You shouldn’t navigate your financial journey alone. Managing finances well requires certain expertise, informed decision-making, and discipline. This should certainly be done with a partner if you have one. It can also be a great help to have a financial advisor.
Not all financial advisors are a good match for every individual or couple, though. Here’s how to choose a financial advisor right for you, taking into account your needs, goals, situation, and other factors.
Why Does a Financial Advisor Matters?
A financial advisor brings their expertise and experience to your situation. They don’t only have in-depth knowledge of investment options, financial markets, and wealth-building strategies, but they’ve also helped many others navigate the journey.
The experience of helping many others helps an advisor sympathize with the decisions you need to make, the challenges you’ll likely face, and your overall journey. They’ve guided others, some of whom were likely in situations similar to yours, and have the experience to guide you.
Guiding, of course, requires detailed knowledge of the terrain. That’s where the expertise in retirement plans, college savings plans, general financial planning, estate planning, and investment choices (e.g. stocks, mutual funds, bonds, real estate, etc.) come in. They know what paths are available, and how quickly each might get you to your destination.
It’s important to have a financial advisor who’ll be there to guide you all along the way. A general map is only so helpful. You’ll want someone who can show you the exact terrain, and who’ll be there when you need help.
Defining Your Financial Goals: Building a Roadmap to Success
Before seeking a financial advisor, take the time to define your financial goals. What do you want to achieve? Are you saving for retirement, buying a home, funding your child’s education, building wealth for future generations, or something else?
Your specific goals will determine the expertise that your financial advisor should have. You’ll want someone knowledgeable in each area that you have a goal. Some goals (e.g. estate planning and tax mitigation) might require an attorney, accountant, or other professional, too.
Confirm that your chosen advisor has expertise in the areas where you need it. Also, make sure they’ll work with attorneys, accountants, or others as needed.
Different Types of Financial Advisors and Their Expertise
Financial advisors can have expertise in almost any finance-related area. Many focus on retirement planning, wealth generation, estate planning, tax planning, insuring, managing small business finances, and other areas. Many do some combination of the above.
Advisors can also focus on one or several particular investments. While they’ll have knowledge of most investments, they may primarily suggest stocks, mutual funds, bonds, annuities, or some other asset class.
In addition to these areas of expertise, many financial advisors have specific credentials from recognized organizations. Some common and respected certifications are:
- Certified Financial Planners (CFP): Broadly knowledgeable in retirement planning, estate planning, tax strategies, insurance products, investing, and other areas. These are qualified advisors who have the expertise necessary to help most people. They mainly focus on financial planning. CFPs have a fiduciary responsibility.
- Chartered Financial Analysts (CFA): More specifically knowledgeable in investments, investment strategy, portfolio management, and financial analysis. These are highly qualified advisors who primarily help with investing, and less so with financial planning. CFAs have a fiduciary responsibility.
- Registered Investment Advisors (RIA): More specifically knowledgeable in investments, investment strategy, and portfolio management. These are highly qualified advisors who can provide a tailored investment strategy and specific investment recommendations. RIAs have a fiduciary responsibility.
- Financial Planners: Sometimes used by non-certified financial planners, this shouldn’t be confused with a CFP. Financial planners may be knowledgeable in retirement planning, estate planning, tax strategies, insurance products, investing, and other areas, but they don’t have the same level of certification. They may or may not be fiduciaries.
- Financial Advisor: Non-certified financial advisors may be knowledgeable in retirement planning, estate planning, tax strategies, insurance products, investing, and other areas, but they don’t have the same level of certification. They may or may not be fiduciaries.
- Broker-Dealers: Non-certified broker-dealers may also provide financial advice, but they primarily earn commissions from selling financial products. They usually aren’t fiduciaries, and potential commissions can create conflicts of interest.
- Robo-advisors: Standard robo-advisors normally don’t include access to someone who has one of these certifications. Instead, these provide much more generalized advice, usually based on a few different options (e.g. conservative, growth, value, etc.). Robo-advisors aren’t able to offer fully personalized advice.
5 Steps on How to Choose a Financial Advisor with Confidence
With your goals defined and some basic knowledge of the different types of financial planners and advisors, you can use these 5 steps to find a financial advisor who’ll serve you well.
1. Research Credentials and Experience
Verify that the advisor has a professional certification, whether that’s a CFP, CFA, RIA, or other widely recognized credential. Being certified by a company isn’t the same as holding one of these credentials. Some advisors may have more than one credential, but look for at least one of these.
Also, check that an advisor has experience working with clients who have similar goals to yours. This will ensure they have the experience as well as the expertise.
2. Consider Their Investment Philosophy
Does the advisor’s investment approach align with your risk tolerance and investment goals? Whether it’s active or passive management, bonds or stocks, conservative, growth or value, make sure their general strategy matches your desired approach and goals.
The vast majority of investment advisors will be familiar with multiple approaches, and part of the reason to use one is so they can recommend an approach that’s good for you. Still, you’ll want someone whose general approach works with your own thinking.
3. Check Their Services
While investment advisors usually offer a range of services, not all advisors offer all services. Check that an advisor provides retirement planning, wealth management, estate planning, investing, or any other services you’re looking for.
4. Understand Their Fee Structure
Financial advisors can charge a flat fee, hourly feed, percentage of the assets managed, commissions, or a combination thereof.
Many advisors might have a flat fee for certain services (e.g. estate planning consultation), hourly fee for more advanced matters (e.g. business opportunity), and a percentage of assets for ongoing management. Commissions could be on transactions (e.g. stock trades) or sold products (e.g. insurance products); you’ll want to be sure there aren’t commissions that create conflicts of interest.
Be sure you understand an advisor’s fee structure, so you’ll know what you’re paying when you use them. An advisor should be willing to discuss this openly with you. Keep in mind that certified advisors might charge a little more, but the added expertise could be well worth the additional cost.
5. Confirm They’re a Fiduciary
Double-check that they’re a fiduciary, which means they have a legal obligation to advise and act in your best interests. They will be if you’ve already vetted that they have one of the above certifications, but it doesn’t hurt to double-check. Make sure you explicitly ask this if interviewing an advisor who doesn’t have one of the above certifications.
Feel free to ask advisors for a consultation, as they should be willing to have a conversation without charging for the initial appointment. This is when both you and they can explore whether you’re a good match. You can also ask for references if you like.
Choosing the Right Communication Style
Communication is key to a successful advisor-client relationship. Consider your preferred communication style. Do you prefer in-person meetings, phone calls, emails, or virtual consultations? Some advisors offer a hybrid approach, providing maximum flexibility and availability. Choose an advisor whose communication style aligns with yours.
Powerful Questions to Ask a Financial Advisor
Feel comfortable asking specific and pointed questions when you’re interviewing an advisor. Here are a few that should yield clear and informative answers:
- Are you a fiduciary?
- What are your credentials and experience?
- How do you charge for your services?
- What is your investment philosophy?
- How often will we review my financial plan?
- What’s your response time for queries or concerns?
- What’s your succession plan if you’re unable to serve as my advisor?
Any qualified advisor should be able to answer these questions, except perhaps for a succession plan. Advisors who have many years before retirement might not have a definitive plan in place. This one question is more important if interviewing an older advisor.
Red Flags to Avoid in a Financial Advisor
As you interview a potential financial advisor, be wary of anyone who exhibits these red flags:
- High-Pressure Sales Tactics: Avoid advisors who push you to make quick decisions or invest in specific products without considering your needs. At the very least, you won’t get good personalized advice. They also might be funneling you toward products that have commissions.
- Lack of Transparency: Be wary of advisors who are not upfront about their fees or investment strategies. This could lead to dissatisfaction in the aid you receive, and surprises when you’re charged.
- Unrealistic Promises: Steer clear of advisors who guarantee high returns or claim to have a foolproof investment strategy. All investment carries risk, and higher potential returns usually correspond to higher risk.
- Disciplinary History: Check the advisor’s background with regulatory bodies like the SEC, or FINRA to ensure they have a clean record. You can ask them, or contact the agency itself.
- Unresponsiveness: A good advisor should be accessible and responsive to your inquiries. If they don’t answer new clients promptly, what’ll happen once you hire them?
Finding the Right Financial Advisor
Choosing the right financial advisor can be a pivotal step in your financial journey. It’s an important decision, and you don’t have to make it alone.
Looking to turn your financial goals into reality? Our free Advisor Match Tool is here to help. It connects you with experienced financial professionals who can explain complex concepts, answer your questions, and help you understand the pros and cons of different strategies.
Why navigate the financial landscape on your own when you could have expert guidance? Use our free Advisor Match Tool today and take a confident step towards your financial future.
General Disclaimer: The information provided on this site is for informational purposes only and should not be construed as financial advice. Invested Better does not guarantee the accuracy or completeness of the information provided. Please consult with a licensed financial advisor before making any financial decisions.
Investment Risk Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
