Even if you’re an expert on something, it’s always good to get a second opinion. When it comes to money, getting help is especially important. A financial advisor can help you budget, plan for retirement, save for a goal like buying a home, or just make sure you’re on the right track.
However, choosing the right financial advisor can be incredibly difficult. You need to consider your needs and how an advisor can help you reach them, then make sure the advisor you choose meshes with your personality.
How to choose a financial advisor
Your relationship with your financial advisor should last a long time. At the very least, you should start with the expectation that it will.
Your advisor should be able to help you plan for major life events such as buying a home, having children, and retiring on your own terms. Ideally, you’ll work together over years or decades to reach your goals.
This makes choosing a financial advisor very important. Follow these steps to find the best advisor for your needs.
1. Identify the financial advice you need
The first thing you need to do when choosing a financial advisor is to figure out the type of financial planning and advice you need. Different advisors have different skill sets and services.
Think about your goals and why you are seeking advice. If you’re thinking primarily about retirement, you’ll want to work with someone who has experience with retirement planning. If your financial goals are more short-term, like buying a home, you need a different type of advice. You may even be looking for quick personal finance advice like how to budget instead of investment management services.
Or you might have a bunch of different goals—some near-term, some long-term, some in between. Whatever your goals and time horizon, we get the process off on the right foot by identifying the financial advice you need and your goals.
2. Choose the right type of financial advisor
Once you know what kind of guidance you need, you can start thinking about what kind of financial advisor you should work with. There are many different types of counselors and professional designations.
For example, Certified Financial Planners (CFPs) have received a professional designation that demonstrates their ability to offer long-term financial planning for their clients. They have to abide by the rules and regulations laid down by the CFP Board.
On the other hand, Registered Investment Advisers (RIAS) provide a range of financial advice but often focus more on investment and wealth management services.
Many financial advisors have multiple professional designations, which means they can help you with multiple aspects of your financial life. If you work with a large financial firm, you likely have access to many different types of advisors.
If you just want someone who can manage your investment portfolio for you, that requires a different type of financial advisor that offers estate planning and tax services.
3. Learn the difference between fiduciary and non-fiduciary advisors
One of the most important things to know about a financial advisor is whether or not they are a fiduciary.
If an advisor is held to a fiduciary standard for you, it means that they must act clearly and completely in your best interest. They cannot make recommendations based on factors other than your benefit, such as whether the investment they recommend will earn them a commission.
On the other hand, non-fiduciary advisors are held to a lower standard known as the due diligence standard. They must make recommendations that suit your needs, but they are allowed to consider other factors and may act in their own interest by recommending products that earn them a sales commission.
It is not difficult to see how the adequacy standard creates conflicts of interest. If a non-fiduciary advisor recommends a financial product that earns them a higher commission than a product that doesn’t, are they really doing the right thing by you?
In general, you should always ask an advisor if they are a fiduciary to see how they respond. Some professional designations, such as RIA and CFP, require that the holder always act as a fiduciary to their clients.
All else being equal, choose a fiduciary advisor over a non-fiduciary advisor. You can be more confident that their recommendations are in your best interest.
4. Decide how much you can afford
Nothing comes free in life and financial advice is the same. You will need to think about how much you can afford to pay financial professionals for their help.
Different advisors use different fee structures. Some operate entirely on a commission basis, making money by selling you financial products like life insurance or annuities. There are also advisors who charge an annual fee that is either a flat fee or based on a percentage of your invested assets.
Others charge an hourly rate, especially if you’re looking for help evaluating specific investment products or financial decisions you want to make.
Ask any advisor you’re considering working with for a copy of their fee schedule. Also, ask about the different streams of income they receive to make sure they are not selling products that earn them commissions or kickbacks, even if they are technically a bona fide.
Before you decide who to work with, think about your budget and make sure you can afford any consultant fees you may have to pay. Keep in mind that even seemingly small fees can have a huge impact on your overall return.
5. Research financial advisors
Researching financial advisors is important because you will be trusting them with your money and making sure it is managed properly.
Many people find a counselor through a recommendation from a friend or colleague. A recommendation can give you insight into how the consultant works and give you a good reference for the quality of their work.
Still, you should always do your own due diligence on every advisor, no matter how many others talk about. Start with Broker checka free advisor database maintained by the Financial Industry Regulatory Authority (FINRA). Broker Check Advisor listings include their professional designations, work history, financial licenses, and any regulatory or disciplinary actions taken against them.
XY Planning Network Another good resource is for advisors who act as fiduciaries. It doesn’t vet advisors as heavily as BrokerCheck, but it’s a good place to find independent advisors you might not have heard of otherwise.
For individuals with $150,000+ in investable assets, Zoo Financial offers a free matching service that connects you with vetted, fee-only advisors. The platform accepts only 5% of advisor applicants in its network and provides personalized matches based on your specific financial situation and goals in about 2 minutes.
You can also consider working with a robo-advisor. These are programs that manage your investments for you. They base their investment strategy on your goals and risk tolerance, typically building a portfolio for you using low-cost mutual funds and ETFs.
However, many robo-advisors have no human component and do not offer customized financial planning services. If you want that human touch or have really complex financial needs, choose a robo-advisor that employs human financial planners or stick with an independent human advisor.
6. Interview potential advisors
Before you commit to working with a financial advisor, interview a few potential candidates.
You want to make sure you find a good financial advisor who meshes with your personality and understands your goals. The last thing you want is to work with someone who prioritizes different aspects of your financial life than you do or has a fundamentally different investment philosophy.
You should feel comfortable asking potential financial advisors about their philosophy for helping people reach their goals, whether they offer comprehensive financial planning or more focused services, and any other questions you may have about how they operate.
The last word
Choosing the right financial advisor for your needs is incredibly important. Consider your needs, think about the type of professionals who can help you, try to find someone who follows sincere criteria, consider their fee structure, and talk to them to make sure they’re a good fit.
By following this process, you give yourself a better chance of finding a mentor you can stick with long-term. And once you’ve found this advisor, you’ll be ready to tackle long-term financial goals like saving for retirement or growing your kids’ college fund.