Managing your finances can be overwhelming, especially if you lead a busy lifestyle or have ambitious financial goals. That’s where a financial advisor’s support can make all the difference.
A skilled financial advisor can manage your financial planning and may help you achieve your financial goals faster. They can also assist with tax, retirement, estate, and insurance strategies. Most importantly, they can free up your time and attention to focus on other matters.
Currently, there are over 330,000 financial advisors in the United States. With so many options, you may be wondering how to find a financial advisor that’s right for you. Below, we’ll explain how to choose a financial advisor in eight steps.
Step #1: Clarify Your Goals
Before you start your search, reflect on why you want to hire a financial advisor. Some possible reasons include gaining help with the following:
- Financial planning – If you want to achieve specific short-term or long-term financial goals, such as saving up for a down payment or your child’s college tuition, a financial advisor can craft a custom budget and financial plan for you. They can also strategically structure your investments to expedite the process.
- Investing – Did you know that $1,000 invested in the S&P 500 in 1954 would be worth one million dollars today? Investing your money into stocks, bonds, and other securities can be an effective way to grow your wealth. If you’re interested in investing, a financial advisor can help you construct a financial portfolio that aligns with your goals, timeline, and risk tolerance.
- Tax planning – While your accountant can help you file your taxes appropriately, a financial planner can help you streamline your tax burdens using strategic income deferrals, charitable donations, and other tax-efficient strategies.
- Insurance planning – Protecting your financial future involves more than just saving and investing; you also need to safeguard against unforeseen events. A financial advisor can assess your unique risks and suggest insurance plans to protect your income, assets, and loved ones.
- Debt management – Amid rising inflation, many Americans are financing their lives with loans and credit cards. If you have a lot of debt to pay down, a financial advisor can help you design an efficient repayment plan and offer support along the way.
- Retirement planning – A financial advisor can review your current retirement strategy to ensure you’re on track. They can also estimate how much money you’ll need to retire comfortably, craft a savings plan, and suggest the best investments to grow your wealth.
- Estate planning – If you want to leave a legacy for your loved ones, an estate plan can ensure your assets are distributed according to your wishes and streamline your heirs’ tax burden.
Some financial advisors specialize in one of these areas, while others provide a full suite of services. Identifying which services you need ahead of time can help you narrow down your search accordingly.
#2 Understand the Different Types of Financial Advisors
Service offerings aren’t the only thing that sets financial advisors apart; credentialing does, too. The term “financial advisor” isn’t associated with any specific credentials. However, you can ensure your financial advisor has the proper level of education and experience by choosing one with the following titles:
- Certified Financial Planner (CFP) – CFPs are financial advisors with a fiduciary duty to their clients, meaning they’re legally bound to act in their clients’ best interests. They must complete a rigorous certification process and keep up with continuing education. As a result, CFPs are uniquely qualified to offer personalized, ethical, and comprehensive financial advice. As of 2024, less than one-third of financial advisors possess this prestigious credential.
- Registered Investment Advisors (RIA)—RIAs are individuals or firms registered with the Securities and Exchange Commission (SEC) or state regulatory authorities to provide financial advice. Like CFPs, RIAs offer a high level of expertise and act as fiduciaries to their clients. However, RIAs often focus primarily on investment management instead of CFPs’ more comprehensive scope of services.
- Chartered Financial Analyst (CFA)—CFAs undergo a rigorous education in investment management. As a result, these financial advisors often manage large investment portfolios and institutional investments. They also adhere to a strict code of professional ethics.
- Certified Public Accountant (CPA) with Personal Financial Specialist (PFS) – CPAs are licensed accountants with expertise in tax preparation, financial reporting, and auditing. Some CPAs also possess a PFS credential, enabling them to offer comprehensive financial planning advice.
Along with these respected designations, some other credentialed financial planners include Chartered Financial Consultants (ChFCs), Certified Investment Management Analysts (CIMAs), and Chartered Life Underwriters (CLUs).
Understanding these credentials can help you choose a financial advisor with the education, experience, and fiduciary commitment to protect your best interests.
Step #3: Consider Using a Robo-Advisor
Credentialed human advisors offer the most comprehensive financial advice, but their services may not be suitable for everyone. If you prefer a lower-cost solution, a robo-advisor may be sufficient.
Robo-advisors are automated platforms that provide investment management services. They use algorithms to create and manage diversified portfolios, focusing primarily on exchange-traded funds (ETFs). Most robo-advisors charge a flat fee or a percentage of assets managed of around 0.25%. For a $50,000 account balance, 0.25% would be $125 a year. Thanks to this affordability, robo-advisors are a suitable solution for individuals seeking a hands-off, low-cost approach to investing.
While most robo-advisors can’t advise you on tax strategies or insurance, some offer access to human financial planners for an additional fee.
Robo-Advisors vs. Human Advisors
Here’s a quick comparison to help you decide if a robo-advisor or human advisor is right for your financial situation:
- Cost – Robo-advisors are typically more affordable than human advisors since they automate the investment process. However, you get what you pay for – robo-advisors don’t provide the same service offerings or tailored support as a human advisor.
- Personalization – Robo-advisors build and manage your portfolio based on your stated financial goals, risk tolerance, and time horizon. While they offer some degree of customization, they lack the detailed personalization of a human advisor.
- Scope of specialization—Robo–advisors’ services are limited to management. On the other hand, human advisors can assist with retirement planning, estate planning, tax optimization, and insurance, making them a better fit for people with more complex financial needs.
- Human touch – Pursuing your financial goals can be an emotional process. While robo-advisors may provide cost-effective investment management, they lack the emotional support and personalized guidance a human advisor can offer. This human touch can be particularly reassuring during volatile markets or significant changes in your personal life.
As you can see, robo-advisors may be right for people with more straightforward financial needs. However, human advisors are better suited to individuals with complex financial needs who want a more hands-on relationship with their financial planner.
Step #4: Determine Your Preferred Payment Structure
How financial advisors charge for their services can influence the quality of their advice and overall cost. Understanding the different payment models can help you select an advisor whose compensation aligns with your financial goals.Here’s an overview of the main types of financial planner payment structures:
- Fee-Only – Fee-only financial advisors earn their income exclusively from their clients’ fees, as opposed to commissions on financial products. This payment model fosters a transparent and client-focused relationship. Financial advisors can structure their fees in the following ways:
- Percentage of the assets they manage for you (typically around 1%)
- Flat annual fee
- Hourly rate
Because fee-only advisors don’t earn commissions on financial products, they’re less likely to have conflicts of interest. Most fee-only advisors are also fiduciaries, so you can trust them to put your best interests first.
- Commission-Based—Commission-based financial advisors often advertise their services as “free.” That’s because they earn their money through commissions on financial products, such as investments or insurance policies. Promoting these products may sometimes introduce conflicts of interest in your relationship. Commission-based financial advisors are rarely fiduciaries. Instead, they’re held to a “suitability” standard. This means they can recommend products to their clients as long as they suit their general situation (even if other products may be better suited for their long-term goals).
- Fee-Based – Fee-based financial advisors employ a hybrid payment structure. In addition to charging fees, they also earn commissions on financial products. While some fee-based advisors act as fiduciaries, they may not uphold this standard when selling commission-based products.
As you can see, selecting the right payment structure is crucial, as it can influence the quality of advice and the potential for conflicts of interest in your relationship. If you want the most objective advice available, opt for a financial advisor who employs a fee-only or fee-based model.
Step #5: Create a List of Potential Financial Advisors
With your preferred services, advisor type, and payment structure in mind, you can look for financial advisors in your area. Start your search by asking your friends, family, and colleagues for recommendations. Their referrals can offer valuable insights into different advisors’ expertise, communication styles, and client satisfaction.
From there, you can expand your search online. Websites like the National Association of Personal Financial Advisors (NAPFA), the Certified Financial Planner Board, and local financial planning associations often allow you to refine your search based on advisors’ credentials, specialties, location, and client reviews.
Combining personal referrals with thorough online research can create a targeted list of prospective financial advisors qualified to help you achieve your financial goals.
Step #6: Interview Financial Advisors
Once you’ve created a list of a few financial advisors, you can schedule consultations with them to get a feel for their communication styles. During these consultations, make sure to ask the following questions:
- What professional certifications or designations do you hold?
- What is your educational and professional background?
- How long have you worked as a financial advisor?
- What type of clients do you typically work with?
- What services do you provide?
- What are your areas of expertise?
- What is your approach to financial planning?
- What is your investment philosophy?
- How will you tailor your advice to my financial situation?
- Do you have a minimum asset requirement?
- How do you charge for your services?
- Do you act as a fiduciary?
- How do you handle conflicts of interest?
- Have you ever faced any disciplinary actions?
- Will you collaborate with any other advisors, such as CPAs or attorneys?
- Who will be my primary point of contact for your services?
- How often will we communicate?
Based on their answers to these questions and your rapport, you can better understand which financial advisor is the best fit.
Step #7: Carefully Vet Each Financial Advisor’s Background
Before making your final selection, verifying your top choice’s credentials and background is a good idea. You can do so by:
- Reviewing their Form ADV – A Form ADV is a financial advisor’s mandatory filing with the SEC and state regulators. It outlines their employment history, services, fees, and potential conflicts of interest. It also features information about their investment philosophy.
- Investigating their disciplinary history – Next, you can dig into your financial advisors’ disciplinary history on the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck website. It will showcase a clean record or a list of regulatory actions, complaints, and sanctions.
Taking this extra step ensures you select a qualified professional who maintains high ethical standards and can provide peace of mind as you embark on your financial journey.
Step #8: Hire the Financial Advisor
After determining your favorite financial advisor, the next step is to engage their services. This process varies slightly from one advisor to the next, but it generally involves the following steps:
- Express your interest in becoming a client.
- Review the advisor’s engagement letter.
- Sign their Form ADV and Form CRS (Customer Relationship Summary).
- Clarify your goals, risk management, and investment timeline.
- Provide your financial information.
- Establish clear communication preferences.
- Set up your accounts and transfer them to their management.
Choose the Right Financial Advisor With Confidence
Selecting the right financial advisor involves careful consideration. You need to evaluate your advisor’s credentials, fees, fiduciary duty, and communication style. By taking the time to vet potential advisors thoroughly, you can make your final choice with confidence.
Are you ready to start your financial advisor search? Reach out to Alden Investment Group. As a trusted RIA, we can connect you with experienced advisors who will act in your best interest and offer expert guidance on everything from investment planning to asset management.
Take the first step toward securing your financial future by contacting us today.
Sources:
Finance Strategist. How Many Financial Advisors Are in the U.S.?
https://www.financestrategists.com/financial-advisor/advisor-types/how-many-financial-advisors-are-in-the-us/
The Motley Fool. 9 Investing Stats That Will Blow You Away.
https://www.fool.com/retirement/general/2016/01/28/9-investing-stats-that-will-blow-you-away.aspx
Gallup. Americans Continue to Name Inflation as Top Financial Problem.
https://news.gallup.com/poll/644690/americans-continue-name-inflation-top-financial-problem.aspx
CFP Board. Certified Financial Planner Population Grows; U.S. Advisors Expand.
https://www.cfp.net/news/2024/02/certified-financial-planner-population-grows-us-advisors-expand#:~:text=The%20United%20States%20has%20the,of%2098%2C875%20CFP%C2%AE%20professionals.