If you know you want a financial advisor, choosing the right one can be a challenge. There are so many different fee structures and specialties, knowing how to sort through your options is difficult. You trust your financial advisor with your money, so it is important to make the best possible decision.
How to Choose a Financial Advisor
When you start your search for a financial advisor, you need to find someone whose skills matches your needs. That means you need to recognize what you are looking for before you start looking.
Here are some common needs from financial advisors:
- Cash flow management
- Budgeting
- Retirement planning
- Investing
- Paying for children's education
No financial advisor is perfect for every need, which is why it is so important to understand your needs before hiring anyone.
How to Find a Financial Advisor
Your first step in choosing a financial advisor after examining your needs is to find potential advisors. You will want someone who is easy to reach, and ideally not too far from your home or office so it is easy to get to a meeting if needed.
There are over 750,000 registered financial advisors in the United States. SmartAsset's financial advisor search tool can help you navigate to the best advisor for your needs. Answer questions about where you live, your plans for retirement, and other financial priorities. In just a few minutes, you'll be all set and SmartAsset will have an advisor contact you.
Questions to Ask a Financial Advisor
Once you have found a few advisors, you should interview them to decide who is the best fit for your needs. Here are some example questions to ask to make sure you end up with the right advisor.
How many years of experience do you have as a professional financial advisor? Do you want someone new and inexperienced managing your money? It is best to find someone with plenty of experience. Advisors with a decade or more under their belt have seen multiple economic cycles and can better help you weather the storm.
What is your strongest focus area in financial planning? Some advisors are experts in retirement. Others have expertise in estates and trusts. Others still are best suited to help you pay for your child's education. Some financial advisors focus on people who are self-employed. Be sure to choose someone who can help with what you need, not what someone else needs.
What is your budgeting philosophy? Every family's budget is unique. Budgets can be very detailed or more general. Some advisors suggest living frugally to meet your goals, others take a more balanced approach. Find an advisor with a philosophy that matches yours.
How are you compensated? Some financial advisors are “fee only.” This means that you pay your advisor a flat fee for their services. Many advisors charge based on the size of your portfolio. The worst situation is where advisors are paid a commission by mutual funds. In this case, a conflict of interest exists. The advisor is incentivized to put your money into those funds even if they are not the best for your needs.
How much does it cost to work with you? After learning how they are paid, make sure you know how much you will pay. No one wants a giant surprise bill after your first meeting.
Are you a fiduciary? Fiduciary means putting your needs first. Many financial advisors work as a fiduciary and have to put your needs first, even if it means they earn less money. However, many financial advisors are not fiduciaries, and can give you advice that is not in your best interest.
Do you own the same investments you'll suggest to me? Do they put their money where their mouth is? Advisors who suggest one strategy to clients and use a different strategy for their own finances should be a big red flag.
How have your client's portfolios performed? How did you handle their portfolios during the Great Recession in 2008? These questions get to the root of their performance. If the advisor does not readily share this information, they are probably hiding something that went wrong in the past.
Make Sure Your Financial Advisor is Licensed
Financial advisors are not allowed to give you specific investment advice unless they are licensed. The most common and important license for a financial advisor is the CFP, or Certified Financial Planner. CFPs are regulated and must take a course and pass a test proving their competence in financial topics.
Series 7 and Series 63 licenses give finance professionals the ability to recommend and trade stocks, bonds, and other investments on your behalf. Make sure your financial advisor has successfully completed both of these exams and has an up-to-date license.
Beware of Lofty Promises
If an advisor makes promises that sound like something from the 2016 Presidential Campaign, proceed with caution. Promises to beat the market and outperform other advisors and funds are easier said than done. Further, no advisor can promise that they will beat the market.
At the end of the day, many financial advisors have similar skills. They use comparable tools and reports to stay up-to-date on the markets and help find the best investments for you. If any advisor gives you a bad vibe, don't feel bad looking elsewhere.
Choose an Advisor You Can Trust
After you have met with a few advisors, it is time to make your decision. Asking about licenses, fees, and past performance is black and white. There are other parts of the decision that are a bit more subjective.
Do you like the person? Do you trust them? Would you trust them with your daughter's education fund? Your retirement?
If you have been able to limit your list down to your final few, it is time to trust your gut. It is important to have an advisor you like, trust, and enjoy interacting with. Your money is too important to put in the hands of someone you don't trust. Pick and advisor who feels like a partner who will stand beside you through your financial journey. If you do, you'll be on track for a great financial future.
If you're ready to start, answer a few questions in SmartAsset's financial advisor selection tool and you'll be contacted by a few advisors in your area to choose from.
