How to Choose a Financial Advisor

Financial advisers are everywhere. The challenge is finding the right one.

Hand selecting candidates with a red pen.

When selecting a financial advisor, keep your expectations in mind and plan to meet several professionals in the field before zeroing in on the right one. 

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You will never have a problem finding a financial advisor. The challenge, like looking for the right toothpaste brand or a shampoo, is deciding what kind of advisor to work with. You probably have stood in the grocery store on many occasions, wondering: Should I get the one that specializes in fighting enamel erosion or teeth whitening? Am I looking to tame my oily hair or give it a fuller body?

Most of us know our teeth and hair like the back of our hands. But deciphering what type of financial advisor to hire requires knowing something about money – and your personality – and understanding a slew of confusing terms.

It isn’t an impossible choice, of course. Plenty of people have picked financial advisers and lived to tell about it – but if you want a solid working relationship and one that helps you make smart financial decisions, and lots of money, it helps to understand what you’re getting into and why you’re even talking to an advisor in the first place.

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1. Expectations and when to get one. Obviously, not everyone is ready to hire a financial advisor. If you’re lurching paycheck to paycheck, and you want to start saving, that’s great, and you should – but generally, a financial advisor won’t be interested in working with you, as harsh as that sounds. They do make money, after all, from their clients who are making money. If you’re only able to sock away $30 per week or month into a savings account, because of what you’ll bring to the table and what they’ll take away from it in fees, neither you or the financial advisor can afford to work together.

So when is it time? Here’s a good rule of thumb: “Once someone is to the point that they have stable and steady income and have the ability to save at least 20 percent of their annual income, it might be time to consider a financial advisor,” says Nicole Rutledge Regilio, a certified financial planner with Resource Consulting Group in Orlando, Fla.

But even if you aren’t there yet, financial advisory firms and online services can provide assistance. For instance, maybe you’re solidly in the middle class and putting a little away regularly but not a lot. Websites such as the garrettplanningnetwork.com, myfinancialadvice.com, learnvest.com and jempstep.com can either hook you up with a certified financial planner who works with the middle class – or offer tools to help you invest.

2. What type of financial advisor to get. You could hire a financial planner, an accountant, an insurance agent, an attorney – they all will give valuable financial advice – but if you’re new to this game of hiring an advisor, you probably don’t need all of them at once. You’ll likely want to hire a certified financial planner. As for finding one, you can certainly pull out the phone book or start searching the Internet, but a good course of action is to start with recommendations from friends, family or colleagues.

3. Fiduciary or suitability? The financial industry has two sets of compliances that advisers have to follow called the suitability standard or the fiduciary standard.

Fiduciary standard. This is when your financial advisor is legally bound to give you good advice – advice that fits your needs. They’re also referred to as fee-only advisers; you’ll typically pay a quarterly fee that’s calculated as a percentage of the assets your advisor is managing.

Suitability standard. As financial advisers who follow the fiduciary standard will gleefully tell you, advisers who follow the suitability standard are only legally required to make sure the investments are suitable for you – they aren’t required to necessarily be your best option. A financial advisor following the suitability standard works on commission, paid from a percentage of the money that you’re investing.

Fee-only advisers are understandably proud of their distinction, but some of them will make it sound as if you go with someone who works on commission, you might as well hire a hobo to manage your money. Which is why it’s important to remember that brokers following the suitability standard aren’t out to get you. It is true they may steer you toward an investment that their employer (your big brand name brokerage firm) is touting, but presumably, he or she wants to keep you as a happy client for years to come. As with anything, as you shop around, you’ll want to crunch the numbers in fees and see what looks like your best bet. The fees often, but not always, cost less at a brokerage firm – another reason some people are attracted to them.

“I don’t believe the fiduciary standard itself protects people from harm,” says Kevin Meehan, the regional president of the Chicago branch of Wealth Enhancement Group, an independent financial planning and advisory firm. And just to be clear, Meehan’s company is dually registered to provide service under a fiduciary standard or a suitability standard.

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“The integrity of the advisor and the organization is your ultimate protection,” he says. “I suggest to those looking for an advisor that they ask questions related to the adviser’s financial status, along with the organization itself. My experience is that if your advisor does not feel financial pressure for their own needs, and has plenty of people to talk to, they don’t have to maximize compensation on everyone they meet.”

4. Get to know your prospective advisor. Shop around, says Patrick Morris, CEO of Hagin Investment Management in New York City. You are the client. Advisors recognize you may talk to a number of professionals.

And when you do talk, try to get an understanding of the adviser’s style. “Do they buy and hold, or are they more aggressive?” asks Morris. “What assets are they very knowledgeable in – equities, real estate, bonds commodities? Everyone has some kind of bias that they bring to the table, and understanding it will keep you better informed about risk.”

Morris also suggests making sure your advisor has a solid understanding of tax and estate issues. “At the end of the day, bad tax and estate planning can make decades of good hard work and savings disappear,” he says. “Any advisor you’re considering should either have some background in these issues or have attorneys, estate planners and accountants that they work with that can help you.”

Morris also suggests asking financial advisers about their past job experiences and how long they’ve been advising clients. Everyone starts a career sometime, of course, but if you have an advisor who just started and has a long and storied career of wearing many different hats, “be a bit cautious,” Morris says. “In my experience, a lot of people move through financial advisory, thinking that it looks easy. It isn’t.”

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That might sound self-serving given Morris’ profession, but he has a point. If managing money was easy, nobody would ever hire a financial advisor.

Corrected on Feb. 12, 2014: A previous version of this story misstated the services Wealth Enhancement Group provides.