How to Choose a Financial Advisor — Income Insider

13 min readAug 2, 2021

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Financial advisors are professionals whose job is to provide accurate and timely advice about financial strategies and products and to help you achieve your financial goals.

But choosing a financial advisor isn’t easy. It involves a lot of different factors and considerations. But here are some key questions you can answer for yourself to help you narrow down the list and focus on finding a great financial advisor for you.

How Much Money Do You Have to Invest?

Many firms and individual advisors have asset minimums. Generally, the more “high-touch” individualized attention a firm provides to its clients, the higher the investment or asset under management (AUM) minimum is likely to be. Some firms have minimums of millions of dollars. Others have a very low minimum or no minimum investment.

If you have a relatively small amount available to invest, that will narrow down your available options considerably.

How Do You Want to Pay?

Obviously, financial advisors have to get paid, one way or another. Each revenue model has advantages and disadvantages for different kinds of clients. Here are some of the most common:

Commissioned sales agents. These are commonly stockbrokers/registered representatives and insurance agents. The advantage with them is that there’s typically no money required out of your pocket: The financial firms pay their commissions. But they are incentivized to make recommendations that pay big commissions, not select the very best available financial products and solutions. Some are required by their employers to recommend “in-house” products marketed by their own firms. They may be required to meet a production quota — formally or informally — which may affect their recommendations to you.
AUM fees. Some firms charge a percentage of the assets you give them to manage or an AUM fee. 1% to 2% of AUM is common. Many Registered Investment Advisor firms use this model. The richer you get, the more money you stand to make. So your interests and theirs are aligned in that sense.

But there’s a little-recognized conflict built into this model: They may not be inclined to advise you when it’s time to pay off a big mortgage or other debt early or sell off assets they manage.

Fee-only. Some financial planners are “fee-only,” meaning they do not charge or accept commissions from anyone but the client. They may charge by the hour, by the appointment, or have a flat monthly retainer. Some charge an AUM fee. There are no hidden fees and usually no surprises. These advisors can be great for wealthy people with large portfolios. The drawback of fee-only advisors is that they can be expensive for people with small portfolios.
Flat Fee. This is a variation of the ‘fee-only model. A few advisors out there charge a flat monthly or annual fee, regardless of the level of assets under management. These can be an excellent fit for people with large portfolios (often around $5 million and up) because their annual fees are less than the AUM fee they would pay to some other firms. These advisors may also be a good fit for people who want someone to manage their assets but are concerned that an AUM fee might bias their advisor against making withdrawals.
Fee-based. These advisors charge a combination of fees and commissions. They have a broad range of capabilities and often have access to the broadest selection of financial products to recommend and place. They may have some conflicts of interest, as do commissioned advisors in general, but they may be less pronounced.

Fiduciary vs. Suitability Standards

Some advisors are held to a higher legal and ethical standard than others. There are two basic standards that apply to financial advisors: The fiduciary standard and the suitability standard.

Advisors who are fiduciaries are held to the highest standards of all. Every fiduciary is expected to provide the utmost in good faith and fair dealing when making recommendations to a client. All recommendations must be solely in the client’s best interest, and they may not engage in self-dealing.

Fiduciaries are legally obligated to provide advice that is in your best interests. If there are any conflicts of interest between the advisor or their firm and you, they must clearly disclose it.

Other advisors are held to a lesser standard of suitability. That is, all their recommendations must be suitable for the client, given their overall financial situation. As long as the advice and financial product recommendations are suitable, advisors are free to recommend products that give them a good commission or help them qualify for bonuses, trips, or other perks.

Members of the National Association of Fee-Only Financial Planners (NAPFA) are required to adhere to the fiduciary standard, as are Registered Investment Advisor firms (RIAs) and their representatives (Investment Advisor Representatives, or IARs).

Suitability is a lesser legal standard than the fiduciary standard. But there are many excellent advisors operating at both levels.

Commissioned stockbrokers (often called “registered representatives, who typically work for broker-dealer firms) and commissioned insurance agents usually work under the suitability standard. In contrast, most fee-only financial planners, including advisors with the Certified Financial Planner designation (CFP), are held to the fiduciary standard.

The advantage of the suitability standard is that it makes it easier for advisors to offer services without charging the client any money out of their own pocket. The advisor can get paid in commissions.

The disadvantage is that sometimes the client may not be placed in the very best products for their particular situations. They may not even tell you about low-cost index funds, for example, or no-load mutual funds or annuities, since these wouldn’t generate a commission for them. The advisor doesn’t have to disclose whether there is another product with lower fees that might do just as well or better for you.

Do You Want Help with Budgeting and Financial Management?

Some financial advisors focus strictly on helping you pick stocks, bonds, mutual funds, and insurance products. Others provide more personalized services, including assistance with budgeting, consulting on education decisions, career counseling, the psychology of money, and other services.

Do You Want a Focus On Growth, or On Safety?

If you’re young and you have decades to go before you expect to retire, you may want an advisor who focuses more on growth investments — even to the point of aggressiveness. These advisors work with people who are willing to risk substantial market losses in the short run because they believe that approach will generate better returns in the long run.

Stockbrokers fall in this category, as do advisors who focus primarily on mutual funds.

If you want to put more emphasis on safety and security, rather than on risk and growth potential, you might want an advisor who focuses on retirement security, guaranteed income, and annuities. These advisors tend to have more of an insurance background, as opposed to an investment background.

Are You a Small Business Owner?

Business owners have some additional concerns beyond those who work full-time as W-2 employees. If you’re a business owner, you may want to choose a financial advisor with experience and expertise in some additional topics. Examples include:

Setting up employee workplace retirement plans, such as SEPs, SIMPLE IRAs, and 401(k)s
Advising on executive benefits for business owners
Business risk management and insurance topics
Advising on funding buy-sell agreements and succession planning
Business income tax planning

These advisors may also be insurance agents, CPAs or attorneys, or partner with CPAs, attorneys, insurance professionals, and others to form a multi-disciplinary team.

Are You a High-Net-Worth Investor?

Like business owners, High-net-worth investors (HNWs) often need some special expertise that the mass market doesn’t have to worry about.

For example, high-income or high-net-worth individuals may need individualized advice on topics like these:

Asset protection
Estate planning
Permanent life insurance planning
Income tax planning
Non-qualified deferred compensation
Business planning
Employee benefits
Workplace retirement plans

Talk with the advisors you are considering and ask them what expertise they have on any of these topics. Most won’t be experts on all of them. But they may have professionals in their firms or whom they regularly work with who can fill in any gaps in their own knowledge.

Depending on the advisor, you may need to know when to call in a specialist.

Most experienced financial planners are accustomed to playing “quarterback” and helping you manage a multidisciplinary team of financial, insurance, risk management, legal, real estate, and tax experts.

Do You Want Them to Help You Pick Stocks and Bonds?

Some people aren’t content with general advice about asset allocation (e.g., hold 60% in a stock index mutual fund, 30% in a bond mutual fund, and 10% in cash and money markets). They want help picking individual funds, or individual stocks and bonds.

A stockbroker with a Series 6 license can advise you about mutual funds and variable annuities. But they can’t help you buy and sell individual stocks, bonds, or help you execute option strategies.

For those, you need someone with a Series 7 license from the SEC.

Do You Want a Virtual Advisor or Personalized Service?

In the internet age, you don’t necessarily need to meet with an advisor in their office. But some people want that kind of high-touch, in-person relationship. Speak to your advisor about what level of service you can expect, and what might be ‘too much.’

Generally, commissioned advisors love to hear from clients because it may create an opportunity for them to help you execute a transaction because it generates a sales commission for them.

AUM-type and flat fee planners need to limit the amount of time they spend with you in person or on the phone, so they can focus on managing investment portfolios and finding new potential clients.

Occasionally, financial advisors can and do “fire” clients they feel are disruptive or too ‘high-maintenance’ for them to continue serving, given the amount of revenue they generate for the term.

Robo-Advisors

Robo-advisors are a relatively recent addition to the scene. These are online “bots” that have you answer a detailed questionnaire about your financial objectives, time horizon before retirement, and risk tolerance. They then use artificial intelligence to recommend an investment portfolio for you. You can then use their platform to buy and sell the funds or other securities they recommend

Fees are very low compared to other alternatives: They start at around 25 basis points (0.25%) per year, with no up-front commissions.

They also tend to have very low asset minimums, or no asset minimums at all.

These can be good for people with little or no savings, and who want to minimize fees and commissions.

The disadvantage to Robo-advisors is that you won’t have anyone to call with any in-depth, detailed questions about your own personal circumstances.

However, when these questions do arise, you can combine the Robo-advisor with the services of a fee-only financial planner who charges by the hour or on a flat fee per consultation or appointment basis.

Online Brokers/Advisors

These outfits are one step up the cost chain from full Robo-advisors. With these firms, customers do most of their interactions and transactions online. But you may have access to a financial advisor or team of advisors who can answer questions and make more personalized recommendations if the need arises.

Compared to Robo-advisors, fees are higher, but not as high as with a full-service broker.

Minimum investments/asset requirements range from zero to a few tens of thousands of dollars.

Major Certifications

Financial advisors may hold one or more certifications. If you look at their business cards and see a lot of letters after their name, these are usually what those letters refer to. Here are some of the most common and prestigious:

Chartered Financial Consultant (ChFC). This is another very demanding and prestigious certification, positioned to compete with the CFP credential. ChFCs must take similar coursework as CFPs, and take some additional coursework on working with businesses. ChFCs are more likely to have an insurance/risk management background as compared to CFPs, who often come from investment houses, but this isn’t a hard and fast rule.
Chartered Financial Analyst (CFA). This is an extremely demanding certification, pursued by people who want to focus on analyzing company financials for investment firms and other clients. This is an excellent credential to look for if you want someone to advise you on an investment portfolio and who will be picking stocks on your behalf.
Chartered Life Underwriter (CLU). This is a respected credential among life insurance and annuity professionals. They specialize in helping individuals and families as well as business owners reduce exposure to various risks.
Chartered Mutual Funds Counselor (CFMC). These professionals have taken a ten-week course designed to give them expertise in helping clients select and combine mutual funds to achieve their financial goals.
Chartered Alternative Investment Analyst (CAIA). These advisors have special expertise in alternative asset classes- That is, investments other than stocks, bonds, mutual funds and CDs. Examples include real estate, hedge funds, limited partnerships, gold and precious metals, or cryptocurrencies.
Certified Public Accountants (CPAs). These are professionals with particular expertise in tax planning and financial reporting. They can represent clients before the IRS.
Enrolled Agents (EAs). These professionals are also experts on tax compliance, though with a narrower focus than CPAs. They can also represent you before the IRS, if necessary.
Personal Finance Specialists (PFS). This designation is given to CPAs who complete approximately 200 additional hours of coursework and pass a detailed exam on providing more general financial advice on top of their tax specialty.

Do You Need Special Expertise?

Other professionals, like doctors and lawyers, often have areas of specialization. You don’t want a foot doctor treating your brain tumor if you can help it. And if you are putting together a merger of two FORTUNE 500 Wall Street companies, you don’t want to hire someone who’s spent his whole career as a public defender in Whitefish, Montana.

Financial advisors have areas of specialization and expertise as well.

Depending on the specific expertise you want, look for certifications like these:

Retirement Income Certified Professional (RICP);
Chartered Advisor for Senior Living (CASL);
Certified Financial Divorce Practitioner (CFDP);
Chartered Special Needs Consultant (ChSNC);

Investigate the Advisors’ or Firm’s ADV

Before handing over any money to a brokerage firm or financial advisor, you may want to look at their Form ADV, which you can access via the website www.brokercheck.com.

This is a form each firm and advisor files with the Securities and Exchange Commission (SEC). On this form, you’ll find:

A detailed description of the services the firm or advisor offers;
Advisor and firm professional history, qualifications, and industry certifications held;
Disciplinary actions against the firm or advisor;
Discussion of fees and charges.
The advisor’s outside business interests, if any.

If you are considering working with an insurance professional, check with your state’s insurance commissioner’s office. Insurance is regulated at the state level, not the federal level.

You can find your state’s insurance commissioners’ contact information here.

Questions to Ask Prospective Advisors

When you’re interviewing potential financial advisors, here is a list of questions you can ask them to help ensure you’re getting a good fit:

What’s your investment philosophy?

Most investment advisors should have a reasonably developed answer to this question. This can help you decide if the two of you are a long-term fit.

What’s your typical client’s portfolio size?

If you’re nowhere near typical for this advisor, you may be with the wrong firm. You don’t want to be the smallest client in the firm, because you might be the last priority for returned emails, new information, or access to the top planners in the firm. You might be relegated to the most junior financial advisor in the firm, instead of the top planner.

You also might not want to be the biggest client at the firm. If your portfolio is many times bigger than the advisors’ typical client, you might benefit by talking to an advisor who works with people at your level.

How long have you been a financial advisor?

Age doesn’t matter that much, but it’s good for advisors to have experienced at least one major market decline while in the business.

How do most of your clients invest their money?

If you are primarily interested in using mutual funds and annuities to build a retirement account over the long term, someone who focuses on retirement planning, mutual fund investing, and asset allocation (balancing portfolios between major asset classes like stocks, bonds, and cash may be a great fit.

If most of their clients are speculating in options, futures, foreign currency trades, and cryptocurrencies, that may be a sign that your interests don’t align well with theirs.

How do you get paid?

It’s important to be clear on what revenue model the advisor uses to understand any possible conflicts of interest.

Are you a fiduciary?

This should be a ‘yes’ or ‘no’ question for them. Be wary of any advisor who can’t answer directly.

How will we be working together?

This question can help establish mutual expectations of how much phone and email contact you might expect from the advisor. Will they be available for phone consultations outside of scheduled appointments and formal reviews? The more general they are, the more you can expect to pay in fees and expenses, most of the time.

Who is your custodian?

The custodian is the company that holds the assets on your behalf. This is an important safeguard against crooked asset managers — such as Bernie Madoff — who may try to use your assets for their own ends. The custodian gives you an independent accounting of your money.

Will I have to pay taxes if I invest with you?

If you have to sell securities or other investments in order to move them into an account with your financial advisor, you may have to pay income or capital gains taxes. This is important to know since taxes can cost thousands and thousands of dollars in some transactions. Depending on your situation, it might make the difference between moving your money to a new firm or vehicle or leaving it alone.

Think Long-Term

You should choose advisors who are likely to stay in business and be available to work with you for a long time. You may not want an advisor who is decades older than you because at some point, your advisor will retire and you might not want to work with their replacement.

You also want one with similar views on risk tolerance vs. safety, socially responsible investing, retirement planning, alternative asset classes, and other major issues.

Where to Find a Great Financial Advisor

Personal referrals are a great way to find financial planners and advisors. Ask successful and relatively wealthy people in your town, whom you admire and trust, if they have any recommendations for someone who would work with you.

You can also check organizations like the CFP Board for Certified Financial Planners in your area, NAPFA for fee-only planners, and the Financial Planning Association.

Originally published at https://incomeinsider.org on August 2, 2021.