How to Choose a Financial Advisor

Aspiring clients will rarely have a problem finding a financial advisor.

Instead, the challenge is deciding what kind of advisor to work with. There are myriad types of advisors, fee structures and services money professionals offer using the “financial advisor” title. Sorting through those differences can be a challenge.

The following are nine steps and questions to consider when choosing a financial advisor:

1. Do you need a financial advisor?

2. Decide what services you need.

3. Select which type of advisor you want.

4. Captive vs. independent advisors.

5. Know the difference between a fiduciary financial advisor and nonfiduciary.

6. Determine what you can afford.

7. Get referrals from friends or Google.

8. Check the financial advisor’s credentials.

9. Interview multiple advisors.

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Do You Need a Financial Advisor?

Obviously, not everyone is ready to hire a financial advisor.

If you’re living paycheck to paycheck and you want to start saving, that’s great, and you should. But generally, a financial advisor won’t be interested in working with you, as harsh as that sounds. Advisors do make money, after all, from their clients who are making money. If you’re only able to sock away $30 per week into a savings account, because of what you’ll bring to the table and what they’ll take away from it in fees, neither you nor the financial advisor can afford to work together.

So when is it time? Here’s a good rule of thumb: “Once someone is to the point that they have stable and steady income and have the ability to save at least 20% of their annual income, it might be time to consider a financial advisor,” says Nicole Rutledge Regilio, director of financial planning and wealth advisor with Resource Consulting Group in Orlando, Florida.

But even if you aren’t there yet, financial advisory firms and online services can provide assistance. Websites such as GarrettPlanningNetwork.com and napfa.org, which connects clients with the National Association of Personal Financial Advisors, can hook you up with a financial planner who works with middle-class investors.

Likewise, robo advisors can be a great option for new investors. With low fees and account minimums, robo advisors are a cost-effective way to start investing.

If you do want that in-person experience, you still have options. Financial advisors come in many forms, from financial planners and brokers to investment advisors. In general, a financial planner is who you turn to if you want help with holistic financial planning. Planners specialize in helping you create a strategy for managing your entire financial life.

Brokers and investment advisors, on the other hand, are more likely to concentrate on the investment side. Brokers tend to be better for people who just want someone to help them buy or sell investments and don’t need as much strategy planning help. Investment advisors can provide guidance on which investments to choose and may even take over daily management for you.

Decide What Services You Need

Besides cost and how much you have to invest, an important factor in choosing a financial advisor is knowing what services you want from the advisor.

“While most people assume all financial advisors do the same thing, that’s not always the case,” says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan.

Advisors can specialize in different areas of planning and products. For example, some advisors lean toward securities-based solutions, such as stocks and funds, while others will prioritize insurance-based products. Similarly, if your primary focus is retirement planning, you may want to work with a retirement financial advisor.

There are numerous specializations in the financial advice industry. Here are a few you might look for depending on your situation:

Retirement planning specialists (RPS) help you prepare for and live in retirement.

Wealth planners specialize in the needs of clients with more wealth, usually requiring clients to have at least $1 million in assets and sometimes upward of $20 million.

Estate planners help prepare your estate for your beneficiaries.

— Certified divorce financial analysts (CDFA) specialize in helping clients through and after divorce.

— Certified financial transitionists (CeFT) help clients through major life transitions, such as selling a business or the loss of a spouse.

“Some advisors even offer full family office services such as paying bills and doing taxes,” says Jason Steeno, president of CoreCap Investments and CoreCap Advisors in Southfield, Michigan. When choosing an advisor, think about your needs and how involved you want to be in your financial affairs.

Select Which Type of Advisor You Want

There are many different types of advisors with whom you could work, from traditional financial advisors you meet with in person to online advisors or robo advisors. The type of financial advisor best suited for a client “depends on the complexity of their situation and whether or not they have a desire to have a more personal relationship with their advisor,” Regilio says.

As you consider the types of financial advisors, think about what you want from the relationship, both in terms of services and interactions, as each of the following will have a different approach.

Traditional financial advisors. These advisors offer the most opportunity to build a personal relationship. “A traditional advisor should be able to navigate more complex situations and provide more holistic advice in a broader range of areas,” Regilio says.

Human advisors can also build a history with clients and use this knowledge and continuity to inform and anticipate your changing needs throughout your life, says Andrew Crowell, vice chairman of wealth management at D.A. Davidson & Co. in Los Angeles.

If you want to build a long-term relationship with an advisor, however, keep age in mind, Tallou says. If you’re 30 years old, working with an advisor in his 60s may not be the best idea since he could retire before you do.

“Often when advisors leave the business, clients become orphan clients and distributed to other advisors,” Tallou says.

Human advisors are typically the most expensive type of advisor, Regilio says, but “the advice you receive should be more specific to you and your goals.”

Robo advisors. Likely the most low-cost option, robo advisors are perhaps the easiest type of financial advisor with which to work, given their 24/7 access and low or no account minimums. Robo advisors generally “offer automated investment solutions and models, which are designed to help take the emotional ups and downs out of investing and help keep the investor on track with their financial plan,” Crowell says.

But this advice is often high-level and typically can’t take into account all the moving parts of your situation, Regilio says. This can become detrimental as your life progresses and financial situation becomes more complex.

You’ll also get the least personal interaction with a robo advisor and aren’t likely to talk with the same person each time you reach out, she says. “It could be challenging to even connect with an actual person at times.”

For these reasons, robo advisors are usually best for someone who is just starting out or who has no desire for more than a bare-bones investment management approach.

Hybrid advisors. These advisors aim to provide the best of both worlds: a low-cost, automated investing platform that comes with access to human advisors who can help address life’s complexities. These solutions can be a good option for investors whose situations are too advanced for a robo advisor but who don’t feel they’re at the level to warrant a traditional financial advisor, Regilio says.

The downside is that the two elements of hybrid advisors may not play well together. “Mixing advisory solutions could potentially lead to an uncoordinated and/or disjointed financial plan,” Crowell says.

Hybrid advisors often require the investor play quarterback in coordinating the various solutions and approaches, he says.

Most interaction with even the human side of a hybrid advisor is also likely to be electronic or by phone, with little to no face-to-face interaction, Regilio says.

Captive vs. Independent Advisors

If you opt to work with a human financial advisor, another aspect of the advisor’s practice to consider is if he works as a captive or independent advisor.

Captive advisors work for larger firms, such as Merrill Lynch, Edward Jones or Charles Schwab, Tallou says. While independent advisors own their own firms.

There are pros and cons to each type of advisor. “Captive advisors are bound by the best wishes of the firm and may be incentivized to push certain plans or strategies to meet quotas or reach a bonus,” says Tallou, who is an independent advisor.

But being affiliated with a larger firm can also give captive advisors and their clients access to a broader array of products at lower cost than with an independent advisor. Captive advisors can also benefit from being part of a large team of experts.

“Of course, all financial advisors know other professionals across different industries,” Tallou says, “but having them in-house can be a difference maker because they tend to be more in-tune with each other in terms of what the overall financial goal is for the client.”

Know the Difference Between a Fiduciary Financial Advisor and Nonfiduciary

The financial industry has two sets of compliance standards that advisors follow. One is called the suitability standard, and the other is the fiduciary standard.

The fiduciary standard is when your financial advisor is legally bound to act in your best interest. Fiduciary advisors must put their clients’ interests before their own. They’re also referred to as fee-only advisors because they don’t accept commissions on the investments they recommend.

As financial advisors who follow the fiduciary standard will tell you, advisors who follow the suitability standard are only legally required to make sure the investments are suitable for you — they aren’t required to be your best option, and the advisor may be incentivized to put you into products that line their pocket more than yours.

Fiduciary advisors are understandably proud of their distinction, but some of them make it sound like choosing someone who works on commission is like hiring a crook to manage your money. Brokers following the suitability standard aren’t out to get you. It’s true they may steer you toward an investment that their employer (your brokerage firm) is touting, but presumably, they want to keep you as a happy client for years to come.

A good credential to look for is the CFP, or certified financial planner. CFPs are advisors who have met extra education and experience requirements to better serve their clients’ holistic financial planning needs. They’re also held to an ethical standard by the CFP Board.

Determine What You Can Afford

As with all financial matters, choosing a financial advisor will often come back to cost. It’s not only what type of financial advisor you need, but also what type of financial advisor you can afford.

In-person financial advisors have three ways they can earn compensation: through an annual, hourly or flat fee; through commissions on the investments they sell; or a combination of a fee and commissions.

Annual fees based on assets under management are the most common fee structure for financial advisors. While financial advisor fees average 1% per year, they’re often charged on a sliding scale. The more assets you have with the advisor, the lower your fee will be. This means that as your assets grow over time, the cost of your financial advisor will diminish.

Robo advisors can also use a fee-based structure, but they’re usually far cheaper. Most robo advisors charge between 0.2% and 0.5% of assets per year, unless you want access to a human advisor. In this case, the fees can be as much as 1.5% per year, plus the fees on the investments you own, which can also be north of 1%.

Human advisors can also charge flat fees for individual services. For instance, you might pay $2,000 for an advisor to create a financial plan for you. After the plan is created, however, you’re usually on your own to implement it, unless you want to pay for continued advice.

Ask for Referrals From Friends or Google

As for finding a certified financial planner — or any advisor — you can certainly pull out the phone book or search the internet, but a good course of action is to start with recommendations from friends, family or colleagues. Ask people with a similar financial situation or goals to yours.

“This should provide a list of advisors from people who have actual experience using them as opposed to just choosing an advisor via an online search,” Steeno says. You can always use Google to check out the recommendations or augment the recommendations with online lists of advisors in your area.

Check the Advisor’s Credentials

Verify your advisor’s credentials on BrokerCheck.finra.org or AdviserInfo.sec.gov. Both are free tools that provide the background and experience of individual advisors and firms, including robo advisors. Most importantly, these sites will tell you about any disciplinary action the advisor has received. The CFP Board also maintains a list of disciplined CFPs by state on its website.

Interview Multiple Advisors

Finally, shop around. Advisors recognize that you may talk to a number of professionals, and you should.

When you do talk to advisors, ask them to describe their client experience, Crowell says. “How frequently and how will they communicate with you? How do they measure ‘success’ in a client relationship? Do you need to fit into their model, or are they able to customize an approach to your individual preferences and needs?”

Ask about the other resources available to you as a client. “No one can be an expert in all aspects of financial matters,” Crowell says. “Knowing your advisor has access to specialized expertise” can reassure you that you won’t “outgrow your advisor’s capabilities.”

Be upfront with what you bring to the table, too. “You want to work with the advisor who is best for your situation and needs,” Regilio says. To that end, “share an overview of your financial situation as well as what you hope to achieve with the advisor.”

Steeno says it’s important to ensure your advisor has a documented process for managing client money. “If they cannot explain how their process works, or you hear inconsistent explanations of how they manage their clients’ money, you should think twice about hiring them,” he says.

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How to Choose a Financial Advisor originally appeared on usnews.com

Update 09/06/22: This story was previously published at an earlier date and has been updated with new information.

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