Choosing a Financial Advisor

Couple meeting with a financial advisor

Choosing a financial advisor to help you manage your money can be a smart move, especially if you're trying to save for retirement or looking to begin living frugally so that you have more cash on hand.

Planner vs. Advisor

Sometimes, the terms "financial planner" and "financial advisor" are used interchangeably. However, according to Investopedia, the two terms are different.

  • A financial planner helps clients plan for their financial futures. This may include providing tax, estate, or retirement planning advice.
  • A financial advisor deals solely with investing. Their main job is to help clients achieve financial goals through investments.

Although the two fields are distinct, many professionals working in the field provide both types of advice. Some planners are also advisors.

Types of Financial Advisors

According to the Certified Financial Board of Standards, there are several different types of financial planners. These planners are categorized by the type of product they sell or advice they offer. Types of advisors include:

  • Investment Advisors: These professionals provide advice regarding securities. To legally do so, they must be registered with the Securities and Exchange Commission and the securities agency in the state in which they work.
  • Stockbrokers: These advisors assist with the purchase and sale of stocks, bonds, and mutual funds. They must be registered with a company that is a member of the Financial Industry Regulatory Authority.
  • Insurance Agents: These agents provide advice about home, life, auto, and casualty insurance products. They may represent several insurance companies or work solely with one insurer.
  • Estate Planners: These advisors provide advice regarding preparing property and assets for an individual's death. Their advice may encompass creating trusts or inserting clauses in a will. However, unless they are an attorney, they rarely write these trusts or wills.
  • Accountants: These professionals assist with tax planning for both state and federal taxes. They must be licensed in the state in which they practice.

Selecting an Advisor

The SEC states that there are six things to consider prior to choosing an advisor:

  1. The type of advice you seek: If you seek advice regarding your entire financial health, meaning savings, investments, and retirement planning, you probably want to work with a professional that is both a planner and advisor, since he or she will likely be able to meet all of your needs. However, if you only want an advisor to help you with purchasing casualty insurance, you probably only need to meet with an insurance agent.
  2. The services the professional can deliver: It's not worth your while to meet with an insurance agent if you require advice regarding your investment portfolio.
  3. The professional's limitations: Is the professional licensed and able to answer any questions you have about the products you seek or types of planning you'd like to engage in? If not, you might consider working with a different planner.
  4. The services you're paying for, how much those services cost, and how the advisor gets paid: There are four main ways advisors are paid, or the advisor may use a combination of the four ways:
  • By charging a percentage of the value of the assets they manage for you
  • By charging an hourly fee
  • By charging a fixed fee
  • By taking a commission on any securities they sell

Licensure Considerations

A final consideration when choosing a financial advisor is their licensure. Depending on the products they sell or advice they offer, the advisor may need to be registered or licensed by federal or state agencies.

There are dozens of licenses that an advisor may choose or is required to hold, but a way to check whether the advisor you are considering meeting with holds the licenses he or she is required to have is by searching for them via the Financial Industry Regulatory Authority, Inc.

Searching for an Advisor

These agencies can help you find the most suitable financial advisor for you:

  • The National Association of Professional Financial Advisors: This association is comprised of fee-charging financial advisors. The website allows for searching for an advisor by the advisor's name or client's address.
  • Certified Financial Planners Board of Standards: This association allows you to search for a certified financial planner near your home. It also allows you to check an advisor's certification status.
  • The Financial Planning Association: This group allows you to search for a planner by city, state, zip, or type of fee structure or services sought. You can also tell the association about the type of services you seek and its management will recommend planners for you.

Meeting with an Advisor

Once you've determined that the advisor you're interested in working with has earned all required licenses and provides the advice or services that you seek, it's time to start asking questions. The SEC suggests you ask about:

  • The advisor's prior experiences working with clients of similar financial backgrounds and standing
  • The types of products and services that the advisor offers
  • Whether the advisor anticipates needing to work with another advisor or planner to meet your needs
  • Any prior disciplinary action taken against the advisor by a regulatory agency
  • The advisor's payment and fee structure

Planning for your Financial Future

When it comes to planning for retirement, death, or for building up your bank account, a financial advisor might be the key to success. Remember, however, that it's perfectly acceptable to meet with two or more advisors to get a feel for how they operate and what they can do for you. It's also acceptable to switch to a new advisor if you feel that your current one is no longer meeting your needs.

Choosing a Financial Advisor