How to Choose a Financial Adviser
Choosing a financial adviser can be intimidating. You have to find someone you enjoy working with. At the same time, you have to trust that they aren’t trying to sell you products you don’t need or making recommendations that aren’t in your best interest.
There are multiple types of financial advisers, and each can help you manage your money. It’s important to understand what kind of adviser you’re dealing with and how they make money. It can make the process of choosing a financial adviser easier and allow you to make better decisions.
Identify your money needs before choosing a financial adviser
Before you search for a financial adviser, it’s essential to understand what you need help with.
Financial advisers can help you with much more than investing topics, including debt management and retirement plans. They can even make insurance recommendations and offer estate planning advice to help you protect yourself and your family.
It can help you narrow your search if you have a clear idea of the areas where you need help. If you don’t have assets, children or significant debt, you might need to meet with an advisor periodically to ensure you’re on the right track with your retirement plans and brokerage accounts.
If you need advice for something more complicated, like restructuring debt payments or establishing a trust for your child, you’ll likely need to choose a financial adviser who can handle complex cases and has experience on the topic you need help with.
Spend time thinking about where you need help before researching advisers to help narrow down your options.
Determine the type of financial adviser you’ll want to choose
There are multiple types of financial advisers available. Some, like robo-advisors, offer more do-it-yourself guidance, while online and traditional advisors play a more active role in managing your money.
Robo-advisors are digital services that offer simplified investment management, usually through exchange-traded funds (ETFs). Most robo-advisors are designed to help people invest for long-term goals like retirement. They can be great for suggesting effective asset allocation and helping with automatic rebalancing.
When you sign up with a robo-advisor like Betterment, they will ask you to fill out a series of questions about your goals and risk tolerance. Using proprietary algorithms, the computer will build an investment portfolio based on your responses.
If you have a complex situation or want to speak to a real person, you might need to choose another financial adviser option.
Online financial advisers
Online financial advisers are a hybrid of traditional and robo-advisors. Companies like Facet Wealth or Empower offer automated investment options, but you can access a human financial adviser (or team of advisers) online if you have questions.
Online financial planners can be a good option for those who need help but want to avoid paying higher fees. These services usually cost more than robo-advisors but generally are less than a traditional advisor. And some online financial advice services require an investment balance of $25,000 or more to work with their online financial planners.
Traditional financial advisers
Traditional advisers are the investment professionals you typically think of and usually offer multiple services to help with your financial planning. Clients generally meet with traditional financial advisers in person, over the phone or via video chat.
Traditional advisers are usually the most expensive and may require a high minimum investment balance. If you have a lot of assets and need specialized services or want to develop a long-term relationship with one specific person, a traditional adviser may be a good option.
Pay attention to the fine print when choosing a financial adviser
Of course, all of this management costs money, and it’s vital to understand what you’ll be paying for a financial adviser’s time.
Robo-advisors: Since robo-advisors are computer-based, they tend to offer the lowest fees, often an annual fee based on your account balance. Betterment, for example, charges 0.25% of your account balance annually, which means you would pay $62.50 a year on an account balance of $25,000.
Online advisers: Online advisers tend to have more hybrid fee structures. They may charge a flat monthly fee, an hourly fee or an annual percentage of your assets under management (AUM), traditionally less than 1%, although that varies by company. Facet Wealth, for example, charges a flat fee of $2,000 to $6,000 annually, depending on the complexity of your situation.
Traditional advisers: These financial planners and advisers typically charge more than other options. The charges can fluctuate up or down based on your account balance and situation.
Understand fiduciary duty
Almost anyone can call themselves a financial adviser, so it’s essential to be on the lookout for people trying to sell you something you don’t need. One way to do that is to verify that your adviser is a fiduciary, which means that they are legally required to put your interests ahead of their own.
Registered investment advisors (RIA) and certified financial planners (CFP) are bound by fiduciary duty to offer advice and products that will help you, not necessarily their bottom line. As you research potential advisers, look for these acronyms to ensure you get solid advice.
It is also vital to pay attention to how an adviser is paid. Those who earn commissions typically try to sell you products that will make them money, not necessarily the product that would work best for you, although sometimes the two overlap.
Commission-only financial advisers are generally not fiduciaries. That doesn’t mean that the adviser is necessarily trying to take advantage of you or sell you something you don’t need, but it is important to be aware of their motives.
A fee-only or fee-based adviser typically only earns money based on the fee they charge you, not the products they sell. They may charge a flat or hourly fee for their services or a percentage of your account balance. Generally speaking, most fee-only advisers are fiduciaries, although some may pause their fiduciary duty when discussing products like life insurance.
How do I find a financial adviser?
One of the easiest ways to find a good financial adviser is to ask friends and family members if they have recommendations. However, that doesn’t mean you don’t have to do your own research. To find a CFP or other fiduciary adviser in your area, check out the following resources:
- The National Association of Personal Financial Advisors
- FPA PlannerSearch
- The Garrett Planning Network
- The XY Planning Network
Questions to ask when choosing a financial adviser
Once you have three or four candidates who seem like a good fit, schedule a phone or video interview to discuss their process and your situation. As part of your interview, be sure to ask the following questions:
- Are you a fiduciary?
- Do you always act as a fiduciary? (A fee-based adviser can pause their fiduciary duty if selling a commission-based product like life insurance.)
- How long have you been in business? (Try to find someone who’s been a financial adviser for at least 3-5 years.)
- How often will we meet?
- How do you make your money?
- What services do you offer?
- Do you have account minimums?
- Do you have any conflicts of interest?
- What information do you need to develop a financial plan for me?
- Will you collaborate with other advisors, like CPAs or attorneys?
- Will you file tax returns or help with tax-related questions?
- Can you help me with estate planning?
As you meet with each potential adviser, pay attention to who is talking more—you or them. If an adviser spends more time talking about themselves than asking about your goals and financial situation, it might be a clue about how the relationship will go.
Choosing a financial adviser can be intimidating, but if you know what to look for, the process gets easier. Be sure to look for a certified financial planner, confirm that the person is a fiduciary, and do your homework to ensure they’re the right fit for you.
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