How to Choose a Financial Advisor

If you’ve heard it once, you’ve heard it a thousand times: You need to invest for retirement, especially if you want to build wealth and retire with a nice nest egg.

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That means you’re going to need a financial advisor at some point—someone who can explain complex investments in ways you can understand.

Finding the best financial advisor near you might seem intimidating at first, but we promise, it’s not as hard as it seems! Here’s the gist of it: Pick a financial advisor committed to educating and empowering you. That way, you can make the best decisions about your financial future.

What Is a Financial Advisor?

A financial advisor is an educated, certified pro who can help you understand, manage and make progress toward your retirement savings, college savings and other investment goals.

If that sounds like a lot for one person to manage, it is. That’s why financial advisor isn’t a one-size-fits-all title. Financial advisors come from diverse backgrounds and offer a wide range of services. They often hold different degrees and certifications too. So, finding an advisor who fits your specific needs—like a SmartVestor Pro for investing—is very important.

How to Choose a Financial Advisor

You have lots of options when it comes to choosing a financial advisor (and not all of them are good). But fear not—you can find a financial advisor who’s worthy of your time by following these seven steps.

1. Evaluate your financial needs.

First things first—think about what you need. Take a good, hard look at where you are on your financial journey and how a financial advisor can help you.

For example, maybe you’re ready to begin investing for retirement (only if you’re out of debt and have an emergency fund in place!). Or maybe you just don’t have the time or the know-how to choose and manage your investments by yourself. A good financial advisor can help you with all of this and more.

We get it—no one wants to pay for things they don’t actually need. That’s why the first step is getting clear on what services you do need. From there, you can choose the financial advisor who’s the best fit for your current goals.

2. Understand the different types of financial advisors.

Different financial advisors have different specialties. They can be investment professionals, tax professionals, wealth managers, financial consultants, financial planners—or any combination of these.

Plus, financial advisors can have all kinds of different titles depending on the training they’ve received or exams they’ve passed. Here are just a few:

• Certified Public Accountant (CPA)
• Personal Finance Specialist (PFS)
• Registered Investment Advisor (RIA) and Investment Advisor Representative (IAR)
• Certified Financial Planner (CFP)
• Chartered Financial Analyst (CFA)

Having so many options can cause a lot of confusion. But here’s what it boils down to: You want a financial advisor who has solid training and experience (and who treats you with respect). A good advisor will use their knowledge to teach you, while a bad advisor will talk down to you and expect you to go along with whatever they say. We’ll pass on that second option, thanks.

All right! Now we know a little more about the different types of financial advisors. But what does a financial advisor do? Well, a lot! This is why it’s so important to figure out your financial needs before sitting down to meet with your advisor. That way, when you start interviewing financial advisors, you’re more likely to find a good fit for your situation.

But which type of financial advisor should you choose for different financial goals? Here are some of the major services they provide—and the type of advisor you should talk to for each one:

• Investments: If you need help with investments, you’ll want to chat with an investment professional like an RIA or CFP. They’ll let you know which investments are right for you, balance your portfolio, and help keep your mind at ease. 
• Retirement planning: Need help figuring out what your dream retirement looks like (and how to get there)? This is also where you’ll want to talk to an investment professional. They can project your future financial needs and strategize the best way to stretch your investments and retirement savings—so you can reach that dream. 
• Tax planning: Do taxes make your head spin? Talk to a tax professional (like a CPA) about your complicated tax questions. These financial advisors can also help minimize your tax burden. 
• Estate planning: Talking about end-of-life plans isn’t fun, but it’s very important. Wealth managers and attorneys (particularly a PFS) with estate planning experience can put a plan together with you and provide some peace of mind—no matter how complex your financial situation. 
• Health and long-term care planning: There’s a good chance you’ll need more medical services as you get older—it's just a fact of life. A financial advisor or insurance agent can help you create a plan for these expenses. 
• Inheritance management: Are you expecting a large inheritance? A wealth manager can help you decide the best way to put it to work for you—and your legacy. They’ll also walk you through any tax implications you might have to deal with.

4. Know the cost of a financial advisor.

When deciding on a potential financial advisor, it’s also good to know how they get paid. There are usually three main ways advisors get paid: commission only, fee only or fee-based. Here’s what all that means.

• Commission only: You pay the commission (or sales load) as a portion of the money you invest. Let’s say you want to invest $10,000 in a mutual fund, and it has a 5% fee. You would pay a $500 commission while the rest of your money is invested in the fund. 
• Fee only: A fee-only financial advisor accepts a percentage of the assets they manage for you, an hourly fee, or a flat-rate fee for their services. They can also work on retainer. RIAs and IARs are usually fee-only advisors.

• Fee-based (hybrid): You’ll pay based on the amount you invest with them, plus you’ll pay them a commission for any additional products you buy from them.

There are positives and negatives to each approach—just watch out for possible conflicts of interest with commission-only advisors. Regardless, you should always ask a financial advisor how they get paid. If they won’t give you a straight answer, maybe it’s time to find someone else to manage your wealth.

How much does a financial advisor cost?

Okay, now we know a little more about how financial advisors get paid, but how much will that actually cost you? The answer depends on a lot of things—like the individual financial advisor, the size of your investments, and the number of services you want. But you can use some averages to estimate your costs.

Here’s how much you can typically expect to pay a financial advisor:

Commission Only	Commissions are usually charged when you buy shares of a mutual fund, and they typically range from 1–5.75%.
Assets Under Management (AUM) Fee	The fee is based on a percentage of Assets Under Management (AUM), usually starting at 1% up to $1 million AUM and decreasing as AUM goes up.
Hourly Fee	Average financial planner hourly fees range from $150–300 per hour.
Flat Fee	Flat fees (including retainers) depend on a wide range of factors, including services provided, but often cost several thousand dollars.
Fee-Based (Hybrid)	In a combination of fee-only and commission-based compensation, the financial advisor gets a percentage of AUM as well as additional compensation when they sell you more products.

5. Research financial advisors.

Now we’re getting to the good stuff: researching and interviewing possible financial advisors. Remember, it can take a few tries to find the best financial advisor for you—and that’s okay! This isn’t social media—you’re building an actual relationship with a real human.

Here are some things to keep in mind:

Interview a few different advisors.

Don’t just go with the first person you talk to—schedule a few conversations with different advisors. You’ll get a clearer picture of what you’re looking for. Plus, you’re more likely to make a good decision if you have options to choose from.

If you’re not sure where to start, the SmartVestor program makes this process simple by connecting you with up to five financial advisors who might be a good fit for you. From there, you can interview each one to see who fits your needs best. And it’s completely free to get connected!

Ask a lot of questions.

You should never be afraid to ask financial advisors questions—a lot of them. And a good investment pro should always give straight answers. The interview phase is a great time to get all the information you need so you can choose the right pro for you.

So, come prepared with a list of questions. Here are a few ideas to get you started:

• What certifications do you hold, and are you a fiduciary (someone who is legally obligated to manage money for your benefit, not theirs)?
• What do you love most (and least) about your job?
• What services do you provide to your clients?
• What’s your investment philosophy?
• How will we communicate about my investments, and how often?
• How do you get paid?
• How will you measure and evaluate my investment performance?
• How long have you been a financial advisor, and what’s your track record?
• If you’ve ever lost clients, can you tell me why they stopped working with you?

If an advisor recommends a particular fund, another great question to ask is “Do you personally invest in this fund yourself?” If an advisor is confident enough in a fund to invest their own money, that can give you a confidence boost.

Any experienced financial advisor will be able to answer these questions. You need to feel like you can trust the person who’s giving you investing and retirement advice. So if they can’t answer these questions well, they’re not the right advisor for you.

Make sure you share investing philosophies.

No matter what, you want a financial advisor who clearly explains their investing philosophy. Make sure they have a long-term investing strategy that matches your wants and goals. And they should always respect your opinion.

6. Walk away if it doesn’t feel right.

If something doesn’t feel right about a potential financial advisor, keep on looking. Finding and hiring the right pro can be difficult, but you need to feel good about the relationship.

Avoid sales-minded pros or “experts” who make you feel dumb for asking questions—you’re not. In fact, you’d be dumb if you didn’t ask questions! The right financial advisor will explain every detail to you until you get it—no matter how long it takes. You should never feel left out in the dark. If you do, you’re talking to the wrong person.

Again, interview as many financial advisors as it takes to find someone you can trust to educate you. That way, you’ll know your options so you can make the best investment choices.

7. Choose a financial advisor who teaches you.

You can’t make an informed decision with your money if you don’t understand what you’re investing in. That’s why you need a financial advisor with the heart of a teacher.

It’s important to choose someone who takes the time to help you learn about your investments. They should be able to explain to you—in a way you can understand—the difference between a 401(k) and IRA. Or why you should choose a Roth 401(k) over a traditional 401(k). Or how to choose mutual funds with a long track record of success. They should empower you to make the best decisions for your financial future.

When you find a professional who answers all your questions and leaves you feeling confident about your future—no matter the market conditions—you’ve found the right financial advisor for you.

Remember, You’re in Charge of Your Money

Some people have lost their fortunes simply because they let other people manage their investments for them. The truth is, no one cares about your money like you do. Whether you’re investing thousands or millions each year, you need a plan that puts you in control. It’s your retirement and your future, so don’t be shy about taking charge of it!

A good financial advisor shares their expert advice but knows you still call the shots. If they want you to do something simply because they said so, find someone else to partner with. Remember, you should never invest in something you don’t fully understand, and you should certainly never feel pressured to do so. You aren’t hiring a parent—you’re gathering counsel. You want someone who’ll guide you to make the best decisions . . . for you.

 

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.