How to Choose a Financial Advisor

A financial advisor helps people manage their money and reach their financial goals.

The number of different services and areas of expertise offered makes finding the right one for your situation critical. Doing so means you won't end up paying for services you don't need or working with an advisor who isn't a good fit for your goals.

Here are six steps to help you choose a financial advisor.

Step 1: Identify your financial needs

Before you start looking for the right advisor, reflect on what you're hoping to get out of the relationship.

Some advisors may provide holistic help, guiding you on everything from savings goals and budgeting to retirement and estate planning. Other advisors might be specialists, meaning they have certifications or expertise in a particular area of finance.

Identifying what you need (and don't need) could help you not only save money but also decide whether an online or traditional financial advisor is a better fit.

Here are some areas to dig into as you compile your financial advisor wishlist:

• Personal finance: Financial advisors can help clients create budgets or financial plans. They can also help prioritize short- and long-term financial goals. For example, if you need help with specific savings goals — such as planning for home ownership, college or a large purchase — a financial advisor can offer suggestions for how to structure your money or investments to help meet those needs.

• Debt: Some financial advisors specialize in debt management and repayment. This could be helpful if you are struggling with credit card, medical, student loan or other types of debt and are unsure of how to tackle it.

• Investing: If you're new to investing or just want a more personalized approach, a financial advisor can be helpful. Investment advisors can work with you online or in person, or you could even opt for a digital version, such as a robo-advisor.

• Tax strategy and planning: Whether you're running a business or just need some help with a tricky tax problem, financial advisors who specialize in taxation and tax planning can help. Some financial advisors have deep expertise in tax strategy or may even hold a certified public accountant (CPA) credential.

• Retirement: Retirement planning can go beyond contributing to a tax-advantaged plan, such as 401(k) or IRA. If you're interested in learning more about other ways to save — or even just make sure you're on track — a financial advisor can help review your strategy and offer personalized recommendations that could help ramp up or diversify your savings.

• Estate planning: If you're looking to ensure that your assets get dispersed a certain way or that your loved ones have everything they need after you're gone, an estate plan or a trust can help. A financial advisor who specializes in estate planning can make sure all the documents you need are in order.

• All of the above: Sometimes you just want help with everything — and that's OK. Plenty of financial advisors offer full-service financial support. If the idea of having one dedicated person or firm for all your financial questions and concerns is appealing, a holistic planner might be a good fit.

Step 2: Know what credentials to look for in a financial advisor

Financial advisors go by many names: investment advisors, brokers, financial planners, financial coaches and portfolio managers. There are even financial therapists. Some of the most common titles advisors use, including the term "financial advisor" itself, aren't tied to any specific credentials, so don’t assume that someone who uses an official-sounding title has any specific training or credentials.

So who does what, and who can you trust? If you're looking to work with someone who might be managing your money or giving you financial advice, first check to see if they are bound by a fiduciary duty; this means they are obligated to act in their client’s best interest rather than their own. Not all people who call themselves financial advisors are fiduciaries.

Here are two common credentials you can look out for:

Certified financial planner (CFP)

Financial advisors who hold a certified financial planner designation have a fiduciary duty to their clients as part of their certification. Working with a CFP who has a fee-only payment structure is another way to ensure that the advisor is paid directly by you and not through commissions for selling certain investments or insurance products.

Registered investment advisors (RIA)

Registered investment advisors are either individuals or companies that employ investment advisors. They provide numerous financial services, including personalized investment advice, and are bound by fiduciary duty. RIAs are also registered with and regulated by either the U.S. Securities and Exchange Commission or state regulators, depending on how much money they manage^[0]

» Who does what? Learn more about the different types of financial advisors

Step 3: Review financial advisor service types

Financial advisors aren't just available at your neighborhood advisory office or bank. There are lots of ways to get financial advice. The option that's right for you will likely depend on your personal preferences, the services you need and your budget.

Robo-advisors

If the only thing you need is investment management, consider working with a robo-advisor, a digital service offering simplified, low-cost portfolio management. You answer questions online, then computer algorithms build an investment portfolio according to your goals and risk tolerance.

• Low cost ($): Some robo-advisors have no or low management fees, and many services have no or low account minimums, so you can start investing with any amount of money.

• Good when: You need help investing for financial goals like retirement, but don’t want or can’t afford a complete financial plan.

• Look elsewhere if: You need more rigorous or holistic financial planning. Although some robo-advisors offer higher-tier financial planning services, most excel at simple investment management.

Online financial planning services and advisors

This is the next step up from a robo-advisor: an online financial planning service that offers virtual access to human financial advisors. A basic online service might offer the same automated investment management you'd get from a robo-advisor, plus the ability to consult with a team of financial advisors when you have questions.

More comprehensive services such as Facet Wealth and Empower roughly mirror traditional financial planners: You'll be matched with a dedicated human financial advisor who will manage your investments and work with you to create a holistic financial plan. Many online financial advisors can match you with an advisor with a top-tier credential, such as a certified financial planner.

• Medium cost ($$): Online financial planning services will typically cost less than a traditional financial advisor but more than a robo-advisor. They will typically have higher investment minimums.

• Good when: You're comfortable meeting with an advisor online or don't know how to find an advisor. Online advisor marketplaces such as Harness Wealth and Zoe Financial, and many online advisors themselves, do the work of vetting a financial advisor for you. (NerdWallet also operates NerdWallet Advisory, a registered investment advisor offering advisor matches.)

• Look elsewhere if: You'd prefer to work with an advisor in person.

Traditional financial advisors

Traditional financial advisors can meet with you in person and will be able to help you with all of your financial planning needs.

• High cost ($$$): This is often the highest-cost option. Many traditional advisors charge about 1% of your assets under management. Some advisors also require a high minimum balance, such as $250,000 in assets.

• Good when: You want specialized services, your situation is complex, or you want to meet your financial advisor in person and develop a long-term relationship with them. More traditional financial advisors generally offer a holistic look at your finances, including goal-planning.

• Look elsewhere if: You only need basic advice or investment management, or you don't want to vet a potential advisor yourself.

Step 4: Consider how much you can afford to pay an advisor

Financial advisors have a reputation for being costly, but there is an option for every budget. It's important to understand how much a financial advisor costs before you commit to services. Generally speaking, there are three cost levels you're likely to encounter:

• Robo-advisors often charge an annual fee that is a percentage of your account balance with the service. Robo-advisor fees frequently start at 0.25% of the assets they manage for you, with many top providers charging 0.50% or less. On a $50,000 account balance, 0.25% works out to $125 a year.

• Online financial planning services and advisors typically charge either a flat subscription fee, a percentage of your assets or both. For example, Empower charges 0.49% to 0.89% of assets under management per year. Facet charges an annual fee that starts at $1,000 a year and goes up based on the complexity of your financial situation. Both fees include portfolio management and financial planning.

• Traditional financial advisors also often charge a percentage of the amount managed, with an average fee of around 1%, although it can range higher for small accounts and lower for large ones. Others may charge a flat fee, an hourly rate or a retainer.

How much you should spend on a financial advisor depends on your budget, assets and the level of financial guidance you need. If you have a small portfolio, an in-person advisor might be overkill — you will save money and get the guidance you need from a robo-advisor. If you have a complicated financial situation, a robo-advisor may not provide what you need.

Step 5: Vet the financial advisor's background

No matter what title, designation, certification or license an advisor claims to have, it’s on you to vet the advisor’s credentials and experience. Always verify any credentials they claim to have and check to see if they've had any disciplinary problems such as fraud.

You can research an advisor’s background by looking up their Form ADV before you agree to work with them. You can also review an advisor's employment record (and look for red flags like disciplinary actions) on FINRA's BrokerCheck website.

Step 6: Hire the financial advisor

If you're happy with a particular financial advisor's background and are confident that they're a good match for your financial situation, the next step is to start working with them.

The hiring process for financial advisors will vary from advisor to advisor, but here is a general outline of the steps in engaging a financial planner or similar professional:

1. A consultation with the advisor to discuss your financial situation. This is typically free.

2. The advisor provides you with an engagement letter outlining their ethical principles and any potential conflicts of interest.

3. The advisor provides you with legal documents to sign, such as a Form ADV and/or a Form CRS.

4. The advisor begins gathering information on your financial situation and starts managing your finances.