How to choose a financial advisor: 6 tips for finding the right one

If you’re not an expert in money matters, choosing a financial advisor to manage your money life can be a tough decision. It’s almost impossible to know every financial arena well because they can be so specialized. Estate planning is completely different from picking the right investments, for example. Managing a portfolio is different from crafting a monthly budget.

Here’s what to think about when you’re searching for a financial advisor to work with and some tips for choosing the right advisor for you.

How a financial advisor can help you reach your financial goals

Finding the right financial advisor can take a lot of weight off your shoulders, but giving someone access to one of the most sensitive parts of your life can be emotionally challenging.

A financial advisor can help with various aspects of your financial life, ranging from budgeting and saving for retirement to managing an investment portfolio or estate planning. Many of these issues can be complex and intimidating. Financial advisors spend their time working with these issues and are there to guide you through your own financial journey.

As you hunt for a financial advisor, you’re actually hiring an expert to work for you. It’s a job interview, so it’s important to pay close attention to all the answers the advisor gives. And watch out for the “advisor” that a financial company provides to you for free. These advisors are usually riddled with conflicts of interest – they’re more like salespeople than advisors. That’s why it’s so important to have an advisor who works only in your best interest.

If you’re looking for an advisor who can truly provide real value to you, it’s important to research a number of potential options, not simply pick the first name that advertises to you.

Here are six tips to help you choose a trustworthy financial advisor that you can rely on.

1. Identify your financial needs and why you need an advisor

Before you choose an advisor, you’ll want to spend some time thinking about why you’re looking for a financial advisor in the first place. Some people are primarily looking for investment advice or help saving for retirement, while others are looking for advice on how to pay off debt or develop an overall financial plan.

You also should consider if you’d like ongoing access to an advisor to meet with a few times during the year, or if you could benefit from one or two sessions to help you develop a financial plan. Many advisors offer services by the hour and this may help you save money in the long run compared to paying an annual fee for decades.

2. Consider the different types of financial advisors

There are a few different categories of financial advisors to choose from. Find which one best fits your needs.

• Robo-advisors: A robo-advisor automates the investment process by building an investment portfolio based on your goals and risk tolerance. The fees are typically below those of traditional advisors and often come with features such as automatic rebalancing and tax-loss harvesting.
• Fee-only advisors: A fee-only advisor charges a fee for their services, typically hourly or annually. Notably, fee-only advisors do not earn commissions on the sale of investment products to clients.
• Fee-based advisors: A fee-based advisor may earn commissions on the sale of investment products to clients, which can create a conflict of interest.
• Wealth managers: Wealth managers tend to target high-net-worth clients and offer a comprehensive array of services including estate planning, tax planning, investment management and more.

You’ll want to ask whether a potential advisor is a fiduciary, which requires them to put your interests before their own. Advisors who hold the Certified Financial Planner (CFP) credential are required to act as fiduciaries for their clients.

3. Know what credentials to look for

Consumers looking for financial advisors should also check their professional credentials, seeking out well-recognized standards such as chartered financial analyst (CFA) or certified financial planner (CFP). These designations require their holders to act as a fiduciary.

“These individuals have mastered a complex body of knowledge, have passed a comprehensive examination (or in the case of a CFA charterholder, a series of examinations), and agree to abide by a code of ethics,” says Robert Johnson, professor of finance at Creighton University.

Johnson cites part of the code for CFA charterholders that exhorts them to “act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.”

You can verify an advisor’s credentials at the CFA Institute’s site or the CFP Board’s site. While these credentials don’t guarantee that someone is indeed working in your interest, they do indicate a certain level of education and competence, and those are valuable.

You may also use Finra’s BrokerCheck tool to see employment history and any disciplinary action against a firm or an advisor.

4. Review financial advisor service types

Robo-advisors

Robo-advisors create investment portfolios using an algorithm that accounts for your financial goals and risk tolerance. Fees for robo-advisors are typically well below that of traditional advisors because you are getting very little, if any, contact with a human advisor. Some robo-advisors do provide access to financial advisors for any specific questions you may have, but they may not be available until you reach a premium service tier. 

Online financial planning services and advisors

Online financial advisors are becoming increasingly common and can help you develop an overall financial plan to meet your goals. These advisors may charge fees on an hourly basis or at a flat rate, and you can schedule meetings on an as-needed basis. These advisors may be a good fit for those early in their careers who just want to make sure they are on the right track but don’t have enough assets to pay for an ongoing advisor relationship.

Traditional financial advisors

A traditional financial advisor will usually provide the highest level of service but will also come with the highest cost. You’ll likely pay a flat fee or a fee based on the value of assets you have invested with the firm. The service might include regular meetings with an advisor to review your financial plan and additional services such as tax or estate planning.

5. Evaluate how much you can afford to pay a financial advisor

Financial advisors charge fees in different ways, and the costs can vary significantly depending on the type of advisor. Here’s how the fees breakdown.

• Robo-advisors: Robo-advisors typically charge an annual fee as a percentage of assets under management, which tends to come in at around 0.25 percent annually. This translates to $25 for every $10,000 you have invested.
• Fee-only advisors: Fee-only advisors typically charge fees either at an hourly rate, flat rate or an annual rate as a percentage of assets you have with the firm.
• Fee-based advisors: Fee-based advisors may charge fees on an hourly or annual basis, but may also earn commissions on the sale of certain products.

Financial advisor fee types:

• Hourly: Fees are charged based on the number of hours an advisor works on your account. Hourly rates vary by advisor.
• Flat rate: Some advisors may charge a flat rate that includes all the services you’ll receive. Rates can vary, but you may pay around $6,000 per year or more.
• AUM fee: Many advisors charge clients a percentage of the assets under management, which often runs around 1 percent annually. This means that if you have $100,000 with an advisor, you’ll pay roughly $1,000 in fees each year.

A few questions you can ask include the following, says Brian Walsh, CFP, head of advice and planning at SoFi: “Do they earn commission on insurance sales? Do they earn commission on stock transactions? Are they affiliated with a financial company that offers proprietary products?”

Be very careful around an advisor that you’re not paying for service. As the old saying goes, “He who pays the piper calls the tune.”

If you’re just looking for some initial guidance, you may be better off scheduling one or two sessions with an advisor that charges by the hour. You can get a financial plan without the ongoing costs. Those in more complex situations may benefit from working with an advisor year-round where the annual fees make more sense.

6. Research and vet financial advisors

There are thousands of financial advisors across the U.S., so it can be intimidating to try to find the right one for you. Here are some tips to help you research and find financial advisors in your area.

• Ask friends and family: It may sound simple, but asking friends and family who they use as financial advisors is one of the best ways to find an advisor. They can share good and bad experiences and you can trust their opinion.
• Advisor matching tools: There are many online services that match clients with advisors such as Zoe Financial, Wealthramp and Harness Wealth. These tools are typically free to clients and can help you narrow the list of potential candidates.
• Professional organizations: The CFP Board and the National Association of Personal Financial Advisors (NAPFA) both offer tools to search for advisors in your area. Just plug in your zip code and you’ll get a list of advisors located near you.

“Speak to friends and family to see who they would recommend and why,” says Bill Van Sant, managing director at Girard, a wealth management firm in the Philadelphia area.

“Ultimately, you need to feel confident in the advisor’s competency, objectivity, and their responsiveness to your needs,” says Van Sant. “The advisor-client relationship, like many relationships, is built on trust and communication, so doing the proper due diligence in choosing an advisor should provide long-term benefits and peace of mind for all parties.”

Questions to ask a financial advisor

When shopping around for financial advisors, you’ll want to get a clear understanding of what they bring to the table. Here are some key questions to ask before you hire someone.

• How do you get paid? Understanding how an advisor gets paid is the key to understanding a lot about how the relationship might unfold. You’ll want to make sure their incentives are aligned with yours and that they won’t be taking action just to earn a commission.
• What are your credentials? Understanding the advisor’s educational background and professional credentials is also important. The financial world is complex, and you’ll need an advisor who has shown they’re competent at handling it. Look for designations like CFA or CFP to ensure the advisor has gone through proper training.
• Are you a fiduciary? Acting as a fiduciary means that an advisor is obligated to put your interests before their own. You’ll want to be sure they are committed to acting as a fiduciary all of the time for you.
• What happens if you change firms? As in any business, people leave their jobs for new opportunities, but that can be disruptive when a trusted advisor leaves without notice. They might not be allowed to contact you at their new firm and your account might get passed on to someone you’re not familiar with.
• How does your firm measure your performance? This is also key to understanding your advisor’s incentives. They might say that they’re working for you, but if their annual bonus depends on them doing something else, they’ll likely act in the way that most benefits them.

Bottom line

Finding an advisor is not as simple as going with the person a fund company or insurance broker assigns you. You need to actively search for someone who’s going to work in your best interest, and that takes some time. But in the end, you’re probably going to get better advice, save money and earn more while achieving your financial goals. That’s worth the extra legwork in helping you find an advisor that you can work with for decades.