How to Choose a Financial Advisor

A financial advisor helps people prioritize or set goals, manage the financial and emotional effects of life or market changes, review and rebalance investments, plan for retirement and manage the tax consequences of various decisions.

However, you should avoid paying for services you don't need or for financial advisors who aren't a good fit for your goals. Here's how to choose a financial advisor.

Step 1: Decide what you want the financial advisor to do

What can a financial advisor do?

Financial advisors primarily provide services in these main areas.

• Personal finance: This involves helping create budgets or financial plans, as well as set short- and long-term goals such as buying a house, paying for college or making a big purchase.

• Debt management and repayment: Financial advisors can help people who are struggling with credit card, medical, student loan or other debt and who are unsure how to tackle it.

• Investing: Investment advisors help decide where to invest money and help create an asset allocation strategy. They can work with you online or in person, or you could opt for a digital version, such as a robo-advisor.

• Tax strategy and planning: Some advisors have expertise in tax strategy or may hold a certified public accountant (CPA) credential.

• Retirement: A financial advisor can help find ways to save for retirement, stay or get on track for retirement, and create a retirement strategy.

• Estate planning: A financial advisor might help you set up an estate plan or a trust to protect your assets and ensure your loved ones have everything they need after you're gone.

For some financial planning services, such as tax filing, setting up trusts or creating business entities, you may need to find a specialist. So if you know you know you need a particular service, keep that top of mind when you start your search.

When is it time to hire a financial advisor?

You can seek out financial help at any time, but it’s especially important to get financial guidance for significant life changes. Whether you’re buying a house, starting a job, getting married or having a child, these life events can have major financial implications, and some upfront financial planning can go a long way toward building a stable financial future.

It’s also wise to speak with a professional if your financial situation itself has changed. Maybe your salary has increased or you inherited some money from a relative. When money starts flowing in, it’s a good idea to give it a positive direction. Otherwise, it can be all too easy to spend unnecessarily.

Step 2: Decide what you want to pay

How much you spend on a financial advisor depends on your budget, assets and the level of financial guidance you need.

For example, if you’re only focused on one goal right now and you just want help picking stocks, a financial advisor actually might be overkill. You may save money with a robo-advisor.

But if you have a complicated financial situation, want personalized advice or are thinking about active investment management, a robo-advisor may not provide what you need. You may spend more with a financial advisor, but it’s worth it if it helps you meet your goals and gives you peace of mind about your money.

If at any point you realize you’re paying for services you don’t need (or don’t use), it’s time to shop around.

» MORE: When (and how) to switch financial advisors

Typical financial advisor fees

Financial advisor fees vary widely. Advisors typically charge a percentage of your assets under management (AUM), but some charge flat annual or monthly fees, an hourly rate, a one-time financial plan fee or even commissions. The table below gives an overview of typical financial advisor fee ranges.

» Learn more about how much a financial advisor costs

Step 3: Find financial advisors you may want to work with

Next, gather a list of possible advisors who provide the services you’re looking for and fit your budget. There are several ways to find a financial advisor. Here are a few tips:

• Consider virtual options. If it’s not important to you to meet a financial advisor in-person, you can find one that operates virtually. They may offer lower rates.

• Use a financial advisor matching service. These services match you with a financial advisor for free.

• Ask your local network for recommendations. Often, people have long-term relationships with their financial advisors. Check with family and friends — or even your tax preparer — to see if they can point you in the right direction. If your colleague has worked with an advisor for 10 years and loves them, it's probably a good sign.

• Check with professional organizations or networks. These associations often have directories that allow you to search for professionals based on several criteria.

» MORE: Search for a financial advisor near you

Step 4: Vet the financial advisors on your list

Find a fee-only fiduciary

To ensure you’re getting unbiased financial advice, we recommend that you work with a licensed, registered fiduciary who is a fee-only advisor.

• Advisors with a fiduciary duty are required to work in the client’s best interests rather than their own best interests or their firm’s best interests. 

• Fee-only advisors are paid directly by you and not through commissions for selling certain investment or insurance products.

• A fee-based advisor, however, may be paid by clients as well as other sources, such as commissions from financial products they sell.

Look for these key financial advisor credentials

Don’t assume that someone with an official-sounding title has any specific training. Financial advisors go by many names (e.g., investment advisor, broker, financial planner, financial coach, portfolio manager, wealth advisor, wealth manager or even financial therapist). However, many of the titles advisors use (including the term "financial advisor") aren't based on specific credentials.

» Who does what? Types of financial advisors

Here are two actual credentials to look for when choosing a financial advisor.

• Certified financial planner (CFP): A certified financial planner has completed financial coursework and gained enough experience to obtain one of the most rigorous certifications for financial planning. They also are fiduciaries and sign an ethics agreement when they’re accredited by the CFP Board of Standards.

• Registered investment advisor (RIA): Registered investment advisors provide numerous financial services, including personalized investment advice. They also are bound by fiduciary duty. RIAs are registered with and regulated by either the U.S. Securities and Exchange Commission or state authorities.

Check for red flags

Always verify a financial advisor’s credentials before you agree to work with them.

• Review an advisor's employment record (and look for red flags, such as disciplinary actions) on FINRA's BrokerCheck website.

• Look up a CFP and review any disciplinary history via the CFP Board’s website.

Evaluate other key details

It’s critical to research an advisor’s background by looking at their Form ADV on the SEC website. That form can provide an abundance of information that could help you assess if the advisor or firm is a good fit. Here’s what to look for:

• Assets under management: The total amount of assets managed by the financial advisor firm. A high AUM typically indicates advisor experience and stability. 

• Total clients and age of firm: A large client base and lengthy firm history can be another indicator of advisor experience and firm stability. 

• The client-to-advisor ratio: Generally speaking, the fewer clients per advisor at the firm, the more individualized attention you can expect to receive. Financial advisor firms that have a high client-to-advisor ratio may be stretched too thin or struggle to provide timely responses compared with firms with lower client-to-advisor ratios. 

• The percentage of clients that are high net worth: For someone who is not a high net worth client (net worth of $2.2 million, or assets under management of $1.1 million), we recommend looking for accessible, well-rounded firms that can handle a variety of financial situations.

• Fee transparency: Typically, fee information is in Form ADV. But it may lack specifics. A financial advisor should carefully go over fees with you before you sign up. That includes fees you’ll have to pay in addition to paying the advisor. Most robo-advisors state their fees on their websites. You should also see how much you’re paying in management fees on your account statements.

Book a consultation

Advisors typically offer a free initial consultation where you can discuss your financial situation and ask questions.

For anything you can’t find in official documentation, be sure to ask the advisor during the introductory meeting. It’s normal to meet with a few financial advisors before you decide who to hire. It’s really the only way to determine if you’ll like working with someone. After all, you’ll be discussing sensitive personal information with them, so you want to be sure you feel comfortable.

» MORE: 10 questions you should ask a financial advisor

Step 5: Hire the financial advisor

Once you decide who to hire, you’ll typically follow these steps:

1. The advisor provides an engagement letter that outlines their ethical principles and any potential conflicts of interest.

2. The advisor provides you with legal documents to sign.

3. The advisor gathers information on your financial situation and starts managing your finances.