How To Choose a Financial Advisor

How To Choose a Financial Advisor

Financial professionals are not just for the super-wealthy. A financial advisor can help you make smart decisions and leverage your income and assets using a strategy intended to set you up for long-term success. If you’re unsure about your financial decisions or how you’re managing your money, you might want to consult a professional.

A financial advisor can assist you in determining how much to save and how to invest your money in a manner that keeps you on track to meet your goals. If you have specialized needs, they may be able to help you address them.

It’s crucial to vet anyone you allow to access your money and to keep track of whatever they do with it.

Types of Financial Advisors

When choosing a financial advisor, you should be aware of the different options available to you. Advisors typically vary in both the ways that you will pay them and how they work to help you achieve financial success.

Types of Financial Advisors

Type	Pay Structure
Commissioned Advisor	Receives commissions on products they sell you
Fee-Based Advisor	Provides advice for a fee, often at an hourly rate; also commissioned to sell products
Fee-Only Advisor	Fiduciary not commissioned to sell products who accepts fee directly from clients
Robo-Advisor	Automated portfolio management service that charges a flat fee

Commission-Based and Fee-Based Advisors

Commission-based advisors are often employed by large financial institutions that sell products such as mutual funds and life insurance. These advisors receive commissions on the products they sell. This may create a conflict of interest because higher commissions are sometimes an incentive to sell certain products regardless of whether they are the best fit for the client.

Fee-based advisors usually work for a broker or agent and provide financial advice for a fee, typically an hourly rate, a flat retainer or a percentage of the assets they manage. They are also licensed to sell products for a commission and thus face the same conflicts of interest as commission-based advisors.

Fee-Only and Fiduciary Advisors 

Fee-only advisors do not receive commissions. They provide advice in exchange for a fee paid directly by the client. The fee is usually either an hourly rate or a percentage of the assets they manage, generally from 0.5% to 2% a year. They are fiduciaries who have a legal duty to act in the best interest of the client. 

Some may agree to work for a flat fee. For example, a fee-only advisor may quote $1,500 in advance for a plan. They might charge a fee quarterly or annually.

However, even fee-only advisors may be motivated to act contrary to a client’s best interest. A fee-only advisor who charges by the hour, for example, may take longer than necessary to develop a financial plan or prep for client meetings. An advisor who receives a percentage of assets may keep the client’s money invested longer than it should be in order to charge more for managing a larger portfolio.

The most stringent legal and ethical standards are enforced by the Securities and Exchange Commission and followed by fiduciaries. Fiduciary advisors are a type of fee-only advisors who put their clients’ interests before their own. They do not charge commissions.

Chartered retirement planning counselors, accredited investment fiduciaries, registered investment advisors, investment advisor representatives and Certified Financial Planners all abide by fiduciary standards.

How To Find a Financial Advisor

When trying to find a financial advisor, first consider your goals to narrow down what type of advisor you are looking for.

If you need a comprehensive plan from which you can take action without further guidance, look for an advisor who charges by the hour.

If you want someone to manage your portfolio moving forward, your best bet is a long-term financial planner who charges a percentage of the assets they manage.

Identifying an Advisor

The Association for Financial Counseling & Planning Education®, a nonprofit organization that works with the government and the military to promote its mission of providing financial security to people of every income level and background, offers a directory of accredited financial counselors who cater to low- and middle-income people. The AFCPE does not provide investment or insurance advice and will never sell you products.

If you are a veteran, the Veterans Administration provides financial planning free of charge to veteran beneficiaries of certain insurance plans, such as Servicemembers’ Group Life Insurance.

You also may be most comfortable working with a trusted name or major company. Fidelity and Charles Schwab are some of the largest and sturdiest giants in the industry.

It can also be worth asking people you know for recommendations. Check with colleagues, friends and family. If they recommend someone, ask about how long they’ve worked with that professional, what kinds of services the advisor provided and why they chose that person.

Meeting and Interviewing Financial Professionals

After you’ve identified a list of potential financial advisors, it’s helpful to talk with a couple of them before making your final decision. Most advisors will meet with you once free of charge to see if you’re a good fit for each other.

Your first meeting with a financial professional should be two-way. You should be asking about their credentials, fees and approach. They should ask you about your goals, finances, plans, risk tolerance and approach to saving.

Before the meeting, try writing down your financial objectives. Make sure to bring the list with you. Having clear priorities is essential for helping both of you determine during the interview process if you make sense for each other.

Questions to Ask a Financial Advisor

The National Association of Personal Financial Advisors and FINRA recommend asking some of the following questions when meeting with an advisor.

Financial Advisor Questions To Ask

• How are you compensated?
• If you accept commissions, will you itemize the amount of compensation you earn from products that you recommend to me?
• Do you accept referral fees?
• Are you held to a fiduciary standard at all times?
• Do you provide comprehensive financial planning or just investment management?
• How will you help me reach my financial goals?
• What happens to my relationship with the firm if something happens to you?
• What experience do you have working with people like me?
• What professional licenses do you currently hold?
• Are you registered with FINRA, the SEC or a state securities regulator? If so, for how long and in what capacity?
• Do you have any disciplinary actions, arbitration awards or customer complaints? If so, please explain them. (Compare responses to information found in BrokerCheck and other third-party sources.)
• Do you or your firm have an overarching investment philosophy?
• What type of investment products and services do you offer?
• Are there any products or services you don’t offer? Why?
• Do you or your firm impose any minimum account balances on customers? If so, what are they? What happens if my portfolio falls below the minimum?
• Can you provide me with any customer references?
• Are there conflicts of interest that we have not discussed? What are they and how do you resolve them?

Try to gauge how aggressive or cautious the advisor is in planning and see if that aligns with your comfort level. Find out if the advisor will be the only professional working with you or if they are part of a team.

Remember that you do not need to agree to any form of payment during your first meeting. Go home and think about it and talk to people you trust. If you feel pressured at all, that can be a red flag.

How To Do a Background Check on Your Financial Advisor

Before hiring anyone, check their background to make sure they haven’t been disciplined and that they are indeed licensed or certified as they claim. According to the SEC, unlicensed and unregistered individuals commit much of the investment fraud in the United States.

You can do a simple internet search of advisors and their firms. Check with relevant government and industry accountability, licensing and certification sites to confirm their credentials and determine any disciplinary history.

For example, you can look up your investment professional’s background through the Investment Advisor Public Disclosure platform provided through the SEC.

The SEC regulates investment advisors who manage $110 million or more in client assets. Someone with a Series 6 securities license may sell mutual funds, variable annuities and variable life insurance. A Series 7 license authorizes the professional to also sell individual stocks, bonds and option contracts.

Advisors with less than $100 million in assets under management must register with the state regulator for the state where the advisor has its principal place of business.

According to FINRA, when a state-registered advisor’s assets under management reach $100 million, the advisor may elect to register with the SEC. When advisors’ AUMs exceed $110 million, they generally must register with the SEC.

You can check the backgrounds of investment advisors on the SEC’s website.

To research the background and experience of financial brokers, advisors and firms, look on FINRA’s Broker Check site, which covers both state and federally registered professionals.

Finally, check with your state’s insurance department to see if the advisor has been disciplined on the state level.

Avoiding Fraud

Beware of advisors who make promises they can’t fulfill. Don’t trust those who brag that they’ll beat the market. Also, don’t believe in guaranteed high rates of return without high risk.

FINRA’s “Red Flags of Fraud”

• Unlicensed advisors selling unregistered securities, which can include stocks, bonds, hedge funds and oil or gas deals
• Overly consistent returns
• Advisors who credit complex investing techniques for unusual success
• Missing documentation and stocks without stock symbols
• An investor who pressures you to make a purchase

Advisors should provide authoritative advice across a range of financial topics. They should ask you about how much risk you want to take and respect your risk tolerance.