Friends, family, and even social media can offer great advice about relationships, car maintenance, mac ‘n’ cheese recipes—a variety of topics, really.
But when it comes to financial planning … it’s probably best to work with a professional financial advisor.
Consider the results of Northwestern Mutual’s 2024 Planning & Progress Study: Nearly two-thirds (64%) of Americans with financial advisors feel financially secure. Less than one-third (29%) of those without advisors feel the same way. People with financial advisors are also more likely to have an emergency fund (84% vs 48%), have a specific plan to pay off debt (79% vs 49%), and have taken at least one step to try to reduce their chances of outliving their life savings (83% vs 53%).
So if you weren’t already convinced of the benefits of working with a financial advisor, hopefully you are now. Either way, the next step is finding one—and that can be a harder task than it might seem. Financial advisors go by many names (registered investment advisors, financial planners, portfolio managers, among others), they offer varying services, they have different payment structures, and they aren’t all bound by the same rules nor held to the same ethical standards.
Today, I’ll show you how to choose a financial advisor. Consider this a personal guide of what to look for in a financial planner—with this outline of questions to ask and information to gather, you should be able to find a professional that meets your specific needs.
Table of Contents
What Should I Look for in Financial Advisors?
At a bare minimum, most people should be looking for an ethical financial advisor with the necessary skills and competency to develop a sound, customized financial plan.
However, while knowledge and ethics may be universally desired, the best financial advisor for you will probably differ from the best one for your neighbor, your niece, or the couple you play pickleball with. That’s because the term “financial advisor” covers a wide variety of professionals that may provide different services, or provide services to different types of clients, have different credentials, and so on.
We’ll go through a step-by-step checklist of questions to ask, characteristics to look for, and things to avoid as you search for prospective financial advisors.
Step 1: Determine What Services You Think You’ll Need
If you’re considering a financial advisor, there’s at least one aspect of your finances that you think is better off in the hands of the professional.
Thus, start with what you need. Are you looking for investment advice? Are you about to grow your family and need financial planning services to help with the transition? Are you trying to determine your ideal retirement age? Financial advisors provide a wide array of services that address these and other questions.
For instance, according to the 2023 Herbers & Company Service Market Growth Study, the top three most in-demand financial services among people with over $250,000 in household assets are tax planning, retirement planning, and investment management. So, decide if you need one or more of the following:
— Budgeting help
— Education-savings planning
— Estate planning
— Insurance advice
— Investment advice/management
— Retirement planning
— Tax planning
— Other financial services
Where you go from there is pretty obvious. Let’s say investment management is the category where you could use the most help. It would be illogical to work with a financial advisor who doesn’t offer that service.
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Step 2: Determine What Type of Financial Advisor You Need
Now that you know what services you need, you should look for a financial advisor that can provide those services.
As I mentioned earlier, though, “financial advisor” often acts as a catch-all phrase covering a wide variety of financial professionals that serve both individuals and businesses alike. For instance, if you were to go out looking for an advisor to address your personal financial needs, you would come across several options:
— Investment advisors: Typically provide investment advice and/or management.
— Financial planners: Typically provide a holistic financial plan. May or may not help you implement this plan.
— Financial advisors: Typically can provide you with, and help you implement, a holistic financial plan. Will often provide a variety of financial services—including budgeting, education-expense planning, estate planning, insurance advice, investment advice and/or management, retirement planning, and tax planning—in varying combinations.
— Wealth managers/wealth advisers: Similar to financial advisors, but typically require a higher personal net worth than financial advisors. Also are more likely than financial advisors to provide services such as estate planning and charitable giving.
— Financial coaches: Provide advice pertaining to basic personal finance concepts such as saving, spending, budgeting, and investing, and related financial goals.
— Robo-advisors: Rules-based, automated investment advisory services with no human interaction.
Importantly: Two different professionals with the same job title might provide different ranges of services. For instance, one person who calls themselves an investment advisor might only provide investment advice and/or management, while a second person might also provide more holistic financial planning. So while the title of a financial advisor might provide a little clarity, in most cases, it’s best to simply ask what they do and do not provide.
By the way, depending on your needs, you might go to a professional that falls outside of the “financial advisor” umbrella. For instance:
— Accountant: Taxes
— Lawyer: Estate planning
— Insurance agent: Insurance guidance
If you just need someone to prepare a tax return or want help buying life insurance, you might not need a financial advisor. However, if you need help with, say, investment advice or retirement planning, or you have a combination of needs, you might want to consider a financial advisor.
Related: 10 Monthly Dividend Stocks for Frequent, Regular Income
Step 3: Ask About Financial Advisors’ Qualifications
It’s important to understand what kind of financial advisor you’re getting. Anyone can call themselves a financial advisor or financial planner on social media—but what ultimately helps best define what a financial professional can do for you is their credentials, certifications, and licenses.
Among the most important designations to look for:
— Certified Financial Planners™ (CFP®): CFP® is an industry-recognized credential demonstrating an individual has met a higher standard of excellence through meeting education, experience and ethical standards. A Certified Financial Planner™ must act as fiduciaries for their clients. As part of maintaining the CFP® certification, holders must complete at least 30 hours of continuing education every other year. These financial professionals specialize in comprehensive financial planning services.
— Certified Public Accountant (CPA): CPAs are licensed professionals specializing in numerous areas of accounting, such as tax planning and preparation, financial analysis and reporting, and auditing and attestation services. Licensed CPAs must meet stringent education, experience, ethical and testing requirements to receive their license and then complete at least 40 hours of continuing education annually. They’re also bound to follow a rigorous code of professional conduct that requires them to act with integrity, objectivity, due care, and competence. While most individuals likely think only of “taxes” when they hear that someone has a CPA license, CPAs are often skilled in many areas and able to offer a robust number of financial services.
— Chartered Financial Analyst (CFA): CFA designations represent a higher level of competence and integrity for financial professionals. These individuals specialize in investment analysis and portfolio management. Usually, CFAs don’t work directly with regular financial consumers and instead opt for institutions, so these are harder to find working as a retail financial advisor.
— Chartered Financial Consultant (ChFC): Chartered Financial Consultants have expertise in financial planning and specialize in insurance matters. This certification is an alternative to the CFP®.
— Series 7: This license allows the holder to sell all types of securities products, which includes common financial planning products like annuities and life insurance policies (but excludes commodities and futures). This license is administered by FINRA and is meant to set a level of competency for a registered representative or stockbroker to work in the securities industry. By being able to sell securities, Series 7 license holders are also able to earn commissions for their sale.
— Series 63: This license allows financial advisors to satisfy a patchwork of state rules and regulations related to soliciting security orders from clients. To provide investment advice or engage in securities transactions for clients usually requires holding this license in conjunction with another, such as the Series 7.
— Series 65: This is a license to provide fee-based investment advisory services. Financial advisors with only this license may provide fee-only investment advisory services, meaning commissioned products aren’t available unless offered through a third-party and determined to be in the best interests of the client. Having this license fulfills the requirements for the financial advisor to be registered with the SEC and/or state regulator(s).
— Series 66: This license is a corequisite with the Series 7 license and represents a less complex, less strenuous licensing process than the standalone Series 65 license. The license enables financial advisors to work in a state-level capacity.
Consider using the Financial Industry Regulatory Authority (FINRA) BrokerCheck to find background information on SEC and state-registered investment advisors.
Related: Don’t Make These 7 Mistakes When Choosing a Financial Advisor
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Step 4: Find a Financial Advisor with a Fiduciary Duty
Fiduciaries are held to higher ethical standards than advisors who are not. The U.S. Securities and Exchange Commission (SEC) states that a fiduciary has the following duties:
— “Provide advice that is in the best interest of the client”
— “Seek the best execution of a client’s transactions where the advisor has the responsibility to select broker-dealers to execute the client trades”
— “Provide advice and monitoring over the course of the relationship”
Importantly: Not all financial advisors are fiduciaries.
For instance, investment advisors who have Series 65 licenses and operate with a fee-only or fee-based pricing structure are considered fiduciaries. Further, financial professionals like a CPA or carrying a CFP® or AIF® (Accredited Investment Fiduciary) certification, are obligated to act as fiduciaries.
While broker-dealers, insurance agents, and stockbrokers have to provide suitable recommendations for clients, they aren’t required to put a client’s interest before their own. In other words, they might always prioritize your interests … but they also might suggest a so-so product that will earn them money but that isn’t necessarily the best choice for you.
It’s a risk.
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Step 5: Avoid Financial Advisors Who Push Sophisticated Financial Products
Traditional financial advisors usually will choose basic products for your investment portfolio. According to a 2023 Journal of Financial Planning survey, the most common investment vehicles financial advisors recommend to their clients are as follows:
— Exchange-traded funds (ETFs): 90.1%
— Cash and equivalents: 78.4%
— Mutual funds (non-wrap): 63.9%
— Individual stocks: 50.8%
— Individual bonds: 47.1%
However, some financial advisors will push more sophisticated financial products, such as annuities, whole life insurance, hedge funds, or private equity funds.
This might not be a red flag, but I would consider it a yellow flag.
For one, annuities and whole life insurance products often pay financial advisors extremely large commissions, which could be a conflict of interest.
And even if this isn’t the case, these products are notoriously complex. The average person might not understand what they’re getting for their money, and it’s challenging to compare these products against each other.
Additionally, hedge funds, private equity funds, and similar investments are notoriously illiquid (they can’t be quickly or easily sold for cash without a substantial loss of value). They’re often opaque investments, too, and they can be highly risky.
As a general rule, even if someone else is doing the picking, you should be able to at least understand the products chosen for your investment portfolio.
Related: How to Invest for Retirement [Strategies + Investments to Use]
Step 6: Understand a Financial Advisor’s Pricing Structure
Financial advisors should have transparent pricing structures so clients know exactly how much they can expect to pay. You should walk away from any financial advisor with a pricing structure that’s either opaque or that you don’t understand.
Advisors typically will be “fee-only” advisors, which means they’re only paid via a fee. That said, financial advisors charge different types of fees. Most commonly:
— Percentage of assets under management (AUM)
— Hourly
— Flat, recurring retainer (could be monthly, quarterly, or annually)
— One-time financial planning fee
But what if you come across a “free” investment advisor?
As the saying goes, “You don’t get something for nothing.” No financial advisor actually works for free—they’re just being paid in some other way. In the investment world, these are typically “commission-based” financial advisors, which means they earn money based on the sales and product referrals they make.
What’s the catch? Well, the investment advice you receive might be skewed toward the products that earn the financial advisor the most money.
To be clear: This doesn’t necessarily mean their recommended products won’t work for you. But it leaves open the possibility that you’re not getting the best financial advice—the potential for conflict of interest is in play.
You can reduce this risk by opting for fee-only advisors.
Related: Do I Need a Financial Advisor? 7 Questions to Ask Yourself
Step 7: Decide Whether You Want a Big Firm or an Independent Financial Advisor
Your first thought might be to select a financial advisor from a well-known brand name. It makes sense! Established brands provide a sense of security and trust. And if you already have other financial accounts with the same company, using their financial advisors might provide more simplicity than looking elsewhere.
But there are advantages to using an independent financial advisor, which is simply an advisor that works on their own or as part of a small team, rather than a big firm.
Independent financial advisors can be just as qualified as the advisors at major firms (assuming they have the proper credentials).
A firm’s advisors might be required to push that firm’s preferred products. An independent financial advisor will not be required to—instead of all your financial products coming from just one provider, you will receive recommendations for the very best products, regardless of who creates them. Further, an advisor with a firm may have more limited access to products they can offer, while independent advisors can work with any number of financial product providers, potentially finding better products for their clients.
Independents also may be able to provide you with more attention and personalized advice. Sometimes, large firms’ advisors are told to focus more energy on ultra-high-net-worth clients, leaving smaller clients with a less-than-satisfactory experience.
Want to talk more about your financial goals or concerns? Our services include comprehensive financial planning, investment management, estate planning, taxes, and more! Schedule a call with Riley to discuss what you need, and what we can do for you.
Related: How Does the 4% Rule Work? [And Why Did It Change?]
One of the most popular retirement withdrawal strategies of the past few decades has been the unfussy “4% rule.” It’s one of the most straightforward rules you’ll come across in finance, even as its creator has made a few tweaks to it over the years.
How does the 4% rule work, how has it changed, and can it help guide your retirement? Check out our primer on the 4% rule.
When Should You Take Social Security?
Social Security is a pillar of many older Americans’ retirement income. Typically, around 90% of people age 65 and older are collecting Social Security benefits at any given time.
But while most of us will end up on Social Security, when we choose to start collecting benefits will differ from person to person. Our guide to Social Security timing may help you decide.
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