Budget Sidekick

Financial Education Series

Choosing a Financial Advisor

Finding the Right Professional for Your Financial Needs

Working with a financial advisor can provide valuable expertise and guidance for your financial journey. However, finding the right advisor requires understanding the different types available, how they're compensated, and what questions to ask to ensure they're a good fit for your specific needs and goals.

Types of Financial Advisors

Understanding Different Advisory Roles

Financial Planners

Professionals who help create comprehensive financial plans covering multiple aspects of your finances:

CFP® (Certified Financial Planner): Rigorous certification requiring education, experience, ethics
Focus areas: Retirement planning, tax strategies, estate planning, insurance, investments
Best for: Holistic financial guidance and coordinating various aspects of your financial life
Investment Advisors

Specialists focused primarily on investment management and portfolio construction:

RIAs (Registered Investment Advisors): Firms registered with the SEC or state securities regulators
Credentials: May include CFA® (Chartered Financial Analyst), Series 65 license
Best for: Portfolio management, asset allocation, investment strategy
Specialized Advisors

Professionals focused on specific financial areas:

Tax professionals: CPAs (Certified Public Accountants), Enrolled Agents
Estate planning specialists: Attorneys with expertise in trusts, wills, and legacy planning
Insurance advisors: Specialists in risk management and various insurance products
Broker-Dealers

Financial professionals who can buy and sell securities for clients:

Registered representatives: Often called financial advisors or consultants at brokerage firms
Licensing: Series 7, Series 6, insurance licenses
Regulatory standard: Regulation Best Interest (higher than suitability but different from fiduciary)

Compensation Models

How Financial Advisors Get Paid

Fee-Only

Advisors compensated solely by fees paid directly by clients, with no commissions from product sales.

Assets Under Management (AUM): Annual percentage fee based on portfolio size (typically 0.5% to 1.5%)
Hourly fees: Billed for time spent (often $200-500 per hour)
Flat fees: Fixed amount for specific services like financial plans ($1,000-$5,000+)
Subscription: Monthly or quarterly payments for ongoing advice ($100-500+ monthly)
Commission-Based

Advisors paid through commissions earned from product sales.

Investment products: Mutual funds, annuities, insurance policies
Compensation structure: Front-end loads, trail commissions, surrender charges
Potential conflicts: Incentives to recommend products with higher commissions
Fee-Based (Hybrid)

Advisors who earn both direct client fees and commissions from product sales.

Common structure: AUM fees for investment management plus commissions for insurance products
Disclosure requirements: Must clearly explain when acting as fiduciary vs. salesperson
Understanding needed: Important to know when advisor is switching roles

Fiduciary Standard vs. Suitability Standard

Understanding the Legal Standards

Fiduciary Standard

The highest legal standard of care in the financial industry:

Legal obligation: Must act in client's best interest at all times
Conflict management: Required to avoid or disclose all conflicts of interest
Who applies it: RIAs, CFP® professionals when providing financial advice
Client benefit: Highest level of protection against advisor conflicts
Suitability Standard

The traditional standard for brokers and insurance agents:

Legal obligation: Must recommend products that are suitable for the client
Limitations: May recommend higher-cost products that benefit the advisor
Recent evolution: Enhanced by Regulation Best Interest since 2020
Who applies it: Traditional broker-dealers, insurance agents

Finding the Right Fit

Key Questions to Ask Potential Advisors

Qualifications and Experience

Questions to understand the advisor's background and expertise:

"What credentials and licenses do you hold, and what continuing education do you complete?"
"How long have you been practicing, and what was your career path to becoming an advisor?"
"Do you have experience working with clients in similar situations to mine?"
Compensation and Conflicts

Questions about how the advisor is paid and potential conflicts:

"How are you compensated for the services you provide?"
"Do you receive any compensation from third parties for recommending specific products?"
"Are you a fiduciary at all times when working with me, or only in certain situations?"
Services and Approach

Questions about the advisor's service model and philosophy:

"What specific services are included in your offering? What's not included?"
"How frequently will we meet, and how do you communicate with clients between meetings?"
"What is your investment philosophy and approach to financial planning?"
Client Experience

Questions about what to expect as a client:

"What is your typical client like, and how many clients do you serve?"
"Will I work directly with you or with a team? Who would be my primary contact?"
"Can you provide references from current clients in situations similar to mine?"

Due Diligence Steps

1. Verify credentials and background. Use FINRA's BrokerCheck or the SEC's Investment Adviser Public Disclosure website to check an advisor's registration, experience, and disciplinary history.

2. Request and review disclosure documents. Ask for the advisor's Form ADV Part 2 (for RIAs) or Form CRS (for brokers), which detail services, fees, conflicts, and disciplinary information.

3. Check for alignment with your needs. Ensure the advisor has experience with clients whose financial situations and goals are similar to yours.

4. Consider personality fit. The advisor-client relationship is often long-term, so choose someone you feel comfortable with and whose communication style works for you.

5. Meet multiple advisors. Interview at least three potential advisors before making a decision to compare approaches, services, and costs.

This article is for educational purposes only and updated as of October 2024. While working with a financial advisor can be beneficial, it's not required for financial success. Carefully evaluate potential advisors and consider how their services and fee structures align with your needs. No single compensation model is universally superior - the right choice depends on your specific situation and preferences.