How to Choose a Financial Advisor in 6 Easy Steps in 2022
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Financial advisors aren’t only for the very wealthy. People in all sorts of financial situations can benefit from some guidance with their financial planning.
Whether you need to come up with a saving plan for retirement, manage your debt, diversify your portfolio or make your paycheck last longer, a financial advisor can help you set clear financial goals and much more.
With so many options now available, it’s key that you first learn how to find a financial advisor that’s right for you.
6 steps to finding the right financial advisor
- Identify why you need financial advice
- Find the best financial advisor for you
- Know how financial professionals get paid
- Determine whether you need a fiduciary financial advisor
- Search for the financial planning you need
- Meet potential financial advisors or brokers
Step 1: Identify why you need financial advice
Finding the right kind of financial advisor is easier after you determine why you need one.
Are you early in your career and want to know how much — and how — to save for your financial goals? Are you paying for your child’s education, or navigating finances during a divorce? There’s likely an advisor for your specific situation.
You may need more than one kind of financial plan, and that’s OK. Just make sure the financial professionals you’re considering have the skills, knowledge and experience to help you with your specific financial needs.
Here’s a list of issues financial advisors may help you with:
|Services financial advisors offer||Things financial advisors can do to help you|
|Retirement planning||A financial advisor can ensure you’re maximizing retirement-specific tools like your 401(k) or Roth IRA so you can maintain your lifestyle after you retire.|
|Paying down debts||A financial advisor can evaluate your debts and create a repayment plan for you to follow, so you can prioritize those that should be paid down first and save money on interest in the long term.|
|Investing||Financial professionals can recommend specific products that make sense for your investment strategy. They can also help you rebalance your portfolio — for example, by moving you from stocks to relatively safer options like mutual funds or ETFs — to ensure it matches your level of risk tolerance.|
|Tax planning||The right financial expert can help you limit your exposure to taxes as you work toward other financial goals. They may evaluate your withholdings and suggest adjustments, if necessary, to help you get more money on payday.|
|Budgeting and saving||A financial advisor can pinpoint opportunities to help you reduce expenses. They can come up with a budget so you can use or save money more efficiently.|
|Getting insured||Whether you’re looking for home insurance, life insurance or even annuities, a good financial advisor can help you find the product that best fits your needs — and point out any holes in your coverage.|
|Estate planning||Financial advisors can help get your important paperwork — such as wills or revocable living trusts — in order. Advisors can also help you identify people to make decisions when you can’t, like a health care proxy and an executor.|
Step 2: Find the best financial advisor for you
A financial advisor is a certified expert that provides guidance on personal finances, tax laws, investments and asset management.
Some financial advisors resemble coaches. They can help you make basic financial decisions and teach you solid spending, saving and borrowing habits. They can also perform high-level investment management for the wealthiest individuals and businesses.
Here’s a summary of the main types of financial advisors out there:
Investment advisers know market conditions and can help create an investment plan tailored to your financial goals. You’d pay them a fee for their advice about whether and when to trade specific securities.
It’s worth noting that an investment financial adviser is purposely spelled with an “e” instead of an “o," to specifically identify legally regulated investment professionals.
An investment adviser must be registered with the Securities and Exchange Commission (SEC) and a state securities regulator. The term is not interchangeable with financial advisor, which has a broader scope generally refers to brokers and is not bound to a fixed legal definition.
Stockbrokers buy stocks and bonds on behalf of their clients. They’re usually associated with a brokerage firm and can make trades for both retail investors (individual investors) as well as institutional investors.
Certified financial planners
Certified financial planners (regulated by the CFP Board) help clients create long-term wealth management plans, taking into account their entire financial life: retirement and investment goals, insurance, taxes and more. They often work with specific types of clients like small businesses.
Robo-advisors are digital investment management services that use algorithms and data about your financial goals to give you tailored suggestions about where and how much you should invest.
Many advisors use a hybrid model which combines some personal interaction with robo-offerings.
Robo-advisors can cost much less than a human advisor. However, some experts are critical of robo-advisors, alleging that they can’t have the customized approach to risk management a human would.
If you’re attracted to this low-cost option, industry insiders recommend picking a hybrid model — such as Schwab Intelligent Portfolios Premium or Vanguard Personal Advisor Services — to combine the ease and low cost of a robo-advisor, and still have access to a human advisor that can help tailor your strategy.
It’s easy to put off planning for your death, but it’s also necessary to ensure your loved ones are taken care of. Financial advisors can help get your paperwork, like a will or revocable living trust, in order. Advisors can also help you identify people to make decisions when you can’t, like a health care proxy and an executor.
Identify why you need a financial plan. You may need more than one kind, and that’s OK. Then make sure the financial professionals you’re considering have the skills, knowledge and experience to help you.
Step 3: Know how financial professionals get paid
There are various ways an advisor makes money — like a commission for selling products, an annual percentage of an investors’ assets, or an hourly rate — so you shouldn’t be afraid to ask for the details.
“Different payment structures might create different incentives,” says securities attorney, Alan Rosca. “If somebody is paid only to sell investments, it means if he doesn’t sell you anything, he doesn’t make any money.”
Here are some ways financial advisors may get compensated for their time and expertise:
- Hourly rate: You could pay advisors for their time like you would an attorney. Hourly rates range from $100 to $400 per hour, according to financial advice site SmartAsset.
- Flat or annual fee: Financial advisors could collect 1 to 2% annual percentage of your assets under management. So, for instance, if your assets total $100,000 you would have to pay between $1,000 and $2,000.
- Commissions: Advisors could collect commissions on the financial products they recommend to you.
- Fixed rate: Advisors could charge a fixed fee of between $1,000 and $3,000 for a service such as creating a full financial plan
- Retainer: If you have a complex financial situation, sometimes a financial advisor will work on a retainer model, and charge you either monthly, quarterly or annually. Since this is not asset-based, it can help minimize conflicts of interest and keep the focus on advice.
Some financial advisor fee structures combine two of these methods. An advisor could charge a flat fee while also collecting commissions on sales of new products.
If you need advice for a specific problem and don’t plan to build a long-term relationship that includes investment management, you should choose someone with an hourly rate.
Robo-advisors are worth looking into as an affordable alternative. The best robo-advisors charge as little as 0.15% in annual management fees and some don’t even have account minimums.
Critics note that robo-advisors rely on the information you provide to make generalized recommendations through an algorithm, whereas traditional advisors may be able to catch nuances and make stock moves based on your specific needs.
However, robo-advisors have been a great starting point for many beginning investors with more limited budgets.
Step 4: Determine whether you need a fiduciary financial advisor
You might think all financial advisors would put their clients’ needs first and avoid conflicts of interest — but that’s not always the case.
Many different financial professionals fall under the term “financial advisor,” but only some of them must adhere to the fiduciary standard.
The fiduciary standard of care — also known as fiduciary duty — is a rule that requires financial advisors put their clients’ best interests ahead of their own, even if that means recommending strategies that could reduce their own compensation.
Registered investment advisors have this obligation while critics say brokers do not, despite a recent regulation that was intended to strengthen these standards.
This comes as a surprise to a lot of people: a 2019 survey from the digital wealth manager Personal Capital found that 48% of Americans mistakenly believe that all financial advisors must meet this fiduciary standard.
Meeting the fiduciary standard matters most when you’re hiring a financial advisor to invest and choose financial products on your behalf. If you’re simply seeking help building a monthly budget, this issue is likely not as crucial.
In either case, don’t be shy about asking potential financial advisors whether they are fiduciaries and any other questions about how they’re compensated. It’s your net worth at stake, after all.
Since this is a complex topic that deserves more attention, we dug a little deeper. Read our in-depth research further down below.
Step 5: Search for the financial planning help you need
Alan Rosca jokes that people will travel to faraway gas stations or appliance stores to find the cheapest gas, dishwashers, or dryers. They’ll spend hours at car dealerships before buying a car. But they’ll rely on a quick Google search to find the right financial advisor.
“We should spend the same amount of time before we give somebody our hard-earned money,” he adds.
While you could always use the internet to find financial advisors in your area, you have more precise search tools available:
BrokerCheck is provided by Financial Industry Regulatory Authority’s (FINRA). You can do some digging into someone’s experience and see whether prospective advisors have faced any disciplinary actions.
Investment Adviser Public Disclosure (IADP)
The SEC’s IADP website is a database that can help confirm that a Registered Investment Advisor (RIA), be it a firm or an individual, has the certifications they say they do.
The National Association of Personal Financial Advisors (NAPFA)
NAPFA is a professional association of fee-only financial advisors. (Fee-only advisors are paid a fixed rate and don’t earn commissions.) You can use their Find an Advisor search tool to find fiduciaries in your neighborhood.
Step 6: Meet potential financial advisors or brokers
Once you’ve identified some potential advisors that meet your requirements, start making calls and set up appointments.
Whether it’s knowing more about your financial advisor’s credentials or a detailed explanation of their pay structure, don’t be afraid to ask for what you need. After all, your life’s savings are at stake.
Questions to ask before hiring financial advisors
Here are some questions you can ask:
- Who are your typical customers?
- How will we communicate with each other?
- How much will I pay and how is that number determined?
- How are you compensated?
- Are you compensated for recommending certain products?
- How do you choose investments and products for your clients?If charged an annual percentage, will it be billed quarterly or monthly?
- Do you charge by the hour?
- Do you have a fiduciary duty to your customers?
You should also ask questions about your specific situation:
- Say you’re a divorced woman in your 40s, does the advisor have other clients in the same boat?
- If you’re a small business owner, do they have experience with that specialization?
- If you’re just starting out in your career, have they worked with millennials or Gen Zers in the past?
If an advisor doesn’t want to discuss these details, move on to someone else. It’s important you choose an advisor who is transparent about how they’ll handle your finances and answer any questions you might have.
COVID-19 and financial advisors
Before the Covid-19 pandemic, finance experts prioritized in-person meetings with their clients and the bulk of the counseling was still done face-to-face, but this has changed with the pandemic.
Stay-at-home orders pushed professionals to turn to video calls in order to keep their business relationships running and help the increasing demand of clients in need of advice.
Although face-to-face meetings will still be important, video calls and other digital means of communication are expected to stay in place even after a return to normalcy.
People looking to hire a financial advisor online will find it increasingly easier, as many agencies and self-employed professionals are adapting and growing their online presence and services.
The fiduciary standard isn’t always simple
The fiduciary standard — the rule stating that financial advisors must place their client’s interests before their own — isn’t always as clear-cut as it sounds. Consumer protection advocates have long been pushing for a more strict and clear fiduciary standard across the industry. But they’ve been disappointed with many of the moves made to further the protection of individual investors.
In 2019, the SEC implemented the new Regulation Best Interest (Reg BI). The new code of conduct holds that financial advisors and broker-dealers must:
- Only recommend products that are in the customer’s best interest
- Clearly identify any possible conflict of interest or financial incentive the broker-dealer may have.
The problem with the new regulation? The SEC didn’t clearly define “best interest,” says James Watkins, attorney and managing member of InvestSense. It, therefore, doesn’t protect investors to the extent that a true fiduciary rule would.
The SEC said it will be defined on a case-by-case basis, but lack of clarity “only serves to create unnecessary uncertainty and unnecessary risk exposure for both advisors and investors,” Watkins says.
How do you protect your best interests?
The best way to protect yourself is to choose a financial analyst who voluntarily minimizes the conflicts of interest in their business model and voluntarily adheres to a fiduciary standard higher than the one the SEC enforces, says Barbara Roper, director of investor protection for the Consumer Federation of America.
Look for advisors with the CEFEX certification, which audits firms and advisors and certifies them as meeting a true fiduciary standard.
It’s also important to keep in mind that brokers may have a different pay structure than advisors. They may make money by selling you products that are okay for you (and will offer them a bigger commission) but are not necessarily the best for you.
Don’t be shy about asking prospective advisors how they’re compensated. Watkins also recommends asking whether an advisor is “open architecture” or “closed architecture.”
Open architecture means that the advisor can sell anything to you. Closed architecture, conversely, means the advisor is limited in what they can sell, often because they’re receiving some sort of compensation from whoever is marketing the investment, like a mutual fund manager.
It may be best to actively find someone who is “open architecture,” and seek out advisory firms that are fee-only, paid exclusively by the client, so you know third-party incentives aren’t involved at all.
How to avoid falling victim to fraudulent practices
Scammers can easily pass themselves off as financial advisors or experts, lending an air of legitimacy to their scheme.
You can use some of the search tools mentioned above, such as FINRA’s Brokercheck and SEC’s IADP, to see whether prospective advisors have any lawsuits or disciplinary actions filed against them, and ensure they’re registered with the SEC and FINRA.
That being said, “real” registered financial advisors can also engage in investment fraud. So even if you are meeting an advisor with a seemingly legitimate practice, you should know what practices are considered fraudulent and what signs to watch out for.
A legitimate, trustworthy financial advisor will:
- Fully disclose potential conflicts of interest
- Set realistic expectations when it comes to earnings (as opposed to grand promises of consistently above-average returns)
- Give you an accurate assessment of the risk associated with each investment
- Always act in your best interest
Steer clear if you notice any of the following:
- High-pressure sale tactics
- Use of phrases like “once in a lifetime opportunity” or “breakthrough technologies”
- Cold calls from unregistered and unsupervised salespeople claiming to be brokers
- E-mails from unknown senders promising a great investment opportunity
- Refusal or delay in sending information about an investment in writing
- Advice to keep the investment opportunity “confidential”
- Pressure to make a quick decision
Watch out for these common investment frauds
This scam exploits the trust between tight-knit communities and specific groups of people (ethnic, religious, professionals, the elderly, etc.). A scammer will approach and convince a trusted member to invest, who then unwittingly encourages more people from their community.
The investment generally turns out to be a Ponzi scheme. By the time people are wise to the scam, the money is long gone. Always be skeptical of an investment opportunity and analyze it thoroughly, no matter who presents it.
Your broker makes an excessive amount of selling and trading with the goal to increase their commission earnings, disregarding your best interests. Watch out for unauthorized or frequent trading, and any suspiciously high amount of fees in your portfolio, as it could be a sign that your broker is defrauding you. Be especially wary of advice to buy variable annuities, as they have very high fees, and are commonly pushed by brokers who want to earn higher commissions.
Promissory notes fraud
Promissory notes are a legitimate form of investment. Investors lend money to a company, which in turn promises a fixed return. However, promissory notes are commonly used to scam individual investors so before investing in these types of securities, you must check out their legitimacy.
A promissory note must be registered, either with the SEC or with the state securities regulator. You can verify a promissory note online with the SEC’s EDGAR database or by calling the state securities regulator.
Pump and Dump
This scheme artificially raises the value of a company (“pump”) by spreading misinformation, with the goal to increase demand and inflate the value of the stocks. After the stocks have gained their temporary, artificial value, the scammers will sell their shares (“dump”) at the inflated price, and profit. After that, the stock goes back to its true value and the other unknowing investors lose their money.
You can notify the SEC of any suspected securities fraud by using their Tips, Complaints and Referrals Portal. If eligible, you can apply for whistleblower status and earn additional protections and confidentiality guarantees.
From helping you save for retirement to managing a complex investment strategy, a financial advisor can make your financial life much easier.
That being said, there are quite a few factors to keep in mind when you’re trying to find the best one for you.
Make sure to do your research by looking closely at their credentials and their record with securities regulators. Additionally, ask plenty of questions about their methods and how they’re compensated. While there are rules stating that advisors should put your interests ahead of their own, this isn’t always the case.
It’s a good idea to meet a few advisors before settling on one. If your first choice does not inspire confidence or you disagree with their recommendations, don’t be afraid to say no or search for a new one, until you find the right fit.
What is a financial advisor?
What does a financial advisor do?
How much does a financial advisor cost?
Robo-advisors, on the other hand, are much more affordable, charging as little as 0.15% annual management fee or a fixed monthly fee.
Do I need a financial advisor?
It's key that you're clear on your financial goals and needs to find the appropriate professional for the task. This could mean scheduling a one-time session with a counselor to optimize your finances or it might mean having a certified investment adviser on retainer to manage your assets.