How to choose a financial advisor
Updated 6:01 AM EDT, Wed April 3, 2024
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Every investor’s financial situation is unique. That’s why the question of how to pick a good financial advisor doesn’t have a one-size-fits-all answer.
While some financial advisors focus on a specific type of client, such as airline pilots, doctors or even couples without children, who you choose as your advisor should come down to whether he or she has the skills to address your needs. It’s not just about wealth — it’s about your life, and that calls for careful consideration of several key factors that determine how to choose a financial advisor.
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Top tips for working with a financial advisor
Navigating complex financial decisions can be daunting. Finding the right financial advisor can be the difference between clarity and uncertainty when you’re trying to achieve your financial goals.
Here are some tips for investors who are considering hiring an advisor.
- Ask if your advisor is a fiduciary: “There is a difference between an advisor who is a broker paid commissions or a fiduciary who must act in their client’s best interest,” said Clark Richard, CEO of Vineyard Global Advisors, based in Englewood, Colorado.
- Find an advisor who gets to know you: “Voltaire said that you should judge a person by their questions rather than their answers,” said John Cunnison, vice president and chief investment officer at Baker Boyer Bank in Walla Walla, Washington, alluding to the 18th-century French philosopher. “A good financial advisor will ask a lot of questions about you. They will be curious about what wealth means to you. They will spend considerable time seeking to get to know you and what is important to you.”
- Know what you’re looking for in an advisor: “Define what you believe value is when it comes to working with a financial advisor. Understand the product offering available, if the company has an open architecture, meaning they have unlimited offerings,” said Shinobu Hindert, a certified financial planner (CFP) at Empowered Planning in Encinitas, California. She suggested would-be clients rank factors most important to them and decide whether the advisor and his or her company can grow with the client over time.
- Ask questions: It’s important to understand what kind of ongoing service to expect, said Hindert. Those questions, she said, include, “Who are your go-to people? Is their app user-friendly? What’s their cyber-security like? What sort of phone support do they offer? Are the people answering the phones knowledgeable? Do they offer local support?”
- Don’t accept an advisor who pitches specific products in the first meeting: “Be wary of a fast recommendation or product solution,” said Trevor Mann, a financial advisor at Consolidated Planning in Glen Allen, Virginia. “If the advisor you’re interviewing does not spend the time to fully understand your situation before giving advice, it’s not actually tailored to you.” He suggested interviewing financial planners who are not tied to a broker-dealer or insurance company that requires them to sell certain products.
Understanding your financial needs
When selecting a financial advisor, the first step is to identify your specific financial goals.
Common client financial goals often include:
- Building a retirement nest egg and making sure you don’t outlive your money in retirement
- Aligning your investments with your goals and risk tolerance
- Minimizing taxes on investments
- Ensuring that spending doesn’t outpace income in retirement
- Leaving an inheritance or financial legacy for your family
- Making charitable donations
- Planning for children’s or grandchildren’s education expenses
- Maintaining financial stability or a desired lifestyle in retirement
Whatever your goals may be, the first step is developing a financial plan to gain some clarity into your financial picture.
Your advisor should align with these goals, or be able to tell you what may be possible and what may not, given your situation. Your advisor is your guide along your financial journey, so they must understand enough about you to be an effective collaborator.
For example, if an advisor specializes in working with airline pilots, but you’re a fine artist, that advisor may not be the best fit. Take the time to shop around and interview a handful of advisors to get a good feel for who can deliver what you’re looking for.
Areas that advisors can work on
Many investors believe that an advisor simply chooses investments or just picks stocks, but the old-fashioned stock broker is a thing of the past. Today’s financial planners and advisors assist clients with a range of money-related questions.
Regina McCann Hess, a CFP and president of Forge Wealth Management in Malvern, Pennsylvania, offers a checklist of items that advisors typically help with:
- Social Security benefit strategies
- Medicare strategies
- Divorce
- Death of a spouse
- Tax planning strategies
- Estate planning strategies
- Creating tax-free retirement income
- College planning
- Gifting strategies
- Debt management, particularly student loan debt
- Retirement planning to avoid outliving your money
- Tax ramifications of Roth versus traditional individual retirement accounts (IRAs)
- Long-term care strategies
Of the latter, Hess said, “That’s not just insurance.”
She added that planners will work with clients to address the who, how and where questions surrounding long-term care, including paying for services and hiring caregivers.
Different types of financial advisors
While it can seem confusing at first glance, financial advisors’ businesses are structured and regulated in several different ways. The kind of service you get depends on which type of financial advisor you choose.
| Pros | Cons |
|---|---|
Some established gold-mining companies pay dividends
| Physical gold does not pay interest or dividends
|
May provide a long-term store of value
| Can be expensive to transport, store and insure
|
Can act as a safe-haven asset during times of equity market turmoil
| Can be stolen or counterfeited
|
Not subject to the same counterparty risks as other assets
| Subject to the volatile nature of commodity cycles
|
Fee-only fiduciary financial advisors
Fee-only fiduciary financial advisors are very transparent about the way they earn money. These firms charge a direct fee for their services without receiving commissions or incentives.
This model ensures that the advisor will prioritize your financial well-being rather than pushing products for a commission. In that sense, fee-only financial advisors have no conflicts of interest, since they won’t be recommending, say, a high-priced mutual fund primarily because they get compensated.
However, be aware: Fee-only advisors might recommend that you invest more with them or, for example, take a mortgage instead of paying cash for a house since they are compensated for the total value of stock-and-bond assets they manage for you.
Many fee-only advisors also include financial planning as part of their assets under management (AUM) fee. That generally makes sense, as your investment mix can be adjusted over time as your situation changes, and your advisor has the total picture of your finances.
You’ll often see the fiduciary advisory structure linked to the certified financial planner (CFP) credential.
While the credential indicates that the advisor has passed a rigorous exam and has some industry experience, it doesn’t indicate his or her particular expertise with your situation. Many advisors without that certification may, in fact, be well-suited to your needs and have extensive planning experience. Here again, it’s important to interview several advisors before making your selection.
Investment advisors
Investment advisors who specialize in asset management do not include planning in their services. Instead, these advisors exclusively focus on optimizing and overseeing your investments with the primary goal of maximizing your returns.
This business model isn’t as prominent as it once was. Today’s advisory clients are often more interested in the big-picture view that the combination of planning and asset management offers.
These days, considerations such as tax strategies, insurance planning, estate planning and retirement planning are among the factors to consider when choosing a financial advisor. Typically, those decisions go hand-in-hand with the process of developing an investment portfolio.
In addition, an advisor whose job is simply to maximize your return might take extra risks in your portfolio if they are afraid of missing a benchmark.
For those reasons, use caution if you encounter an advisor who only manages assets and doesn’t offer planning services.
Robo-advisors
A robo-advisor is a digital platform that offers automated, algorithm-driven investing services with minimal human intervention.
A robo-advisor’s algorithms create and manage a diversified investment portfolio tailored to an individual’s financial goals and risk tolerance. These portfolios typically consist of low-cost, index exchange-traded funds (ETFs), which are pooled investment securities that track indexes of stocks and/or other assets.
Some well-known companies providing robo-advisor services include Betterment, Wealthfront, Schwab and Vanguard.
These platforms typically offer low fees, as their services are limited compared to those offered by human financial advisors. While algorithms select your investments, you’ll still get access to customer service representatives who can answer questions; however, those customer service reps can’t offer investment or planning advice.
Robo-advisors have gained popularity for their accessibility, convenience and low fees. They can be a good choice for younger investors who are just beginning to save, or those with few assets to manage.
While robo-advisors can help instill investing discipline for people who may be inclined to trade more often, they may not be right for those who want more individualized investing and planning help.
Traditional financial advisors
You don’t hear the term “stockbroker” anymore, as the business of charging commissions for trading stocks in client accounts has gone the way of the dinosaurs. But some advisors are still legally allowed to earn commissions for selling mutual funds and insurance products.
Today, an advisor affiliated with a broker-dealer operates within a financial institution that executes securities trades — for both clients and themselves. That differs from an advisor whose firm is structured as a registered investment advisor (RIA), who has a fiduciary obligation.
Advisors affiliated with a broker-dealer can also offer planning, and they are required to serve as fiduciaries on qualified retirement accounts, such as IRAs.
Be aware that these advisors may prioritize products that generate higher commissions even when the client may be better served by a different investment. Investors should carefully consider the potential bias in these advisors’ recommendations.
Options for financial advice
There are many options when you’re considering how to choose an advisor, or how to choose a financial planner for retirement.
For example, some advisors are affiliated with national firms, such as Charles Schwab, Edward Jones or Raymond James. Others own or are employed by registered investment advisors, which are completely independent firms with no affiliation to big, national broker-dealers.
It can be difficult to understand an advisor’s affiliations, so it’s important to ask questions so you can understand whether the firm is independent or must adhere to the policies of a large parent company. Affiliation with a broker-dealer may also mean the advisor receives commissions, which is important to understand as well.
Determining how much you can afford to pay an advisor
There is no standard fee for financial advisors. The cost depends on the type of services you want, the size of your investment accounts and the advisor’s compensation structure.
You’ll find that the majority of advisors charge between 0.25% and 1% of your account balance, although they could charge as much as 2%. Clients with larger accounts are typically charged less. That may sound counter-intuitive, but smaller accounts are often more labor-intensive for advisors, and their work doesn’t scale as it does on a larger account.
For example, if you have $1 million for an advisor to manage, and they charge 1%, you would pay $10,000 annually. Advisors usually bill monthly or quarterly.
A growing number of advisors are now charging a flat fee, regardless of the total assets they manage. Fees vary widely but typically fall into a range between $2,000 and $7,500 per year.
You also have the option of choosing a fee-only planner who doesn’t manage assets. Those planners can either charge by the hour or on a project basis, depending on the complexity of your situation.
These fee-only planners may start with rates as low as $250 per hour, but your fee may be significantly more if your financial situation has a lot of moving pieces.
How to vet a financial advisor’s background
Occasionally, you’ll read about a fraudulent advisor who stole from unsuspecting clients.
Those situations are sad, but you can do your best to avoid them by looking up an advisor on the BrokerCheck website, a database of advisors with securities licenses offered by the Financial Industry Regulatory Authority (FINRA). It can reveal what are called “disclosure events,” or incidents where financial advisors have run afoul of some regulation or rule.
By looking up a prospective advisor on BrokerCheck, you can determine how long the advisor has been licensed, which securities-licensing exams he or she has passed, their tenure with the current firm, their previous employment and whether or not there are any disclosure events.
You can also ask an advisor whether he or she has additional credentials, such as the CFP or chartered financial analyst (CFA) designation, and whether they have experience with financial situations similar to yours.
The CFP Board’s website has a database of advisors who have earned that credential, and the CFA Institute has a member directory where you can look up charterholders.
A CFA charterholder is a finance professional with expertise in investments. He or she has passed a series of three investment-focused exams.
What questions should you ask when choosing a financial advisor?
- Is the advisor a fiduciary all the time? Some firms are always fiduciaries, while others can charge commissions on non-retirement accounts. This question ties into how the advisor is paid; it’s important to understand whether you’ll pay a percentage of assets under management, a flat fee or some other arrangement.
- What is the advisor’s approach to investing? Does the advisor believe in index-based asset allocation, actively managed funds where the holdings change more frequently in response to market conditions or a mix of the two? There are many ways to generate investment returns, so it’s important to understand how the advisor approaches the market.
- Who is the firm’s custodian? No, we’re not talking about the person who cleans the office. The custodian of a financial firm is the brokerage where your assets are held. Very few advisory firms hold your money themselves, as that requires jumping through myriad regulatory hoops. Ask how you’ll be able to access the custodian account to monitor your holdings and returns.
- How much access will I have to you? While it’s generally not necessary to meet in person with an advisor on a regular basis after your accounts are set up and your plan is completed, you want to be sure your calls and emails will be returned in a timely manner.
- What is your background in this industry? Before you interview an advisor, check their credentials on BrokerCheck. If you can’t find them there, or you see troubling disclosure events, you can cancel the meeting or ask about what you’re finding. In the meeting, ask about the advisor’s industry experience and if they have a track record of helping clients similar to you.
- May I contact your referrals? Advisors are able to provide you with the names and contact information of clients who have agreed to provide a referral. These existing clients can give you more insights into the experience of working with that particular advisor.
What else should you consider when choosing a financial advisor?
Beyond licensing, credentials, professional track record and basic competence, you want to feel comfortable with your advisor. After all, they will know as much or more about your financial situation as anyone else, so don’t overlook the personal chemistry factors.
If the advisor tends to speak in jargon and uses phrases and concepts you don’t understand, that’s a red flag. A good advisor should function as a teacher and take pains to be sure you understand their approach to investing.
An advisor who talks over clients’ heads may be trying to appear smart, or perhaps just has poor communication skills. Neither is something you should overlook.
In addition, if you and your partner interview an advisor as a couple and find that the advisor primarily talks to one person over the other, that may also signal potential problems. You want a financial advisor who communicates equally with both partners and that both feel comfortable to ask questions.
How technology is changing the world of financial advising
Technology has become increasingly important to the advisory industry, with big changes in the past few years as a result of the pandemic.
For example, if you work with a financial advisor, you may have previously only met in person. These days, you probably have the option to meet both in person or via videoconference. Some advisors have gone all-virtual, allowing them to meet with clients in any part of the world.
In the past, a financial plan was a printed book, sometimes contained in a leather binder embossed with the firm’s name and the client’s name. Many times, the plan was tossed in a drawer and forgotten.
Those days are gone. Today, financial planning software like MoneyGuidePro, eMoney Pro and Right Capital allow an advisor and his or her client to develop a plan in real time and make changes on the fly, anytime. No need to wait until the proverbial yearly review.
“Technology has evolved so that planning can be done more frequently and tactically, and include short-term and long-term goals in a hyper-personalized approach,” said Joe Buhrmann, senior financial planning consultant at eMoney Advisor.
This allows the incorporation of more life events and an agile approach to just-in-time planning.
“Clients appreciate the sleek look and easy-to-understand nature of a one- or two-page plan summary that can allow them to understand the plan and implications of their decisions, and help them to take action,” Burhmann added.
Along with that comes more actionable plans, a great benefit to clients.
“Accurate, up-to-date data on the client’s complete financial picture can be an anchor for expanded service offerings by the advisor,” said Burhmann, “There are more ‘easy buttons’ being added to platforms to make the financial planning software the centralized hub for client interactions and to visually assess the impact of decisions.”
Not only do advisors rely on more sophisticated planning software, but they can also leverage technology to help allocate portfolios and assess portfolio risk levels. These tasks took longer in the past, taking valuable time that could be spent meeting with clients and getting a better understanding of their needs.
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Frequently asked questions (FAQs)
A financial advisor can provide financial planning, investment guidance and strategies to help you realize your financial goals. This overlaps with big life decisions, such as retirement and estate planning.
If you’re looking for expert financial guidance, personalized investment strategies, retirement planning, estate planning or assistance in managing your finances, you may benefit from a financial advisor’s services.
Financial advisor costs vary. An advisor may charge hourly fees, flat fees or a percentage of assets under management, typically ranging from 0.5% to 2% of AUM annually.
Consider a financial advisor when you face complex financial decisions, if you lack the time or expertise to manage your finances, if you need retirement planning services or if you want professional guidance to help you achieve your financial goals. Financial planners may uncover questions that even savvy investors hadn’t thought of themselves, and they can offer help thinking through big financial decisions.
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This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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