How to choose a financial advisor: steps to find a partner
In the past several years, investment startups and entrepreneurs have popped up all over the place. Their goal? To address the financial services industry's past inability to provide personalized but affordable advice to investors who don't have large amounts of money.
These players are here to stay. They have even changed the overall industry, as traditional brokers (and online financial advisors) now let investors trade stocks and exchange-traded funds (ETFs) for free.
Step 1: Understand the types of financial advisors
Step 2: Identify the services you need
Step 3: Decide how much you will invest
Step 4: Understand your budget for financial advice
Step 5: Research potential financial advisors
Step 6: Make your choice and take action
Step 1. Understand the types of financial advisors
While many platforms advertise "financial advisor" services, dozens of subcategories exist within this field. OK, sifting through specific job titles can get a bit tedious. Still, it's essential to know the basics of different advisor types to determine what they offer and whether their offerings align with your goals.
- Financial coach: Consider hiring a financial coach if you're looking to make more progress on your savings journey. While coaches don't need the high accreditations of other advisors, they can serve as mentors on core concepts like financial literacy, budgeting, and spending. You won't be able to invest or build a comprehensive plan with a coach, but they can get you started thinking about your financial health and analyzing your cash flows.
- Certified financial planner (CFP): A CFP is like a financial coach with a degree. To earn a CFP diploma, these advisors must pass a rigorous test, proving their competency in budgeting, debt management, and retirement planning. Not all financial planners have a CFP, so double-check each advisor's accreditation status.
- Investment advisor: For help with asset management, consider a registered investment advisor (RIA). This type of financial advisor can assemble a comprehensive strategy for your investment portfolio. handle rebalancing and risk adjustment on your behalf. To ensure an investment advisor is legitimate, you should have no difficulty finding their status on BrokerCheck by FINRA.
- Financial consultant: While "financial consultant" isn't as legally binding as a CFP or RIA, there is an official accreditation — the Chartered Financial Consultant (ChFC) — to check. Financial consultants typically handle everything CFPs can, but check each advisor's strengths for greater context.
- Wealth advisor: If you envision financial advisors only working with the world's elite, then you're probably thinking about wealth advisors. As the name suggests, these financial advisors work exclusively with high-net-worth clients and typically have exorbitantly high minimums to handle a broad range of financial services.
Three categories of online financial advisors
No matter an advisor's certification, you'll likely run across three types of online financial services in your research. These broad categories highlight how much or how little an advisor relies on technology.
Custom advising
A custom advisor is an individual or team that provides personalized (or "customized") guidance on your financial plan. Sometimes, you'll meet with a custom advisor in person, but more platforms offer ways to connect via phone or online. This is the perfect option for people who crave a personal touch and don't mind paying higher fees to connect with a live human being.
Leading custom financial advisor
WiserAdvisor is an online directory that helps connect you to certified financial advisors throughout the USA. With a free account, you can search WiserAdvisor's database to find qualified advisors in your area and see whether they meet your expectations.
It's free to schedule your initial consultation with an advisor through WiserAdvisor, but each provider has unique fee stipulations and minimums. WiserAdvisor also lets you fill out a questionnaire with your financial goals to automatically match you with an advisor with relevant credentials and experience.
Tech-assisted online financial advisor
More financial advisors nowadays use technology to offer clients extra data analytics without sacrificing personal one-on-one time. While these tech-assisted services may not do as much hand-holding as traditional custom advisors, they tend to provide lower fees thanks to the cost-saving digital tools they bring to portfolio management. So, if you don't mind sacrificing some personal guidance, this option may offer a happy medium.
Empower is a financial advisory best known for its retirement planning services, but it also gained a reputation for its high-powered digital tools after acquiring Personal Capital in 2020. Today, anyone can use Empower's financial tools for free with an online account, which includes investment tracking, goal-setting, and budgeting. For the personal touch, Empower also offers clients a team of dedicated financial advisors for a yearly fee of over $100,000.
Automated online financial advisor
For those who want to go all in on technology, automated advisors are the way to go. These "robo-advisor" platforms solely rely on algorithmic programs to manage your money — no human contact needed. While some of these robo-advisors offer optional human assistance, you'll typically have to pay higher fees and won't get this feature in a standard plan.
Instead, robo-advisors shine as the most affordable option both in terms of fees and account minimums. Investors with a good idea of what they want and are more concerned about their fee burden tend to prefer robo-advisor platforms.
Leading automated financial advisors
Founded in 2008, Wealthfront is a robo-advisor that offers access to automated index investing to easily put your funds on autopilot. Beyond investing in curated portfolios of ETFs and mutual funds, you can use Wealthfront's other financial services, like a high-yield savings account, bond portfolios, and individual stocks, to add greater diversity to your strategy.
Wealthfront also works with many retirement products like Traditional and Roth IRAs, so you can invest funds with its automated programs while enjoying tax breaks.
Step 2: Identify the services you need
There's often overlap in the services financial advisors provide, but don't take it for granted they handle your problem area. Consider a few of the major services financial advisors offer to better understand where to focus your attention:
- Investment management: If you want to build a portfolio that fits your risk tolerance and meets your long-term goals, work with a financial advisor with asset management experience. With this skill, an investment manager buys, monitors, and rebalances a pool of assets — including stocks, ETFs, and REITs — that meet clients' preferences.
- Retirement planning: Advisors involved with retirement planning help set the course for financial security later in life by estimating a client's income needs and setting their savings targets. A retirement planner may also select the perfect account (e.g., IRAs, 401(k)s, or Roth IRAs) to take full advantage of tax breaks.
- Tax prep: Speaking of tax breaks, some advisors prioritize yearly tax filing and planning, potentially saving you money by identifying tax-saving opportunities like tax-loss harvesting, deductions, or credits. A tax-focused advisor helps ensure all IRS forms get submitted on time with the highest possible after-tax returns.
- Budgeting, debt reduction, and saving: Anyone struggling with their cash flows and spending patterns could work with a financial advisor to optimize their budget. Financial advisors analyze income versus expenses to set realistic spending limits, debt repayment schedules, and savings patterns.
- Estate planning: A financial advisor may also work with an estate attorney to establish the legal transfer of funds after your death. By organizing a client's will, trust, and beneficiary designations, you can rest easy knowing your assets will end up in the right hands.
Take a few moments to write down your top concerns and reasons you want to hire an advisor. This shortlist will help you identify the key strengths and specializations to look for as you search for a partner.
For example, if you're most concerned with paying down debt, it makes sense to focus on financial planners with budgeting experience. However, those more interested in creating a reliable income stream probably need a retirement planner. Always keep these non-negotiable features top-of-mind when reviewing different advisors to find a good match.
Step 3: Decide how much you will invest
With the rise of robo-advisors, minimum deposits have become less of a barrier to financial advisory services. In some cases, you could take advantage of an automated platform with only a few dollars, which is excellent news for those just getting started saving.
Although this makes financial advisors more accessible, sites with low minimums don't offer all the services you get from dedicated teams or one-on-one advisors. Also, the less you invest upfront, the less you stand to gain in the future, so always factor in realistic growth expectations when deciding how much to allocate.
There's no magic number to invest that works for everyone's goals and situation, but there are free online investment calculators for products like IRAs you could use to plug in your expected deposit and track growth expectations.
You could also examine the historical track record of different investment products and research the latest long-term projections to gauge potential gains. These tools could help you determine how much to invest—either as a lump sum or gradually — to reach your growth goals.
Step 4: Understand your budget for financial advice
Remember fees when deciding how much to invest with a financial advisor. These extra expenses vary depending on multiple factors, including the advisor's experience, personalized service level, and fee structure. Still, they always take some money out of your investments.
While each fee schedule is unique, there are a few common types to consider:
- Percentage of assets under management (AUM): In this traditional fee model, an advisor charges an annual fee based on a percentage of the assets they manage for you. For example, if you have a $500,000 portfolio and the advisor charges 1%, the annual fee would be $5,000.
- Flat fees: Alternatively, advisors may ditch the percentage model and offer a flat annual rate. Even if your portfolio rises yearly, you'll pay a set dollar amount to continue working with your advisor.
- Commissions: An advisor might receive an incentive through commission payments for the financial products they sell. While this doesn't mean you can't trust every commission-based financial advisor, it does add a potential conflict of interest.
- Retainer fees: Some advisors charge a monthly or quarterly "retainer fee," which provides you with ongoing access to financial planning services. This fee structure can be the most cost-effective solution if you don't need investment management but want periodic financial advice from a professional.
Step 5: Research potential financial advisors
With all of the preliminaries out of the way, it's time to start searching online for different robo-advisor platforms or professional financial advisors. While it can seem daunting to start this quest, you can keep a checklist nearby when screening different candidates:
- Check for credentials like Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Certified Public Accountant (CPA). Also, look for specialized expertise in areas you're most interested in.
- Use FINRA's BrokerCheck and the SEC's database to check each agent's credentials and if there are any actions against an advisor.
- Visit the Better Business Bureau (BBB) and Consumer Financial Protection Bureau (CFPB) to see if there are any complaints against a financial advisor's business.
- Look for unbiased third-party reviews on sites like Trustpilot for more data on a financial advisor or company.
- Confirm if the advisor is a fiduciary, meaning they're legally bound to act in your best interest.
- Double-check the fee structure and any potential penalties for early withdrawal so you're clear on these policies.
- Ask about your advisor's investment philosophy and whether it aligns with your comfort level.
Step 6: Make your choice and take action
After researching and comparing different options, you should know which financial advisor to work with and how to allocate your funds. Also, remember you don't have to spend all your money with one advisor.
It's possible to work with multiple advisory services to take advantage of different specialties, services, and fees. For example, you could work with a personal CFP for help with budgeting and sign up for a robo-advisor to enjoy low fees on investments.
If you decide to work with one or more financial advisors, be sure you account for an exit strategy. While not advisable, sometimes life happens and you need to withdraw money from an advisory account. The only way to prepare for unpredictable scenarios is to review penalties for early withdrawal and factor them into your investment plan.
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Miranda Marquit is a journalism-trained freelance writer and professional blogger specializing in personal finance.
Eric Esposito is a freelance contributor on MoneyWise with an interest in financial markets, investing, and trading. In addition to MoneyWise, Eric’s work can be found on financial publications such as WallStreetZen and CoinDesk. When not researching the latest stock market trends, Eric enjoys biking, walking his dog, and spending time with family in Central Florida. Eric holds a BA in English from Quinnipiac University.
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