, they can offer recommendations on estate planning, insurance, tax strategies, budgeting, or navigating your finances during a divorce or starting a family.
CFPs need to pass an exam and meet specific training and education requirements. They usually specialize in helping a particular group of people, such as families in the military, freelancers, or women who are working professionals.
Stockbrokers
Stockbrokers are licensed professionals who can buy and sell securities — think stocks, ETFs, mutual funds, options, and futures — on your behalf. Stockbrokers usually work with a brokerage firm.
Instead of working with a stockbroker, you can buy and sell securities on an online discount brokerage. Many brokerages don’t charge commission trading fees on particular securities — such as ETFs or stocks.
While there is some overlap between their functions, stockbrokers specialize in trading securities such as stocks and bonds, while investment advisors manage wealth and provide investment strategies.
Robo-advisors
Robo-advisors are online platforms that use data and sophisticated algorithms to provide automated investment advice and services. In other words, they use AI and computers instead of humans to help you with your investing goals.
Robo-advisors use information you provide through their apps about your financial situation, investing goals, risk tolerance, and investing timeline to determine the best investment strategy. They often use passive investing strategies and invest in low-cost investments such as ETFs and mutual funds.
These investment platforms have limitations, as investment strategies and recommendations are general ones, and a robo-advisor can’t provide customized solutions based on your unique situation.
Robo advisors usually are less expensive than other money management options. They’re more accessible and appealing to investors who are just starting. The best robo-advisors charge low annual management fees, impose no account minimums and provide a robust suite of tools and resources.
No matter which financial professional you decide to work with, it’s essential to understand the fee structures of the professional or the platform. Financial advisors usually charge a flat fee, hourly fee, or percentage of assets under management.
If they’re not a fee-only advisor, they might also charge commissions for selling financial products. Some financial professionals have a fee structure charge with a fee offset, which means they charge a flat fee, but any commissions they earn selling products will bump down your fee.
Step 2: Determine your financial goals
The next step is to figure out your financial goals. Note that they will change over time, and recognize that different strategies will be recommended depending on your current situation and lifestyle. You probably will have many goals, which may include some or all of the following:
Retirement planning
A financial advisor can make sure you’re making the most of retirement vehicles, such as a 401(k), IRA, and HSA. They can also look at how your other assets, such as your savings, pension, and Social Security benefits, play into when you retire. That way, you can align your lifestyle — or a more realistic one — after your working years.
Paying down debt
A financial advisor can look at all your debt, explore repayment options, and develop a plan for you. That way, you can prioritize your high-interest debt. A financial professional can also help you determine whether consolidation or refinancing are suitable routes for you to take.
Investing
Financial professionals can recommend specific products and an investment strategy that aligns with your goals. If they’re an investment advisor, they can manage your investment portfolio. If they’re a stockbroker, they can buy and sell stocks.
Tax planning
A financial expert specializing in taxes can help you employ a tax strategy that minimizes tax liability while maximizing tax returns. They may assess your withholdings and suggest adjustments, inform you of deductions, credits, and exemptions, or suggest tactics that can help lower your tax burden.
Budgeting
A financial advisor can look at your expenses and income to help you gain a clearer idea of your cash flow. They can help you craft a budget to better track your cash flow. They might also help you explore opportunities to help you reduce or think of ways to bolster your income.
Saving
A financial professional can help you more clearly define both short-term and long-term savings goals and introduce you to tools, apps, and strategies to help you save. They might also help you pinpoint exactly why you aren’t able to squirrel away as much cash as you would like and offer recommendations on how you can work toward your saving goals.
Getting insured
Insurance is an often overlooked part of financial planning. Insurance can seem complex and easy to shove aside as the need doesn’t seem immediate. Also, it’s generally unpleasant to think about situations when you or your family need insurance.
This is why it’s wise to have a dispassionate financial advisor who can help you think clearly about your insurance needs to ensure you and your family have adequate life insurance, home insurance, disability insurance, and auto insurance.
Estate planning
A financial advisor can help you gather financial information so you can draft important estate planning documents such as wills or revocable living trusts. They can also help you update account information and your beneficiaries and remind you to make changes to your estate planning documents when you go through life changes such as getting married, having a family, getting divorced, or buying a house.
Step 3: Decide whether you need an advisor who meets the fiduciary standard
It might seem like common sense that a financial advisor will always recommend what’s best for you, but that’s not always the case. Conflicts of interest can arise.
Some financial professionals, such as CFPs and chartered financial analysts (CFAs), who provide portfolio management, are held to a fiduciary standard. That means that the financial professional must put your best interests first when giving advice. They must put your interests ahead of their own, even if it means they’ll earn less in commissions.
Other types of financial professionals must adhere to the suitability standard when they provide recommendations, make plans, and suggest suitable products and services. This standard requires only that recommended investments be suitable for the client’s circumstances. While registered investment advisors and certified financial planners are legally required to follow the higher fiduciary standard, other financial professionals, such as broker-dealers, are held only to the suitability standard.
Step 4: Find the financial planning help you need
In looking for the right professional to provide financial advice and guidance, a thorough check for credentials, credibility, and designations is important. After all, you are disclosing personal information and relying on them to help you carve a path toward a positive financial future.
Here are some search tools to help you find the right financial advisor:
FINRA’s BrokerCheck
FINRA’s BrokerCheck is a trusted tool that helps you search for brokers and brokerage firms to learn about their background, experience, work history, and if they’ve been slapped with any disciplinary actions.
Investment Advisor Public Disclosure (IADP)
The SEC’s Investment Advisor Public Disclosure (IADP) helps you search for registered investment advisors (RIA) and check on their employment history, current registrations, professional background, and certifications.
The National Association of Personal Financial Advisors
The National Association of Personal Financial Advisors (NAPFA) is a professional association. All of its members are fee-only advisors. Its Find an Advisor search tool can help you locate a financial advisor who can help you in all personal finance matters but also might have expertise in a certain domain or focus on certain types of people (e.g., veterans, the elderly, small business owners, etc.).
Certified Financial Planner Board
Similar to the NAPFA, the CFP Board is a professional association. All CFPs are fee-only advisors. You can try its Find a CFP Professional tool to help you find credentialed financial planners.
Step 5: Meet up with your potential advisor or broker
As no two people have precisely the same needs, values, preferences, and goals, a financial advisor should spend time with you to understand where you’re at money-wise, where you want to be, and what you can do to meet your goals. A good financial advisor has the proper background. They’re someone you can establish rapport with.
When meeting with your potential advisor or broker, be prepared to answer basic questions about your financial situation, and be clear on what you would like help with. Your potential advisor will ask you what your goals are and might ask the magical question: how would your life be different if you could make some changes and reach these financial goals?
The Bottom Line
Unless you’re looking for guidance and management in a particular domain, such as investing, financial planning involves a holistic approach and includes an action plan that integrates all areas. It means looking at your current financial situation, short-term and long-term goals, and understanding your values and priorities.
In your search for a financial advisor, take your time. Do your homework in looking for a credentialed professional with a strong background and expertise in the areas you need the most help with. As mentioned before, some financial advisors specialize in helping military families, small business owners, and clients at different points of their lives, from starting a family to retiring in the next five years.
When meeting with different professionals, ask questions about their experience and their process of working with clients. It’s good to schedule exploratory calls with several financial advisors before settling on one. If you find that your first choice doesn’t sit well with you, continue your search until you land on the right one.
