How to choose a financial advisor

So, you've decided you want help managing your financial life. Now what?

The good news: You have a lot of options for getting financial advice. The bad news: You have a lot of options for obtaining financial advice. With so many choices, it's important to make an informed decision so you can pick the financial advisor that's right for you.

Here's an overview of the steps we recommend in choosing the right financial advisor for you:

• Identify your financial planning goals and the level of support you need.
• Understand the different types of financial advisors.
• Consider financial advisor costs and fee structures.
• Know what credentials and qualifications to look for.
• Research, compare, and interview financial advisors.
• Put knowledge into action.

Before we dive into these steps, we'll start with some definitions around financial planning services.

Financial advisor vs. financial planner vs. investment advisor

While the terms "financial planner," "financial advisor," and "investment advisor" are often used interchangeably, they refer to professionals with distinct focuses and services. Understanding the differences can help you choose the right type of professional to meet your specific financial needs.

A financial advisor offers a broad range of services, including financial planning, investment management, and ongoing advice on various financial matters. They can provide both strategic and tactical guidance, offering tailored advice to help you make informed financial decisions and manage your overall financial health.

A financial planner specializes in creating detailed, long-term strategies to help you achieve specific financial goals, such as retirement, education funding, or buying a home. They often use a holistic approach, considering all aspects of your financial life. A financial planner may or may not assist with ongoing investment management.

An investment advisor focuses specifically on providing advice and management for investment portfolios, including asset allocation, diversification, and performance optimization. They'll give you insights and recommendations based on market trends and economic conditions.

Among financial professionals, the term "financial advisor" is the most commonly used. This broad term can encompass both investment advisors and financial planners, as well as other specialists who offer financial guidance. Financial advisors often provide a wide range of services, including investment advice and financial planning, making them a versatile choice for many clients. However, the role of a financial advisor can vary depending on the firm and the specific services offered.

Why picking the right financial advisor matters

Choosing the right financial advisor is one of the most important decisions you can make for your long-term financial success. A good first step is to consider the financial advice style that best suits your needs. A skilled advisor can help you build a robust financial plan, optimize your investments, and navigate market fluctuations, ultimately ensuring that your money works harder for you. Building a strong relationship with your advisor allows them to understand your unique needs, support your financial goals, and help you plan not only for your future, but also for the legacy you want to leave behind.

To make an informed decision, consider these key steps:

Common financial planning services

While the specific services offered can vary, most advisors provide a range of essential financial planning services to help you achieve your long-term goals. Some of the most common services include:

• Retirement planning. Developing a strategy to ensure you have enough savings and income to maintain your desired lifestyle in retirement, as well as understanding the common challenges retirees face.
• Tax planning and savings strategies. Creating a plan to minimize your tax liability and maximize your after-tax returns through legal and effective tax strategies.
• Estate planning. Talking through the legal documents and strategies you may need to manage and distribute your assets according to your wishes, ensuring your legacy is protected.
• Investment advice. Providing guidance on selecting and managing investments to grow your wealth and meet your financial goals.
• Budgeting. Helping you create a detailed budget to track your income and expenses, ensuring you live within your means and save for the future.
• Setting savings goals. Establishing—and achieving—specific savings targets, such as buying a home, funding education, or building an emergency fund.
• Investing an inheritance. Offering advice on how to wisely invest and manage a sudden influx of wealth, such as an inheritance, to maximize its long-term benefits.

2. Understand the types of financial advisors

Financial advisors come in various forms, each offering different levels of service and interaction.

• Automated investment manager. These automated, algorithm-driven platforms provide investment management services with minimal human intervention. They use sophisticated software to create and manage portfolios based on your risk tolerance and financial goals. Automated investment managers are cost-effective, easy to use, and accessible 24/7. They can be ideal for those who prefer a hands-off approach and have straightforward investment needs. However, they may not be suitable for complex financial situations.
• Hybrid advisor. These services combine the benefits of automated investment managers with the personal touch of a human advisor. They use technology to manage investments but also offer one-on-one consultations to address specific financial concerns and provide tailored advice. Hybrid advisors are a good choice for those who want some level of human oversight and personalized guidance. They typically have higher fees than automated investment managers but are less costly than traditional advisors.
• Traditional advisor. These are human professionals who provide comprehensive financial planning and investment management services. They work closely with clients to understand their unique financial situations and develop customized plans. A traditional financial advisor should provide a high level of personalization, expertise in a wide range of financial matters, and emotional support during market volatility. They may require a higher minimum investment and have higher fees than a hybrid or automated investment manager. They're ideal for investors with more complex financial needs and those who value a deep, ongoing relationship with their advisor.

Each advice model has its own benefits and considerations, so think about the level of involvement and expertise you want in a financial advisor before making a decision.

3. Consider costs and fee structures

Understanding the costs and fee structures of financial advisors is crucial because it directly affects your financial health and the quality of advice you receive. Different fee structures can influence the objectivity of the advice and your total expenses.

Common fee structures

• Percentage of assets under management (AUM). In this model, the advisor charges a percentage of the total value of the assets they manage, typically 0.5% to 2% annually, so the fees are proportionate to the size of the portfolio.
• Hourly rate. Some financial professionals charge a fixed rate per hour for services, often used for onetime consultations or specific projects. This model is flexible and cost-effective for short-term advice, though costs can vary based on time required.
• Flat fee. Some advisors charge a onetime or annual fee for a specific service or plan. While this approach makes costs predictable and transparent, it may not cover ongoing advice or management.
• Commission-only. Advisors who use this model earn commissions by recommending and selling specific financial products like mutual funds, life insurance policies, or annuities to their clients. If you consider this option, it's important to ensure the advisor's recommendations truly reflect your financial goals and aren't driven solely by commission incentives.
• Subscription model. In this model, clients pay a recurring monthly or annual fee for access to a suite of financial services, common with automated investment advisors and some hybrids. It offers ongoing support and access to tools, but clients incur continuous costs even if they aren't using all the services.

Fee-only vs. fee-based advisors

Fee-based advisors are compensated solely through client fees, not commissions. This fee structure is designed to remove incentives for the advisor to operate based on their own interests but may come with higher upfront costs.

A fee-based advisor charges fees and can also earn commissions from selling financial products. This structure can be more affordable if you need both advice and products, but it's important to recognize any potential conflicts of interest. 

4. Know what credentials & qualifications to look for in an advisor

Verifying financial advisor credentials and qualifications is essential to ensure that you're working with someone who has the necessary expertise, education, and ethical standards to provide sound financial advice.

A key concept to understand is the fiduciary versus suitability standard. Advisors who operate under a fiduciary standard are legally obligated to act in your best interest. This creates a foundation of trust and transparency in the advisor-client relationship, as it ensures the advice you receive is focused on maximizing your financial well-being rather than the advisor's commission or profit.

Advisors who operate under the suitability standard are only required to recommend investments that are suitable for your financial situation, but not necessarily the best option available. The suitability standard still requires advisors to consider your financial goals and risk tolerance. But since it allows for more flexibility, it can sometimes lead to recommendations that benefit the advisor more than the client.

Importance of credentials and certifications

Credentials and certifications indicate that an advisor has met certain educational and professional standards. This gives you greater confidence that the advisor has the knowledge and experience to handle your financial affairs competently and ethically.

Common certifications include:

• CERTIFIED FINANCIAL PLANNER® professional. CFP® professionals are certified by the Certified Financial Planner Board of Standards and must meet rigorous education, examination, experience, and ethics requirements. They focus on comprehensive financial planning, including investment, retirement, tax, and estate planning.
• Chartered Financial Analyst® charterholder. CFA® charterholders are certified by the CFA Institute, which means they've passed a series of 3 exams covering advanced topics in investment analysis, portfolio management, wealth planning, and more. They specialize in investment management and analysis.
• Certified Public Accountant (CPA). CPAs are licensed by state boards of accountancy and must pass the Uniform CPA Examination. CPAs work on tax planning and preparation, financial reporting, and auditing.

All of these designations tend to have stringent ethical requirements that must be upheld to stay in good standing.

You may also see someone listed as a registered investment advisor (RIA). While not a certification, RIAs are registered with the SEC or state securities regulators and are held to the fiduciary standard. They focus on investment management and advisory services.

You can verify an advisor's credentials and qualifications through the following organizations:

• FINRA's BrokerCheck tool lets you review an advisor's background, registration status, and any disciplinary actions.
• The SEC has an Investment Adviser Public Disclosure (IAPD) database where you can verify the registration status and background of RIAs.
• The CFP Board's search tool can confirm that an advisor holds the CFP certification and allows you to review their certification status.
• Through the CFA Institute website you can verify an advisor's CFA designation and any violations or reports of misconduct.

Use the American College of Financial Services verification tool to confirm an advisor's Chartered Financial Consultant (ChFC) designation and review their certification status.

Financial advisor interview questions

When interviewing prospective financial advisors, it's good to ask about their experience, what kinds of services they offer, and how they charge for them.

Here's a list of additional questions to help ensure they're the right fit for you:

• What's your investment philosophy or strategy?
• Who are your typical clients?
• How do you tailor your advice to individual clients?
• How do you prefer to communicate with clients, and how often will we meet?
• Do you work alone, or do you have a team? If so, can I meet them?
• Do you have any conflicts of interest, and how do you manage them?
• What certifications and credentials do you hold?
• Are you registered with any regulatory bodies, and can you provide proof?
• What technology and tools do you use to manage and track my financial plan?
• Have you ever been disciplined by a regulatory body or had any complaints filed against you?
• What's your continuity plan in case you're unavailable?
• What happens if I decide to terminate our relationship?

Turn knowledge into action

You've worked hard for your money, and choosing the right financial advisor is crucial to securing your financial future. Use the recommendations we've shared to gather the information you need, compare your options, and find the advisor who best meets your needs.

Your financial well-being deserves the best care, so it's worth finding an advisor you trust and who will work with you to help achieve your long-term goals.