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How To Choose a Financial Advisor

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Roger Wohlner
Updated September 28, 2022
7 Min Read

If you’re looking for a financial advisor, there is no shortage of choices. According to the Bureau of Labor Statistics, there were 263,030 financial advisors in the U.S. in 2021. The question is, how to choose the right financial advisor for your needs? We will take a look at some things to consider when looking for a financial advisor and help you narrow down the choices.

Where can you find a financial advisor? 

Finding a financial advisor is not difficult but finding the right financial advisor for your needs can be. Here are a few places where you can potentially locate a financial advisor for your needs.

Personal referrals

Referrals from friends or other professionals can be a good source for finding a financial advisor. One caution here, your friend’s or relative’s situation may be quite different from yours.

LinkedIn, SmartAsset and other websites 

LinkedIn is not just a resource for networking within your profession. It can also be a place to tap your network for referrals for quality financial advice. Of course, advisors you find through your professional network have the same problems as referrals from friends and family, namely that what works for them may not work for you.

SmartAsset is a consumer-focused financial information and advice website that hosts SmartAdvisor, a U.S.-based platform that connects financial advisors directly with prospects who meet their client profile. The benefit of SmartAdvisor over LinkedIn is that it matches consumers with up to three fiduciary financial advisors based on geographic location, the amount of investable assets and whether both the investment advisor and the client are willing to work remotely.

The National Association of Personal Financial Advisors (NAPFA) is the largest professional group of fee-only advisors. They maintain a find an advisor section on their website by location. NAPFA member advisors are required to sign a fiduciary oath and to act as fiduciaries in dealing with their clients. 

The XY Planning Network is an organization of fee-only financial advisors who focus on working with primarily Gen X and Millennial clients. They have a find and advisor tab on their website where consumers looking for an advisor can search for advisors who might be a good fit for their needs.

When should you get a financial advisor? 

There is no one right time to engage the services of a financial advisor. If paying the fees of a financial advisor will take a large chunk out of the money you are hoping to save, it probably doesn’t make sense to hire an advisor.

On the other hand, it does make sense to hire a financial advisor if you have started to save and invest, either when you have just started your career or if you are an established investor looking for help. There are a number of advisor models that can be a good fit for people who are in a number of different situations in their financial lives.

Another good time to think about retaining a financial advisor is when you’ve experienced a life change. Life changes that might warrant working with an advisor can include: 

  • Getting married or divorced
  • The loss of a spouse
  • Birth or adoption of a child
  • Inheriting assets from a relative
  • Approaching retirement 

For these and other life changes, a financial advisor can provide one-time or ongoing guidance. 

What are the different types of financial advisors?

There are a number of different types of financial advisors. They differ in terms of how they operate and the clients they service.

Fee-only financial advisors

Fee-only advisors are paid a fee by their clients, but they do not receive any compensation from the sale of financial products such as commissions or payments from the product providers. This can help to eliminate a potentially major source of conflicts of interest for an advisor. 

Do they do what’s in the best interest of their client or recommend the financial products that pay them the highest commissions or fees? Fee-only advisors generally act in a fiduciary capacity with their clients.

Fee-based financial advisors

Fee-based advisors will often do a financial plan for a fee, but then implement some or all of the plan’s recommendations. Fee-based advisors are often not fiduciaries but rather operate under the less rigorous suitability standard where a product recommendation must only be suitable for a client with a situation similar to yours.

Brokers and robo-advisors 

A broker is typically employed by a brokerage firm and focuses on the sale of stocks, bonds and other financial products. Their compensation is all or mostly all from commissions related to the sale of financial products. This can influence their recommendations for clients. 

Robo advisors are automated online advisors. They use algorithms to allocate client portfolios. Often they use ETFs to do this. Management fees can run as low as 0.25%. Some robo advisors offer access to human advisors as well for an additional fee.

How to choose a financial advisor 

It’s important to start by determining where you need help. Areas where people often need help include: 

  • Budgeting
  • Investing
  • A comprehensive financial plan
  • Estate planning
  • Tax planning 

Next, determine what type of support you need. Do you need an advisor to work with you on a one-time basis? Do you have ongoing advice needs? 

It's also important to interview any human financial advisor that you are considering. Make sure you understand all aspects of how they work with their clients. Don’t be shy about asking questions. 

What to Look For when searching for a financial advisor 

There are a number of factors to consider when selecting a financial advisor. A few things to consider include: 

  • Does the advisor work with clients with similar situations as yours? For example, if an advisor works exclusively with widows and divorcees in their 50s or older and you are married with a family and in your 30s, this advisor may not be a good fit for you.
  • How much experience does the advisor have?
  • What certifications does the advisor have? Much of what you are looking for with credentials (the letters after the advisor’s name) is to confirm the advisor’s education and training. The Certified Financial Planner (CFP) is a solid credential and considered the “gold standard” for financial advisors. The Personal Financial Specialist (PFS) designation is a financial planning designation for Certified Public Accountants (CPAs). There are a number of other designations, though these are the most important ones.
  • Are they a fiduciary? (More on this below.)
  • How does the advisor charge for their services? How much would you expect to pay for the type of advice you need? (I am very biased on this topic, fee-only is the best solution in the vast majority of cases.)
  • Does the advisor have a history of disciplinary actions against them? You can verify this on FINRA’s BrokerCheck site

It’s important that you know as much as possible about any financial advisor that you are considering. This is someone you may hire to help you plan and manage your financial affairs, and you need to know how they work and that they have your best interests at heart. 

If an advisor is reluctant to answer any of your questions, this is a bad sign. A person who is not forthcoming with answers might not be the person to trust with your financial future. 

How much does a financial advisor cost? 

How much a financial advisor’s services cost will vary based on the type of advisor, their compensation structure and other factors. 

An advisor who charges based on assets under management (AUM) may charge 1% annually based on the size of the investment portfolio he or she advises you on. Some may charge a higher percentage, some may charge less. If an advisor is providing advice on a $250,000 portfolio at 1%, this translates to $2,500 annually. If they are billing you on a quarterly basis, which is common, this translates to $625 per quarter. This number will vary with the size of your portfolio. 

Robo advisors generally charge lower fees as a percentage of assets. These may be as low as 0.25%. This may vary by the level of assets invested with the robo advisor and the level of services the investor uses. For example, there would generally be a higher charge if the investor takes advantage of the ability to talk with a human advisor if this option is offered. 

Fees for a one-time financial plan may vary as well. Some advisors may charge a flat project fee, others may charge by the hour based on their time spent. A one-time fee will vary based on the advisor and the complexity of the client’s planning situation. Fees could range from $1,000 to $3,000 or anywhere in between. Hourly fees often range from $150 to $250. 

Commissioned based advisors will receive some or all of their compensation based on commissions associated with financial products they sell you. This might include annuities, life or disability insurance policies or commissioned investments such as load mutual funds. These charges will vary and the commissions are often set from the company whose financial product they are selling. 

Fiduciary versus non-fiduciary financial advisors 

It is crucial that you understand whether or not a financial advisor that you are considering is a fiduciary. The industry has several standards for advisors in dealing with clients. Regulation Best Interest (Reg BI) was enacted as a replacement for the Obama administration’s fiduciary standard. Reg BI has a number of disclosure, diligence and policies about conflicts of interest. Brokers and other advisors must adhere to the provisions of Reg BI. While it is a positive step, it still falls short of the fiduciary requirements that most fee-only advisors must adhere to.

Advisors who act as fiduciaries act only in the best interests of their clients. This means that all recommendations they make are based on what is best for the client, not what pays them the most. 

A number of advisor organizations require member advisors to adhere to a fiduciary standard. NAPFA and the XY Network are two examples. Advisors who are registered with the SEC must adhere to a fiduciary standard as well. Please note that a fiduciary standard is much different than the Best Interest Standard that most brokers and registered reps must adhere to. 

Nonfiduciary advisors must follow a best interest standard. This essentially means that products and services must be suitable for a client in their situation generally, but not necessarily in the best interest of a specific client. 

If this seems confusing, you are not alone in feeling this way. A good approach is to ask the advisor if they are a fiduciary and if so, will they put that in writing? If they refuse you might consider looking for a different advisor.