What financial advisor types you should look for? Once you decide you need a financial advisor, how do you find that perfect fit – that needle in a haystack?
Find out which financial advisor types will really look out for your interests. Plus, best financial advisor credentials, how they they get paid (and what that means for your money), and how to background-check potential financial advisors. If you hire a financial advisor, you owe it to yourself to know these things. Or you could lose money from advisor fraud, fees and lack of growth.
Disclosure: Our editorial content contains affiliates from which we receive a small payment to support the site at no additional cost to you. These marketing partners do not influence our opinion of their products. They do not review, approve or endorse our editorial content. All opinions remain our own.
What are the financial advisor types and are they important to your money?
Most people give less thought to hiring a financial advisor than they do to hiring a babysitter. Or planning their dinner menu. Which is to say, not very much. While hiring a financial advisor is arguably less important than choosing a daycare, it should still get some due diligence. Because your whole financial future rides on your choice of an honest financial advisor who’s the right fit for you.
Consider this a strategic hire – like hiring a chief financial officer (CFO) for your family. Use a disciplined process to find that proverbial needle in a haystack called a financial advisor (and also financial planner, money manager, wealth manager…). Your time investment will be well worth it. By giving you peace of mind and the ability to satisfy your dreams.
Your financial advisor will be privy to your finances and your dreams. That’s a pretty intimate relationship. Find the right person from the beginning for success over a period of years. The right financial advisor can make you money. But the wrong financial advisor can cost you some serious money, even your entire fortune.
9 Steps to Finding the Right Financial Advisor Types and Person
1. Ask yourself: Do you even need a financial advisor at this stage in your life?
Financial advisors can be a big help for mapping out your future and making your dreams come true. But you don’t have to hire one to successfully meet your financial goals.
If you’re digging yourself out of debt, your best strategy and biggest savings is to shed your debt as fast as possible. It makes the most dramatic difference in your long-term financial picture due to compound interest. Read more about getting out of debt here and here.
Does your employer offer a 401(k)? They can often keep your retirement savings on track with little oversight from you or a financial advisor. But you may still need other accounts or potentially a taxable brokerage account.
Maybe a financially savvy family member can help you in the short term. Then a paid financial advisor as you gain more assets. If you decide you need a financial advisor, do you need specific services… or an overall plan that charts your course for success for many years?
2. Two main financial advisor types – fiduciary vs. suitability.
Maybe you do need more oversight on various accounts. Perhaps you don’t want to map out your financial future on your own. Or you have more complex finances – like stock options, or family obligations such as a special needs child. Also, creating and maintaining a balanced and diversified portfolio can take some time and research. (Though it’s not rocket science.) Good financial advisors do things beyond portfolio-building. So take a broad view.
Unfortunately, the world of financial advisors is much like the Wild West. Anyone can hang out a shingle and call themselves a financial advisor, financial planner, wealth manager, money manager, or similar name. The names mean almost nothing. This can make it hard to find that needle in the haystack… the right financial advisor type and person.
Let’s start with some basic necessities. It matters less what a financial advisor calls themselves than their type of responsibility to their client(s). And those responsibilities come in just two stripes… fiduciary vs. suitability. Just two basic financial advisor types.
A fiduciary financial advisor is legally bound to act in your best interest. They must put your needs above their own. As such they’re often referred to as fee-only advisors because they do not accept commissions on investments they suggest.
On the other hand, a suitability financial advisor is only legally required to be sure the investments are suitable for you or someone in a similar situation or life stage. Not that they’re the best option for you, personally. It’s a key distinctive. They may work on commission, which can mean a conflict of interest.
Fiduciary financial adviser types are quite proud of their distinction. They can make it sound like if you hire a commission-based financial advisor (suitability advisor), you might as well be hiring a crook to manage your money. But presumably this suitability advisor still wants to keep you as a happy client, so that’s not necessarily true. What’s more, it could be their products are actually the best for you.
Some advisors maintain that the fiduciary standard isn’t sufficient to protect you from harm. Still, the fiduciary standard is the one we recommend. You should also look for the following designations…
3. The best financial advisor credentials to look for.
The CFP, Certified Financial Planner designation, is considered the gold standard in the financial services industry. CFPs meet stringent educational requirements, pass a rigorous exam, and uphold tough ethical standards set by the CFP Board. All advisors with a CFP must act in the best interests of their clients.
There are other reliable credentials besides CFPs – including the ChFC (Chartered Financial Consultant) and the CFA (Chartered Financial Analyst) certificate. Both also require advisors to master a wide range of subject matter topics and pass rigorous tests.
4. See how each financial advisor type gets paid.
There are basically three ways an advisor can be paid – fee-only, fee-based, and commission. Plus, the new kid on the block, robo-advisors. Know how each financial advisor type gets paid before you choose yours.
Fee-only financial advisor:
This is the best for overall financial planning and/or asset management. Fee-only financial advisors have a fiduciary duty to act in the best interests of their clients. They make their money either through flat fees, hourly rates, or a percentage of assets under management (AUM).
Fee-only advisors get no commissions or fees on product sales. And, they tend to offer more comprehensive advice that can include estate planning, retirement, investing, taxes, insurance planning, and education funding.
Fee-based financial advisor:
Newer to the financial world are fee-based financial advisors. Often affiliated with a broker or agent, they’re licensed to sell investments or insurance on commission — a hybrid of fee-only and commission based. They may charge you for a financial plan, and make money on the “back end” with commissions of financial products they sell.
Naturally, this can pose a major conflict of interest. Their potential for commissions can (and often does!) influence their endorsements for financial products. And unfortunately, when or if you refuse to buy those products, the relationship can sour. (Especially if you had a previous friendship with that advisor.)
Commission-based financial advisor:
Insurance agents, brokers, registered reps, and other commission based financial advisors sell financial products. Can be mutual funds, stocks, insurance, or annuities. They get paid a commission based on the sale. They’re often employees or salespeople of big financial institutions and have earned their Series 6 or Series 7 licenses. Part or all of their pay comes from commissions on what they sell – handing you a major conflict of interest. It doesn’t make them bad people. Just be aware that whenever the temptation of commission is present, it’s bound to influence their advice.
Traditionally these were called sales people, who only needed to advise investments that were deemed suitable (not necessarily best) for you. These are not fiduciary financial advisors.
For young, tech-savvy folks, a robo-advisor to specifically manage investment accounts might be right for you. Especially if you have no children and a simple estate. You won’t get much in-depth advice on topics like insurance, retirement, and taxes. Options for robo-advisors include Betterment, Ellevest, and Wealthfront. Clients with more complex needs and higher net worth may be better served by a human financial planner.
5. Decide what kind of financial advisor help you need.
Financial advisors can offer many types of financial advice.
Are you looking for a 30,000-foot life plan… or advice for a specific area:
- Investment advice
- Debt management
- Budgeting help
- Insurance needs
- Charitable giving
- Tax reduction
- Estate planning
- College planning
- Reassurance. At the beginning of the Covid-19 scare, client demand for financial advisors skyrocketed by nearly 50%.
Think about what you need and expect for your financial life. And for your emotional stability during tumultuous times.
6. Can you (or do you want to) pay your financial advisor?
All financial advisors get paid one way or the other. And they should.
Traditionally, financial advisors charged a percentage of the assets they had under management (AUM). While it seems like their interests are aligned with yours, and often is, that’s not always the case. What if you want to pull some of those AUMs to pay off your house? That means the advisor gets less, at least in the short term. How do you think that’ll affect the advice you get? Plus, that 1% or 2% of AUM can pose a major hit to your account over time. It sounds like a small amount, but it’s not!
However, the AUM model does provide you with a long-term partner and ongoing financial advice and financial planning throughout life’s stages and changes. So, it’s your call. What’s important to you? If you don’t need someone to keep you level-headed during market chaos and can develop your own plan, you might decide it’s not worth the money.
On the other hand, commission-only financial advisors sound like they’re free (on paper). Yet they’re often salespeople for insurance products, annuities, and mutual funds. Remember, these folks are only held to a suitability standard. Not a fiduciary one. And they’re motivated by commissions. So they could end up costing you money if you buy financial product(s) that aren’t really the best option for you. Call it a hidden cost. This has happened to us. More than once, unfortunately.
If you need limited advice on a particular topic, you might consider paying an hourly fee to an advisor. Even if your needs are bigger and broader, you’ll still likely be best served by a fee-only advisor, who won’t benefit from commissions.
But heads up. Because fee-only advisors lack “back-end” income, you may pay more upfront for their unbiased advice and the work that goes into understanding your situation and creating your plan. It’s only fair. They’re providing you valuable expertise.
7. Once you decide on your financial advisor type, gather names.
Now that you’ve done your preliminary research, here’s how to find a good financial planner. Because you want to be sure the person who’s guiding your financial decisions is trustworthy and capable. And that all fees are worth it.
It may be easy to just walk into your bank or drop in to your local Charles Schwab office to find a financial professional to work with. These could be good options. But an unaffiliated professional might better meet your needs, and is worth checking out.
Gather a robust list of names at this stage. Here are some ways to find them. Don’t just default to one person on a recommendation. That’s what got Bernie Madoff’s “investors” into trouble.
- Talk to family and friends. Twenty-five percent of Americans look to parents and friends for financial advice. So they may have tips for you.
- Ask for a referral from your CPA, attorney, or other professionals you know and trust.
- Look to major industry groups such as The Financial Planning Association (see “Planner Search” tool) and the National Association of Personal Financial Advisors (see “Find an Advisor” tool). The CFP Board offers a search tool that lets you customize your results by planner specialty, compensation model, primary language, and the value of your investment accounts. The CFA Institute also has a searchable member directory.
- Check out advisor directories like the Garrett Planning Network or the XY Planning Network. Both these organizations offer planners who work on an hourly basis if your needs are minimal and you just need some questions answered.
8. Verify financial advisor credentials, ethics, experience, and potential misconduct.
Once certified, all CFPs must complete ongoing continuing education coursework and are held to strict ethical standards. You can easily see if a financial planner has any ethical or legal black marks against them on BrokerCheck.
CFPs and other financial advisors are required to disclose any disciplinary actions and/or conflicts of interest on their ADV. This is a very important key disclosure document filed with the U.S. Securities and Exchange Commission (SEC) and state securities authorities.
The ADV describes the services a financial advisor offers, types of clients they serve, amount of assets under management. Plus, an explanation of fees and billing practices, company history, key players’ certifications, and any disciplinary actions due to misconduct. Even online portfolio management companies like robo-advisors must have an ADV on file.
The part of the ADV you want to see is Part II. It contains key facts you should know before you entrust your money to any financial advisor. Pay special attention to the following:
- Fees and compensation (how the financial advisor gets paid)
- Potential risks to clients (like exposure to volatile stocks)
- Potential conflicts of interest
- Disciplinary actions against the firm, financial advisor, or key personnel
- Whether the advisor or firm has filed for bankruptcy
According to a paper from the National Bureau of Economic Research called, “The Market for Financial Adviser Misconduct,” 7% of financial advisors have been cited for misconduct. Even worse, in the largest advisory firms, a stunning 15% of employees dispensing money advice have been cited for misconduct.
But also note… There can be cases of consumer complaints that are frivolous, or have been resolved. Those aren’t necessarily deal-breakers. Some people try to make a fast buck by alleging problems that don’t really exist. If the advisor has been investigated and the case dismissed, you can probably relax and move to Step 9. If not, continue your search.
9. Ask for a free introductory meeting with the financial advisors on your short list.
Once you’ve done your initial financial advisor background check and erased any bad apples, ask for an introductory meeting with two or three. These are usually free. This is your chance to ask questions and consider fit.
The right fit is a key factor. After all, this is an intimate relationship. Your financial advisor will know your most personal details. Financial advisors each have their own style and philosophies. Shop around. Once you think you’ve found your advisor, meet with at least one more advisor before deciding.
Another mention… just because you know an advisor personally doesn’t mean you’re automatically a good fit for their professional services. Don’t make that assumption. It may be easier to work with someone who wasn’t a “friend” before they were your financial advisor. Not always, but it bears mentioning. This can be especially true if they get product commissions you might choose not to buy. That can change the tone of your relationship.
Besides fit, a high level of trust is as important as breadth of knowledge. How much experience do they have in dealing with multiiple real-life financial situations?
Finally, it can be tough to judge a person’s character. Ask for referrals. Run background checks. Ask the advisor “what if?” questions. Read between the lines. Trust your gut if something feels wrong. Even if nothing’s wrong, any sense of distrust can mean bad sleep and stress. That’s just not worth it.
Bottom line? The right financial advisor type and person can help you multiply your money and meet or exceed your financial goals. It’s up to you to do your homework so you uncover that proverbial needle in the haystack. Choose well, and you may not have to repeat this process for many years or even decades.