How to Pick a Good Financial Advisor

By Jessica Dosseh

  • Fee-only vs. fee-based vs. commission

  • What is a Fiduciary Duty and why does it matter

  • Advisor fee structures and costs

  • Professional designations (CFP, CFA, etc)

  • Looking up an advisor on BrokerCheck

TABLE OF CONTENTS

  1. What to look for in a financial advisor

  2. What are the different types of financial advisors?

  3. Determine what financial services you need

  4. Choose a financial advisor service option

  5. Know how much you can afford to pay an advisor

  6. Vet the financial advisor's background.

  7. Questions to ask a financial advisor

What to look for in a financial advisor

Do you need help managing your finances? Well, you are not alone. As you go through your journey, it is crucial that you find an advisor who has your best interest at heart. Finding a financial advisor can be challenging; nevertheless, once you find the right one for you, it can feel like a weight has been lifted.

Financial advisors are not only for the wealthy. They are for anyone who may need a bit more guidance and help with their finances.

To get started finding the best advisor for you, here are five tips to help you choose a financial advisor you can rely on.

What are the Different Types of Financial Advisors

The best financial advisors are the ones who can help you create an actionable plan for all your financial needs. A financial advisor should be your advocate.

One of the challenges when trying to find a trusted advisor is that no law regulates who can call themselves a financial advisor. Unfortunately, not all people who attempt to give financial advice have your best interest in mind. It's important to carefully evaluate potential financial advisors.

Check their credentials.

Look for Chartered Financial Analysts (CFA) or Certified Financial Planners (CFP) to ensure that the financial advisor you choose has undergone proper training and is required to act as a fiduciary. You can verify a financial advisor's credentials at the CFA Institute or the CFP Board. It's important to recognize that not all financial advisors are bound to a fiduciary duty. Fiduciary duty means that a financial advisor is legally required to work in your financial best interest.

On the other hand, other advisors are only held to a “suitable standard,” meaning their financial recommendations could end up being costly to you but profitable for them. In addition to certification, before choosing an advisor, make sure you know how they make their money to help you determine whether or not their goal is to help you reach your financial goals or to help them achieve their own financial success.

Think about the different types of financial advisors:

Robo-Advisors

Robo-advisors provide financial planning services at a low cost with automated investment advice. Robo-advisors may be a good option for people who don't have complex financial needs. You can get started online in minutes.

Fee-Only Financial Advisors

The majority of fee-only advisors are fiduciaries and have minimal conflicts of interest. This type of advisor earns money from direct fees that may be charged as a percentage of the assets they manage for you, or as an hourly or flat rate.

Commissions / Fee-Based Financial Advisors

Commission-based financial advisors tend not to be fiduciaries and earn third-party sales commissions by selling you certain financial products that may or may not be in your best interest. Not all commission models are bad, but you must do your due diligence when choosing the right one.

Some fee-based financial advisors are fiduciaries. They may charge a fee but may also accept commissions from investments. When it comes to fee-based advisors, it's important to determine if they're always acting as fiduciaries, especially when they help you purchase financial products.

Determine what financial services you need.

The type of financial advisor you might need will depend on the complexity of your financial goals. Before speaking to a financial advisor, determine which aspects of your financial life you want to tackle. Here are some questions to help you get started:

  • Do you need help building a budget?

  • Do you need help with your taxes?

  • Do you need help managing debt?

  • Do you need help investing?

  • Would you like to create a financial plan?

  • Do you need help creating a trust or refining your estate plans?

Knowing the answer to these questions will help you find an advisor that can help you with your immediate needs.

Choose a financial advisor service option.

Financial advisors' services can vary depending on how specialized they are; however, the most common services fall under the following categories.

  • Budgeting help – Analyzing where your money goes and how it moves once it leaves your paycheck.

  • Tax planning – Help plan a strategy to help decrease the amount of taxes you owe.

  • Debt management – Create a payment plan that enables you to get out of debt faster.

  • Insurance coverage – Find the best insurance coverage plan to use.

  • Retirement planning – Create a plan to help increase funds for the long-term and keep it safe.

  • Investment advice – Help research the best investment options to grow your portfolio depending on your risk tolerance.

  • College planning – Help create a plan to manage funds for higher education plans.

  • Estate planning – Strategize wealth transfer protocols for the next generations.

Choose a financial advisor that offers the service you are looking for to get the best result.

Know how much you can afford to pay an advisor.

The cost of a financial advisor may vary, but the majority of advisors charge based on a percentage of how much money they manage for you. This fee structure is called Assets Under Management (AUM).

Vet the financial advisor's background.

Thoroughly research potential financial advisors.

A couple of ways to find an advisor would be to first ask family and friends for a recommendation. Another way would be to find one online using websites like:

Once you find an advisor, vet them by double-checking their credentials, fiduciary status, cost, fee structure, and background. You can also use FINRA's BrokerCheck to view disciplinary actions and complaints filed against financial advisors.

Questions to ask a financial advisor.

Get a clear understanding of what each advisor is offering.

Here are some questions you may want to ask:

Gauging credibility.

  • Are you a fiduciary (long-term or short-term)? Understand whether or not your advisor is legally bound to work towards your best interest for the long term, or if they might be able to slip in commission-based products that could be detrimental to your finances.

  • How do you get paid? This question is key in determining the intentions of the advisor. Make sure both of your goals are aligned.

  • What are your credentials? You should have already searched this up before contacting the advisor; nevertheless, it's important to ask them directly to better understand their educational background.

Getting aligned.

  • What kind of services do you offer? Understand whether or not they can help you with your specific needs.

  • What kind of clients do you usually work with? Understand whether or not the advisor's experience level matches the goals you are trying to meet.

  • Do you have any conflicts of interest in managing my money? Understand if they are handling your finances responsibly or putting your finances at risk.

  • What happens if you change firms? Determine if you will be able to work with this advisor long-term or if your finances will be handed off to someone else if they are not around.

  • How often will we meet? Gauge the frequency of interaction and determine if it's worth the price.

  • Will you collaborate with my other advisors, like CPAs or attorneys? Determine whether or not they are a team player and collectively willing to help you grow.

To remember.

Competency, honesty, and empathy are some of the major characteristics of a good financial advisor. Be cautious when choosing an advisor to handle your personal finances, but once you find a good one, they should be able to help you achieve your financial goals and protect your financial future.