How to Choose a Financial Advisor

1. Write Down Your Financial Goals

What kind of help are you hoping to get from a financial advisor? If you aren't sure, start by clarifying your financial goals. That might include the following:

2. Understand the Different Types of Financial Advisors

There are several kinds of financial advisors to consider. The term casts a wide net and can refer to any of the following:

• Certified financial planner (CFP): Credentialed by the CFP Board of Standards, this type of financial advisor can provide general financial education and comprehensive advice that's tailored to you.
• Investment advisor: If you're looking for someone to provide personalized investment advice and possibly manage your portfolio, an investment advisor may be the right fit.
• Wealth manager: This is a financial advisor who often works with high-net-worth individuals. These clients may need help managing multigenerational wealth and creating a tax-efficient estate plan to ensure that their assets are transferred according to their wishes.
• Investment broker: This type of financial advisor can buy and sell securities on your behalf. Many also provide advice and resources for investors.

3. Decide How Much You Can Afford to Pay a Financial Advisor

How much you pay will depend on the type of financial advisor you work with, their fee structure and the level of support you need. Think about your budget and how much you can reasonably afford to spend on financial planning services. It might be money well spent if it ultimately improves your financial situation.

Financial advisors may charge in one (or both) of the following ways:

• Fee only: Some might charge an hourly rate or flat fee for their services, or a retainer fee if you plan on working with them for an extended period. Others may also charge a percentage of the assets they manage, often 1% to 2%. Fee-based financial advisors won't receive a commission on any financial products they recommend.
• Commission-based: These financial advisors earn a commission when you opt into certain financial products. That can include everything from insurance policies to annuities to mutual funds.

Rates for a financial planner can vary widely depending on the advisor as well as your needs and the complexity of your financial situation. That said, $250 per hour, or $4,000 as an annual fee, are considered midrange costs. If you're working with an investment advisor, you could pay 1% to 2% of your total assets per year. Robo-advisors, which automatically invest for you based on your age and risk tolerance, often charge anywhere from 0.25% to 0.89% each year.

4. Research and Compare Financial Advisors

It's wise to do your homework and compare different financial advisors before committing. Here are some simple action items:

1. Compile a list of potential financial advisors. Start with the National Association of Personal Financial Advisors, which maintains an online database. You can also ask friends, family members and colleagues for recommendations.
2. Zero in on their services and fee structure. Once you have a short list, you can look more closely at what each advisor offers—and how much it might cost you. This can help you weed out advisors who may not be right for you. You can also read online reviews and testimonials. Certified advisors are prohibited from using misleading or biased performance reviews to advertise their services.
3. Ask if they have a fiduciary duty to their clients. CFPs and registered investment advisors are obligated to act as a fiduciary. That means they are legally obligated to make recommendations that are in their clients' best interests (not their own). They must also keep careful records and keep their finances separate from their clients'.
4. Make sure they're properly accredited. Anyone can claim to be a financial advisor. Head to the Investment Advisor Public Disclosure site to verify whether an investment advisor is registered with the U.S. Securities and Exchange Committee (SEC). You can also dive into a financial advisor's employment history through the Financial Industry Regulatory Authority (FINRA). Here you'll see if they're properly registered and if they've had any complaints or regulatory actions brought against them.

Frequently Asked Questions

The Bottom Line

If the idea of working with a financial advisor sounds appealing, there are steps you can take to find the right professional for you. Understanding your goals and the different types of financial advisors is the first step. You can then assess your budget and vet potential advisors before making a decision. In the end, you'll want someone who understands your current financial situation and the vision you have for the future.