Regardless of your reason for seeking financial advice, there is almost certainly a financial advisor who can help. Need assistance with retirement planning or investments, or just want to make sure you’re on track financially? There is no shortage of advisors who focus on these areas. Looking for something more focused, like how to pay for college or implement a budget? There are advisors who can help with this, too.
A financial advisor with the right experience for your situation will help you make smart, strategic choices about your finances. You won’t be investing based on emotions or making guesses about what the best option is and what the long-term impacts will be. The advisor will use their expertise to guide you toward smart financial choices and help you understand what you need to do to stay on track and meet your financial goals.
Once you’ve decided to work with a financial advisor, the next step is to find the right advisor for you. Everyone’s financial situation is unique so there’s no such thing as the one best financial advisor. In fact, for reasons we cover below, “Best of” lists for advisors are often suspect. Therefore, your focus should be on finding the right advisor for your unique needs. In this article, we’ll go through some of the important criteria you should consider as you search for the right financial advisor.
What Does a Financial Advisor Do?
What comes to mind when you hear the term “financial advisor”?
Many people imagine an expert who mainly provides investment advice, and years ago this was what most advisors primarily did. Some provided investment advice via selling products with commission, while a smaller percentage of advisors managed client investments on an ongoing basis.
Over the last few decades, however, the business of providing financial advice has evolved. The services advisors provide now can be grouped into a few different categories:
- Financial Planning – Advisors work with you to address myriad financial issues ranging from long-term planning to insurance to tax minimization. Many advisors provide this service as part of a comprehensive financial plan that covers all relevant financial areas.
- Plan Implementation – The segment of advisors who can help with plan implementation has grown sharply in recent years. From coaches who can help with implementing a budget to advisors who work on a quarterly retainer, there are a number of options for plan implementation.
- Investment Management – Many financial advisors still focus on ongoing investment management of client assets and are not focused on providing more holistic financial advice.
- Wealth Management – This typically combines financial planning and investment management. Given the comprehensive nature of what these advisors do, you’ll usually pay more for this service and advisors who provide it often have minimums in terms of the value of client portfolios.
As you begin your search, bear in mind that how advisors refer to themselves is fluid and there are no rigid definitions within the financial advice industry. Some advisors who refer to themselves as financial planners also provide investment management and wealth management. Conversely, some advisors who refer to themselves as wealth managers only focus on managing investments. How advisor refers to themselves can provide some guidance, but you’ll need to dig deeper to find out what they really do.
Questions to Ask When Hiring a Financial Advisor
Here are some key questions to consider during the process of hiring a financial advisor:
Figuring Out What You Need
Why do you need an advisor?
The most important question to ask yourself before hiring a financial advisor is, “What do you need them to help you with?”
What questions do you want answered or what problems do you want the advisor to solve? It helps to think about this before you start working with an advisor so you can focus your search on the right type of advisor.
Here are some of the situations where you might need a financial advisor:
- You know you need a long-term financial plan and you want to put one together, but you don’t know where to start.
- You think you’re on track financially, but you want a professional with expertise in planning to confirm this is the case.
- You have done some financial planning and want to make sure you’re making optimal decisions and haven’t overlooked anything.
- You have built or inherited wealth but you don’t feel comfortable managing it on your own.
- You’re busy and don’t have time to manage your finances properly.
- The ups and downs of the markets make you uncomfortable, but you know you need your investments to grow over time to meet your financial goals.
- You want someone well-versed in your situation who can step in if something happens to you.
Bear in mind that most advisors focus on situations in which you have positive cash flow and need to identify your best financial options. Because of this focus, advisors are less helpful when:
- You haven’t saved and you don’t think you’ll be in a position to do so in the near term.
- Your situation is very simple and you don’t have many choices to make so a customized plan isn’t needed.
- Your primary concern is debt consolidation or debt counseling (in this situation we often refer people to this organization.)
What stage of life are you in?
If working with a financial advisor does make sense for you, another important question to ask is what stage of life you are in? Retirement is the most common reason people look to put together a plan, but there are other life transitions when having a financial plan can be valuable. Some of the most significant transitional stages in life where you might want the services of a financial advisor include:
- Marriage — When you commit to sharing the rest of your life with someone, you will be sharing finances with this person as well. Having a clear understanding of how your finances will be intertwined, what each of your financial goals are and what your long-term plan is can reduce conflicts around money and strengthen a marriage.
- Birth of a Child — Children are expensive and they require both short -erm and long-term financial planning. A solid financial plan can help ensure that you are prepared to provide your child what they need to thrive.
- Inheritance — An inheritance often brings with it both financial and emotional challenges. An advisor can help you understand the short-term and long-term financial implications of your inheritance and identify how to maximize its positive financial impact.
- Milestone Age — Milestone birthdays are often a time of reflection. When it comes to financial planning, they can be a good time to take stock and chart your financial future.
What type of advisor do you need?
Given the wide variety of financial advisors and how they serve clients, starting your search can be daunting. Once you’re clear on what you need, you can begin by determining if a firm works with clients in your situation. More specifically, many firms only work with clients on a retainer basis and insist on managing client assets. If you’re seeking something else – for example, comprehensive planning on a project basis or a time-limited engagement to help with implementation – you can cross these firms off your list.
If you are looking for an ongoing relationship that includes managing your assets, bear in mind that many firms have minimums. These may be based on the value of your portfolio or there may be a minimum fee. In either case, the minimum should be outlined in documents that firms are required to file with the Securities and Exchange Commission as outlined below. If you aren’t comfortable with or don’t meet the minimum, you can cross the firm off your list.
Do you need to meet them face to face?
Another helpful question is whether face-to-face meetings with your advisor are necessary. Many firms can work with clients in other states, and one clear impact of COVID-19 has been the increasing prevalence of remote meetings via Zoom and other videoconferencing software.
Hiring an advisor remotely means you can choose the right fit regardless of location since you aren’t limited to working only with the advisors in your immediate area. You’ll be able to choose a financial advisor who really understands you and your situation — even if they are located thousands of miles away.
Finding an Advisor Who Can Serve You Best
What services does the advisor offer?
Each financial advisor will offer a different set of services so make sure you understand whether the advisor offers what you need. As outlined above, some advisors focus on financial planning and they may or may not offer assistance with implementation. Others focus on investment management, while still others provide both comprehensive planning services and investment management. And be sure to keep an eye out for any minimum fee or portfolio size requirements an advisor might have.
There are two points you should bear in mind as you begin your initial review of an advisor’s services. First, there are no industry standards with regard to how advisors label themselves. Financial planner, financial advisor and wealth manager are all common terms in the financial advice industry, but there are no agreed-upon, consistent definitions of what each does. Second, it’s not uncommon for advisors to claim to offer comprehensive advice when in reality the focus is almost entirely on investment management. Comprehensive advice usually commands a higher fee, so make sure an advisor has a process for delivering timely, consistent advice.
How much experience does the advisor have?
Talk to potential financial advisors about the experience they have. How long have they been in the industry and what kind of work have they done previously?
Having more experience doesn’t necessarily make for a better advisor, but it can be a good indicator of whether an advisor understands what they are doing. Of course, a more experienced advisor with an excellent track record may charge higher fees. You may get better value by working with an advisor who offers quality service but doesn’t have as much experience.
What qualifications or designations do they have?
Without credibility and trustworthiness, an advisor would have no chance of success. As a result, a cottage industry has sprung up to confer credibility on advisors via impressive-sounding designations and awards. As for the latter, I wrote a post here about the proliferation of companies that publish “Best of” lists and make money selling advertising space and plaques to advisors who win these awards.
Wall Street firms have also gotten in on the act by designing in-house designations that can quickly be earned so the advisor can hit the street and start selling. There are certainly some designations that take time to earn and demonstrate that an advisor has proficiency in a body of knowledge needed to serve clients. Some of the more common designations that are generally well-regarded include:
Beyond the designations, some colleges confer degrees in personal financial planning that cover much of what an advisor should know. Finally, as the industry has matured and advisors have become increasingly niche-focused, there are a number of designations focusing on specific issues like divorce or sudden wealth. These can be particularly helpful if you find yourself in a situation the designation is designed to address.
If a potential advisor cites a designation and you’re unfamiliar with it, do a bit of research into what has been required of them to obtain that designation. Did they have to pass an exam and what material was covered? Does the designation require them to follow a certain process, or ideally, act in a fiduciary capacity? Do they need to have continuing education to maintain that particular designation? Getting answers to these questions will allow you to assess the extent to which a designation will be helpful in meeting your needs.
Does the advisor have experience with your particular situation?
Perhaps more important than designations is experience. Ideally, you want to find an advisor who is familiar with your situation and has worked with clients who are similarly situated. The firm may know the ins and outs of your employer’s retirement benefits, for example, or might focus on income planning for retirement or how to plan for college. The more familiar they are with your situation and addressing the issues that are important to you, the more effective they will be.
Many advisors will define what they think of as their ideal client: someone with whom they want to work because they are best able to serve them. Once you’ve narrowed down your list of prospective advisors, ask if they have an ideal client. The closer you are to the ideal, the better the fit is likely to be.
How do they charge for services?
An important factor to consider is how your financial advisor will charge for the services provided. There are three main commission models used by most advisors:
|Type of Compensation||Commission-Based||Fee-Based||Fee-Only|
|How It Works||Some advisors will charge a straight commission every time they sell you a product or make a transaction.
For example, you might be charged a commission for every stock purchase, or a fee may be deducted from the money before it is invested.
|This is a hybrid compensation structure. It can be confusing, but it sometimes offers the best of both worlds.
Some service – often creating a financial plan – is done on a fee-basis, but the advisor can sell commissionable products (most frequently insurance).
|This type of advisor is paid directly by you, not from the sale of an investment product.
How you pay them runs the gamut, from fees based on the size of your portfolio to hourly fees, flat fees or subscription-based fees.
|Pros||● This model can offer a high level of diversity when it comes to product offerings, which can help you find the risk management strategies you want.
● Commission-based advisors will often work with smaller accounts
|● With this model, your financial advisor is motivated to make you more money.
● This advisor has a lot of different types of investments and insurance tools they can recommend.
|● If the advisor is being paid based on a percentage of the assets managed, they have motivation to make more money for you.
● The arrangement will be clear and transparent with no hidden fees and no bias due to conflict of interest.
|Cons||● A commission-based professional is held to the standard of offering recommendations that are suitable to your needs, but not necessarily to the higher fiduciary standard where they are legally and ethically required to manage your assets for your benefit and not theirs.||● Your financial advisor may be influenced to offer you products that come with a commission, whether or not they are the best choice for you.
● They also might be limited when it comes to the securities they can offer.
|● A fee-only professional might have a limited amount of offerings when it comes to insurance products and securities. Also, you might find that they are incentivized to be more aggressive with your portfolio in order to increase their fees.
● Over time, you may end up paying more than you would in a traditional model.
Does the advisor agree to act as a fiduciary?
Another essential factor to consider is whether or not your advisor agrees to act as a fiduciary. What does this mean, and what exactly is a “fiduciary advisor”?
A fiduciary is a person who is given the power to act on behalf of another person, putting their interests first. This legal precedent originally stemmed from an 1830 court ruling and fiduciary duties appear in a wide variety of business relationships, including executors, guardians, trustees, corporate board members, shareholders and more.
As a fiduciary, the advisor or financial planner owes you a duty of loyalty, good faith and trust. Being a fiduciary is considered the “highest legal duty” of one party to another — it means your financial advisor is legally bound to act in your best interests.
If there is a situation with a conflict of interest, the advisor must disclose all the facts and details so the client can make an informed decision about how to proceed. Before working with an advisor, ask if they have signed a fiduciary oath so you can be assured they are working in your best interests.
How will they communicate with you?
This is something else to consider. For example, how often will you hear from the advisor? How will they get in touch with you? Ask the firms you are considering if they have processes in place that outline how (and how frequently) they communicate with clients.
This might seem like something small, but it can make a big difference. Good communication is essential for a successful experience working with a financial advisor, particularly when markets head south or your life changes unexpectedly. If you can’t find a way to communicate that works for both of you, then it might not be a good match.
Are they a good overall fit?
Finally, you’ll want to think about whether or not a potential financial advisor is a good overall fit for you. Do you get along with them and do they understand you? Do they listen and explain things clearly or become lost in industry jargon?
Successful relationships with advisors often span decades, so you’ll want to choose someone you get along with. If meeting with them becomes unenjoyable, then you might find yourself less enthusiastic to work on your financial goals.
How to Begin Your Search for a Financial Advisor
The internet is the most frequent starting point for an advisor search – in fact, the phrase “financial advisor near me” is one of the more expensive paid search terms. However, one big challenge in starting on the internet is the fact that the SEC doesn’t allow advisors to post client testimonials. Some regulators even consider third party review sites like Yelp and Google to be suspect.
So while an advisor’s website and third party sites we list below can fill in many of the details on what a specific financial advisor offers, it can be difficult to judge the quality of an advisor given the lack of online feedback available from an advisor’s clients.
Ask friends and family for recommendations
Contact your family and friends to ask them about financial advisors they have worked with in the past. Since they are your friends and family, they are more likely to give you an honest review. They will likely warn you if they have worked with a financial advisor who didn’t offer high-quality service.
Check out their website
Look at the way advisors describe themselves, how they outline their services and what aspects of finance they focus on. However, keep in mind that on their website they are trying to sell their services, so it is a somewhat biased source of information. They obviously aren’t going to write anything bad about themselves or their services.
Conduct in-person interview
An in-person interview will give you a better sense of what an advisor is like and whether they feel like the right fit for you.
What sort of things can you ask in an in-person interview? If they advise on investments, you can ask them about their investment philosophy. It should be something that resonates with you and is clear and easy to understand.
Also ask them to explain a financial concept to you. You want someone who can explain complex financial concepts in a way you can understand. If they are unclear or vague in their answers, this is a red flag.
Don’t be afraid to ask as many questions as you need to. The ideal financial advisor is someone who will be happy to answer your questions and clarify everything that comes up along the way.
Check official industry lists
You can also look at the various lists compiled by industry organizations, including the following:
The Garrett Planning Network
The Garrett Planning Network is a nationwide community with hundreds of independent financial planners. It was founded in 2000 and has since grown into a huge national network with hundreds of financial planners, all working on a fee-only basis.
The website allows you to search advisors by services and specialties. These advisors provide their services to all types of clients without any minimum account requirements, long-term commitments or sales commissions. Also, all members of the Garrett Planning Network proudly embrace the duty of being a fiduciary and will always place your best interest first.
The National Association of Personal Financial Advisors (NAPFA)
This can be an excellent resource for finding a financial advisor. You can use the Find an Advisor search tool on the NAPFA website — this allows you to search by ZIP code, sort your results based on location and save them to your favorites list. The website has a wide range of financial advisors that can help you with many different financial needs, from long term care to retirement, estate planning, investments and more.
All members of NAPFA must adhere to a fee-only standard and cannot accept any other type of compensation from their clients. NAPFA advisors also must meet a fiduciary standard and must have a peer review of their work before they can become a member.
XY Planning Network
All of the advisors featured on the XY Planning Network website offer their services with no minimums and have signed fiduciary oaths. You can search the website for a financial advisor based on their location or specialty. For example, you can look for an advisor who specializes in dual income families, divorces, planning for college, retirement or any other aspect of financial planning.
The Securities and Exchange Commission (SEC)
The SEC website can be a great resource for finding the right financial advisor. The SEC tracks a lot of information and is a reliable source. Also, the SEC recently created a new form (Form CRS) that can help with the financial advisor search.
Check for reports or complaints
Another important step is to see which organizations the advisor is registered with and if they have had any reports or complaints against them.
Note, however, that if an advisor has a complaint against them, this doesn’t necessarily mean you should immediately rule them out. Formal customer complaints will stay on a financial advisor’s record for quite a number of years.
The longer an advisor has been in business, the more likely it is they will have at least one complaint on their record. They may still be an excellent financial advisor and a great fit for your needs. However, if an advisor has multiple complaints, you may want to look elsewhere.
You can check this via the SEC website using the SEC Action Lookup. This includes information about advisors who have been named in SEC administrative proceedings or have had orders issued against them. Also search an advisor’s background in the SEC’s Investment Advisor Public Disclosure database. If they are not registered here, this is a red flag.
You should also check the FINRA Investor Complaint Center. This website includes a “BrokerCheck” that allows you to quickly look up a financial advisor and see if they have had any complaints filed against them. You can also check the list of individuals barred by FINRA. These advisors have been permanently prohibited from associating with any member in any capacity.
How Will the Advisor Help You Achieve Your Goals?
Finally, the most important question to ask a financial advisor is how will they help you achieve your financial and investment goals?
The key is to be honest with your financial advisor about your situation. Tell them what you are facing, how you feel about the situation and what your ideal financial future looks like. When they have a full understanding of your finances, they will be able to help you in a meaningful and impactful way.