How to Choose a Financial Advisor

It's not easy to admit when you need help — but at a certain point, DIYing your finances may no longer be enough. You may start to have questions only a qualified professional can answer, and that means turning to a financial advisor.

But finding the right advisor can be tricky — the decision is as much about making sure the advisor provides the services you need as it is about making sure there's a personality and overall philosophy fit. For the relationship to work, you need to feel comfortable with the advisor you choose. Here's how to find advisors that meet your needs, decide what type of advisor is right for you and vet your options to land on the best fit.

1. Start with who you want to rule out

2. Decide what you want the financial advisor to do

Many people seek out a financial advisor for the first time after a significant life change — buying a house, getting married or having a child, for example. These life events can have major financial implications, and upfront financial planning can go a long way toward building a stable financial future. Similarly, changes to your financial situation can necessitate hiring an advisor — things like a large salary increase or an inheritance.

A financial advisor may address all of the above, or just a piece of it, or far more than you actually need. That’s why it’s important to clarify what you’re looking for before picking an advisor, so you can be sure they have the tools, experience and working style to help you. What are your most pressing questions? What problem(s) do you hope to solve?

• If you need someone to manage your investments: Many financial advisors are also investment advisors, which means they help decide where to invest your money and make changes to those investment elections as needed. The investment options they offer will vary. Our analysis of Form ADV filings for SEC-registered firms found that about 79% of advisors serving individuals offer financial planning. If you don’t need financial planning, your portfolio is relatively straightforward and you want automated management, you could consider a robo-advisor. It may be able to manage your portfolio for around a quarter of the cost of a full-service financial advisor. If you have more complex investing needs, look for an advisor who has experience with similar cases and the ability to customize your investment approach.

• If you need tax strategy and planning: Inheritance, equity compensation and other scenarios tend to involve tricky tax situations. If you’re in that boat, consider looking for an advisor with expertise in tax strategy or who is also a certified public accountant (CPA). 

• If you need to plan for retirement: Look for a financial advisor who can help you create a retirement planning strategy, including how much to save, where to save it and how to balance this kind of ultimate financial goal with other priorities you may have.

• If you want estate planning: Most financial advisors will talk through what you want in your estate plan to protect your assets and ensure your loved ones have everything they need after you're gone. But they may refer you to an estate attorney or third-party service to draft the actual documents, which means additional appointments, conversations and fees. Ask detailed questions about what estate services a firm offers — and doesn’t — if you know you’ll need help setting up an estate plan or a trust.

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 need a particular service, keep that top of mind when you start your search.

3. Decide what and how you want to pay

Financial advisor fees vary widely, as do fee models. Before you search for an advisor, take time to understand how financial advisor fees work, and align your expectations with your budget.

For an ongoing relationship with the advisor, the most common fee structure is an assets under management, or AUM, fee. This means the advisor charges a percentage of your assets each year, commonly around 1%. Other advisors charge a flat annual fee.

For a one-time or limited engagement — meaning the advisor creates a financial plan you then follow on your own, or meets with you to provide guidance and direction on a specific goal or financial decision — advisors generally charge either hourly or a flat rate.

You can influence how much you spend by exploring your options.

• Financial planning fees vs. investment management fees: Many financial advisors combine these two major services in one fee, but separating them — or even dropping one, if you don’t need it — could lower your costs and clarify what you’re paying for. For financial planning with no investment management, consider working with an advice-only financial advisor. For investment management only, you might save money by working with a robo-advisor as noted above. 

• Type or depth of relationship: The duration of your relationship with an advisor (temporary vs. ongoing), as well as the mode of communication (in-person versus virtual), may influence the cost. If you just want a one-time plan you follow yourself, you'll likely pay less than you would pay for an ongoing relationship with an advisor.

• Level of financial guidance: As the complexity of your finances increases, so might the cost of financial advice. Similarly, the more you want an advisor to do for you (rather than doing it yourself), the more you’ll likely pay.

As you dig into these different dimensions, you’ll find that help exists for every budget and situation. You might also want to think about how you pay — under an AUM model, that fee is generally taken directly out of your investment accounts. When you pay a flat fee or hourly rate, it will come out of your cash flow. There are pros and cons to each, so it's worth thinking about this aspect in addition to the total cost.

4. Make a list, then vet each option

The goal of all of the preceding steps is to end up with a short list of advisors who seem like good options for you. With that list in hand, it’s time to make some initial cuts by taking a deeper look at your potential advisors. The way to do that is by vetting the advisors, which requires some due diligence that is time well spent.

You can review any registered investment advisor's regulatory filings on the SEC's Investment Adviser Public Disclosure website. Pay special attention to the advisor's Form ADV, also available on the SEC website. Look for details about fees, disclosure of any disciplinary action in the firm’s past and current relationships with other companies that might present conflicts of interest.

If the advisor is a Certified Financial Planner, you can also review any disciplinary history and confirm the advisor still holds that credential via the CFP Board’s website. Other credentials can generally be verified by the organization that issues that credential.

Once they've passed that records check, you'll want to set up some initial consultations. 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. Bring questions — if you’re not sure what to ask, we’ve prepared a list to get you started.

This is a good time to ask about anything you can’t find in official documentation, such as the Form ADV or the advisor’s website. For example, fee information is typically in Form ADV, but it may lack specifics.

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 services, 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.

A financial advisor also should carefully go over fees with you before you sign up for their services. That includes any fees you’ll have to pay in addition to paying the advisor — for example, investment costs. On an ongoing basis, you should be able to see how much you’re paying in management fees on your account statements.

Some advisors may be willing to negotiate their fees, asset minimums or both. It never hurts to ask.

» MORE: What to expect when meeting with a financial advisor