You will never have a problem finding a financial advisor.
The challenge, like looking for the right brand or shampoo, is deciding what kind of advisor to work with. You have probably stood in the grocery store before wondering, “Am I looking to tame my oily hair or give it fuller body?”
It isn’t an impossible choice, of course. Plenty of people have picked financial advisors and lived to tell about it – but if you want a solid working relationship that helps you make smart financial decisions, it pays to understand what you’re getting into and why you’re even talking to an advisor in the first place.
The following are the seven steps to choosing a financial advisor:
- Figure out if you need a financial advisor.
- Decide what services you need.
- Select which type of advisor you want.
- Determine what you can afford.
- Get referrals from friends or Google.
- Check the financial advisor’s credentials.
- Interview multiple advisors.
Table of Contents
1. Do you need a financial advisor?
Obviously, not everyone is ready to hire a financial advisor.
If you’re lurching paycheck to paycheck and you want to start saving, that’s great, and you should – but generally, a financial advisor won’t be interested in working with you, as harsh as that sounds. They do make money, after all, from their clients who are making money. If you’re only able to sock away $30 per week or month into a savings account, because of what you’ll bring to the table and what they’ll take away from it in fees, neither you nor the financial advisor can afford to work together.
So when is it time? Here’s a good rule of thumb: “Once someone is to the point that they have stable and steady income and have the ability to save at least 20% of their annual income, it might be time to consider a financial advisor,” says Nicole Rutledge Regilio, a certified financial planner and director of financial planning with Resource Consulting Group in Orlando, Florida.
But even if you aren’t there yet, financial advisory firms and online services can provide assistance. Websites such as the garrettplanningnetwork.com and napfa.org (The National Association of Personal Financial Advisors) can hook you up with a financial planner who works with middle-class investors.
Likewise, robo advisors can be a great option for new investors. With average annual fees of only 0.25% (that’s $25 per $10,000 invested, in addition to any fees charged by the investments you use) and some very low account minimums, robo advisors are a cost-effective way to start investing.
There are also online financial advisors, which provide a combination of robo advice plus access to a human advisor. Many robo platforms offer access to humans now, but some may require you to invest more or pay a higher fee for this additional level of guidance. For instance, to access Betterment’s certified financial planners, you’d need at least $100,000 invested and pay a 0.4% annual fee instead of 0.25%. If you have $100,000 to invest, you may want to just get a personal financial advisor you can meet face-to-face, although in-person advisors cost 1% per year on average.
2. Decide what services you need
Besides cost and how much you have to invest, an important factor in choosing a financial advisor is knowing what services you want from the advisor. For instance, if your primary focus is retirement planning, you may want to work with a retirement planning specialist.
There are numerous specializations in the financial advice industry. Here are a few you might look for depending on your situation:
- Retirement planning specialists (RPS) help you prepare for and live in retirement.
- Wealth planners specialize in the needs of clients with higher net worths, usually requiring clients to have at least $1 million in assets and sometimes upward of $20 million.
- Estate planners help prepare your estate for your beneficiaries.
- Certified divorce financial analysts (CDFA) specialize in helping clients through and after divorce.
- Certified financial transitionists (CeFT) help clients through major life transitions, such as selling a business or the loss of a spouse.
- Certified exit planners (CExP) help business owners sell or exit their business.
- Chartered special needs consultants (ChSNC) help families who are caring for someone with special needs.
3. Select which type of advisor you want
The financial industry has two sets of compliances that advisors follow called the suitability standard or the fiduciary standard.
The fiduciary standard is when your financial advisor is legally bound to act in your best interest. Fiduciary advisors must put their clients’ interests before their own. They’re also referred to as fee-only advisors because they don’t accept commissions on the investments they recommend.
One thing to note, this is different from “fee-based” advisors, who charge fees and commissions. You’ll typically pay a fiduciary a quarterly fee that’s calculated as a percentage of the assets your advisor is managing.
As financial advisors who follow the fiduciary standard will gleefully tell you, advisors who follow the suitability standard are only legally required to make sure the investments are suitable for you – they aren’t required to be your best option. A financial advisor following the suitability standard works on commission, so they may be incentivized to put you into products that line their pocket more than yours.
Fiduciary advisors are understandably proud of their distinction, but some of them make it sound as if you go with someone who works on commission, you might as well hire a crook to manage your money. But brokers following the suitability standard aren’t out to get you. It’s true they may steer you toward an investment that their employer (your brokerage firm) is touting, but presumably, they wants to keep you as a happy client for years to come.
“I don’t believe the fiduciary standard itself protects people from harm,” says Kevin Meehan, regional president of the Chicago branch of Wealth Enhancement Group, an independent financial planning and advisory firm. And just to be clear, Meehan’s company is dually registered to provide service under a fiduciary or suitability standard.
“The integrity of the advisor and the organization is your ultimate protection,” he says.
A good credential to look for is the CFP, or certified financial planner. CFPs are advisors who have met extra education and experience requirements to better serve their clients’ holistic financial planning needs. They’re also held to a “rigorous ethical standard” by the CFP Board.
4. Determine what you can afford
As with all financial matters, choosing a financial advisor will often come back to cost. It’s not only what type of financial advisor you need, but also what type of financial advisor you can afford.
In-person financial advisors have three ways they can earn compensation: through an annual, hourly or flat fee; through commissions on the investments they sell; or a combination of a fee and commissions.
Annual fees based on assets under management are the most common fee structure for financial advisors. While financial advisor fees average 1% per year, they’re often charged on a sliding scale. The more assets you have with the advisor, the lower your fee will be. This means that as your assets grow over time, the cost of your financial advisor will diminish.
Robo advisors can also use a fee-based structure, but they’re usually far cheaper. Most robos charge between 0.2% and 0.35% of assets per year, unless you want access to a human advisor. In this case, the fees can be as much as 1.5% per year.
Human advisors can also charge flat fees for individual services. For instance, you might pay $2,000 for an advisor to create a financial plan for you. After the plan is created, however, you’re usually on your own to implement it, unless you want to pay for continued advice.
5. Ask for referrals from friends or Google
As for finding a CFP – or any advisor – you can certainly pull out the phone book or search the internet, but a good course of action is to start with recommendations from friends, family or colleagues. Ask people with a similar financial situation or goals to yours who they use. Take down a few names, then head back to good ol’ Google to check the advisor out.
6. Check the advisor’s credentials
Verify your advisor’s credentials on brokercheck.com or adviserinfo.sec.gov. Both are free tools that provide the background and experience of individual advisors and firms, including robo advisors. Most importantly, these sites will tell you about any disciplinary action the advisor has received. The CFP Board also maintains a list of disciplined CFPs by state on its website.
7. Interview multiple advisors
Finally, shop around. Advisors recognize you may talk to a number of professionals, and you should.
When you do talk to advisors, ask them to “describe their client experience,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson & Co. in Los Angeles. “How frequently and how will they communicate with you? How do they measure ‘success’ in a client relationship? Do you need to fit into their model, or are they able to customize an approach to your individual preferences and needs?”
Ask about the other resources available to you as a client. “No one can be an expert in all aspects of financial matters,” Crowell says. “Knowing your advisor has access to specialized expertise” can reassure you that you won’t “outgrow your advisor’s capabilities.”
Be upfront with what you bring to the table, too. “You want to work with the advisor who is best for your situation and needs,” Regilio says. To that end, “share an overview of your financial situation as well as what you hope to achieve with the advisor.”