How to Choose a Financial Advisor

Quick Answer

Choose the right financial advisor for you by getting clear on your financial needs, understanding the different types of financial advisors, determining what services are in your budget, conducting background research and comparison shopping.

An agent wearing a blue suit is talking to his client at the living room of a home while showing him documents.

A financial advisor can help you reach your financial goals by providing guidance on investments, retirement planning, insurance and more. Some financial advisors offer comprehensive, ongoing financial planning, while others may just manage your brokerage account or recommend certain financial products.

According to a 2021 survey from Charles Schwab, consumers who worked with financial advisors to create financial plans were more likely to choose good investments, pay down debt and save for emergencies. Overall, creating a financial plan helped consumers feel more confident and financially stable.

Choosing the right financial advisor for you comes down to evaluating your goals and understanding the different types of advisors and their costs. Here's how to pick the right financial advisor in four steps.

1. Write Down Your Financial Goals

Before you begin researching financial advisors, take time to assess your current financial situation, including your financial obstacles and long-term goals. Make a list of areas you'd like a financial advisor to help you with, which might include:

  • Investment strategy: Some financial advisors help clients create investment portfolios that align with their income, goals and tolerance for risk. According to Fidelity, working with a financial advisor can add between 1.5% and 4% to your portfolio returns long-term. They'll monitor your investments to ensure your portfolio remains balanced and aligned with your preferences.
  • Budgeting: Financial advisors can help you analyze your spending and ensure your cash flow is synced with your goals. They can also help you craft a budget to build wealth.
  • Debt management: Financial advisors can help you strategize paying down consumer debts, student loans, car loans and mortgages. If debt repayment is your primary concern and you're struggling with affording high-interest debt payments, a credit counselor may be a better fit for you.
  • Retirement planning: A financial advisor can develop an investing strategy to grow your wealth and plan for retirement. As you approach retirement, a financial advisor can help you shelter your wealth from loss and create streams of income.
  • Estate planning: A financial advisor can work in conjunction with an estate planning attorney (who is qualified to handle your will and other legal documents) to help you allocate your assets to your future heirs.
  • Tax planning: Some financial advisors are also certified public accountants (CPAs), which enables them to help you navigate tax problems, maximize deductions and possibly even prepare your taxes. Whether or not an advisor is a CPA, they should be able to help you prioritize tax benefits in your investing, retirement planning and estate planning.

2. Understand the Different Types of Financial Advisors

In general, financial advisors provide money management and investment advice. The breadth of services a financial advisor offers can differ considerably from advisor to advisor, and only some offer comprehensive financial planning.

The titles "financial advisor" and "financial planner" aren't regulated by law. That's why it's critical that you know what professional training and certifications to look for to verify the qualifications of an advisor.

There are a few main certifications to look for:

Registered Investment Advisor

It's in your best interest to work with a registered investment advisor (RIA) because RIAs are regulated by the U.S. Securities and Exchange Commission (SEC) or state securities divisions and are subject to fiduciary duty.

A fiduciary financial advisor must always act in the client's best interest. Fiduciary standards differ from suitability standards, which only require that an advisor recommend investments suitable to you. An advisor only bound to suitability standards can recommend investments that they'll earn a higher commission on, even if they know that isn't your best option. This can make a difference in the quality of advice you receive. To avoid this conflict of interest, look for advisors who identify themselves as RIA-certified or ask about their fiduciary status.

Chartered Financial Analyst

The chartered financial analyst (CFA) certification is a highly respected, "gold standard" credential. To achieve CFA accreditation, a financial advisor must pass a series of three extensive tests that span investment tools, asset valuation and portfolio and wealth planning.

The CFA program has a pass rate of less than 50%, so you can be confident that an advisor who lists this certification has substantial finance knowledge.

Certified Financial Planner

The certified financial planner (CFP) designation is recognized as a standard of excellence in financial planning. The CFP board confers CFP designation only to those who complete a rigorous program consisting of education, examination, ethics requirements (including fiduciary standards) and 6,000 hours of professional experience or 4,000 hours of apprenticeship.

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

Your budget may determine what type of financial advisor you can work with.

Understand How Financial Advisors Charge Fees

Financial advisors charge for their services in one or more of the following ways:

  1. Fee-only financial advising: Fee-only financial advisors make money from the fees they charge you for their services and do not receive commissions on the investments or financial products they recommend. They may charge an hourly rate, a retainer, a flat fee or a percentage of total assets managed.
  2. Commission-based financial advising: Commission-based financial advisors don't charge you for consultations. Instead, they earn their salary through commissions on investment products they recommend to their clients. Few financial advisors charge commission only.
  3. Commission- and fee-based financial advising: These advisors make money in fees for their services and through trade commissions.

According to the National Association of Personal Financial Advisors, working with a fee-only financial advisor minimizes conflicts of interest. You'll know that your advisor is compensated by you only for their advice, not by earning commissions.

Consider Robo-Advising

A robo-advisor is an automated, low-cost alternative to working with a financial advisor. You'll fill out a questionnaire surveying your age, income, risk tolerance and goals. Then the robo-advisor will use algorithms to build you a diversified portfolio tailored to your preferences.

For those who are just starting out investing and don't need comprehensive money management, robo-advising can be a good option. The robo-advisor will monitor and automatically rebalance your portfolio as necessary. In addition, you can track your progress within the platform, modify your goals and add extra funds to your portfolio.

If you want the cost-effectiveness of robo-advising but also want the option to speak with a real person, you could opt for a brokerage that offers hybrid robo-advising. You won't get the comprehensive services of a traditional financial advisor, but you'll be able to pick up the phone or video chat with a professional at a lower cost than in-person advising. Brokerages such as Betterment and Fidelity offer hybrid advising.

Average Cost to Hire a Financial Advisor

How much you'll pay for financial advising depends on the value of your assets, your geographical region and an individual financial advisor's cost model.

  • Investment advisors: Between 1% and 2% of the account balance per year.
  • Robo-advisors: Between 0.25% and 0.35% of the account balance per year.
  • Hybrid advisors: Between 0.5% and 1.5% of the account balance per year.
  • Fee-only financial advisors: On average, you can expect to pay $250 per hour for a fee-only planner. If you choose to pay an annual retainer, the median charge is $4,000 per year. For a one-time financial plan that you will manage on your own after initial setup, expect to pay about $2,000.

4. Research and Compare Financial Advisors

Once you've taken inventory of your financial planning needs and gotten up to speed on the cost of financial advising, start looking for the right financial advisor.

Compile a List

Once you have an idea of what type of services you're looking for, begin searching for financial advisors in your area. The National Association of Personal Financial Advisors offers an online search tool to locate accredited, fee-only financial advisors. It's also common to ask friends, family and colleagues for recommendations or do an online search for advisors in your area.

Whichever method you use, do your own due diligence and make sure you only reach out to advisors you deem trustworthy and suitable to your financial circumstances.

Look for Warning Signs of Fraud

Fraudsters may pose as financial advisors and brokers online to scam people out of money, with "get rich quick" scams defrauding consumers of hundreds of millions of dollars each year.

Look out for claims that seem too good to be true: "doubling your wealth in days" and huge returns with zero risk. Also, be wary of anyone who asks you to use unusual or hard-to-track payment methods, like credit cards (not typically accepted by brokerages), wire transfers or gift cards, or anyone rushing you to make decisions.

Run Background Checks

You can verify a financial advisor's credentials and reputation in three ways:

  1. Contact your state securities regulator. Your state's securities division is there to protect you from investment fraud and misrepresentation. Before hiring an advisor, navigate to your state's securities division web page and locate instructions for checking an advisor's accreditation and whether there are any complaints filed against the advisor.
  2. Use the SEC advisor search tool. Navigate to the Investment Adviser Public Disclosure site to search for an advisor by name, firm or location. You'll be able to view the advisor's current registrations, employment background and conduct history, including any disclosures about disciplinary events.
  3. Ask the accrediting body. If an advisor lists credentials like CFP and CFA certification, you can contact the accrediting organization to check. Verify that the advisor earned the accreditation and whether they remain in good professional standing.

Review Testimonials and References

You can gather more information on an advisor's history of helping clients build wealth by reviewing testimonials on their site and requesting references.

While a scammer can spoof testimonials, a certified investment advisor cannot. So once you've verified an advisor's credentials, you can take their testimonials at face value.

Certified advisors are governed by SEC Rule 206(4)-1, simply called the marketing rule. The marketing rule prohibits advisors from using misleading or biased performance reviews to advertise their services. In practice, an advisor can't include performance results for a given high-return portfolio and deliberately leave out details on a substantially similar portfolio that didn't perform as well. This protects you from being sold misleading results.

Find a Good Match

Ultimately, once you've verified a financial advisor's credibility, competency and experience, hire based on specialization and communication style. You should enjoy working with your advisor, so look for someone who communicates in your preferred formats (in-person, phone or email) and who you jibe with. To make your final determination, seek free consultations or introductory conversations with a few of your top candidates.

Take Your Time to Choose the Right Advisor

Much like any financial product or service, selecting the right financial advisor takes time, caution and research. Consider your financial goals before you begin your search, seek a professional with proper credentials and a good reputation, and look out for signs of scams and fraud.