How to Choose the Right Financial Advisor

Financial advisors use their expertise to manage your money.  Many advisors also often offer services that extend beyond making investment recommendations.  They engage in limited or comprehensive financial planning and provide advice to help you reach your financial goals. 

People often seek the help of financial advisors ahead of major life changes.  Buying a house, getting married, having a child, inheriting money, and planning for retirement are all common triggers for this decision.

The right financial advisor can make the difference between meeting your financial goals or falling short.  

Here’s how to choose a financial advisor that’s right for you.

Understand the different types of advisors 

There are pros and cons to retaining different types of financial advisors.

Robo-advisors offer simple economic investment management services online.  Robo-advisors often work by having clients answer questions online about their financial situation, risk tolerance, and goals.  An algorithm then generates a suitable investment plan.  

Although robo-advisors may be the least expensive option, not everyone is comfortable with the impersonal nature of these services.

Online personal advisory services connect you with a personal advisor online.  These services typically automate their offerings, permitting clients with fewer assets to be serviced profitably.  An online advisor may assess your risk appetite, review your specific financial situation, and craft an investment plan based on your personal goals. 

Traditional financial advisors usually have a dedicated office in your local area where you can meet.  They will make investment recommendations and often provide limited or comprehensive investment planning services.

Compare fee structures 

Fees charged by robo-advisors and online advisory firms are typically a percentage of assets under management (AUM).  While they vary, they are often between 0.25%-0.30% of AUM.

Traditional financial advisors use different fee structures.

Those who use an AUM model typically charge about 1% of your total portfolio for the first million, with fees declining after you reach break points at higher levels of assets. 

Other advisors may charge a retainer or set monthly or annual fees regardless of how much money they manage. 

Some financial advisors charge an hourly rate, allowing you to pay only for the time you need them. 

Others set a fixed yearly retainer.  Retainer fees are typically about $4,000 a year, while hourly rates usually range from $150 to $350 an hour. 

Some financial advisors charge a flat fee based on the type of financial planning they offer.  These advisors will set up a comprehensive financial plan for you to implement.  While the cost will vary,  $1,000 to $3,000 is the typical range. 

Those who are not registered investment advisors get paid through commissions based on the investments they recommend.  For example, a mutual fund sales load will often be between 3%-6% of your total investment.  This commission is paid to advisors as a one-time fee when the mutual fund is purchased or sold. 

Some advisors will charge using a mix of fees and commissions. 

Low fees matter

The amount of fees you pay your advisor can have a major impact on your returns over time.

An investor bulletin released by the Securities and Exchange Commission’s Office of Investor Education and Advocacy illustrates the impact. 

A $100,000 investment with a 4% annual return over 20 years and a 0.25% fee will be worth $210,000.  The same investment with a 0.50% ongoing fee will be worth only $200,000.  With a 1% ongoing fee, that same investment will be worth only $180,000. 

One way to calculate the true cost of an advisor’s fees is by using an online calculator created by Canadian investor advocate, author, consultant, and speaker Larry Bates.  The calculator breaks down the total gain of your investments before fees, the amount you lose in fees, how much of the total gains you actually keep, and the total value of your investment (the original investment plus the gain you keep). 

An investor paying a 1% advisory fee on a $1 million investment earning 7% over a 25-year period will have a total gain of $4,427,433.  But this hypothetical investor will lose $1,135,562 in fees paid, which includes the “drag” arising from a reduced rate of return.

If that same investor paid an advisory fee of 0.50%, the amount lost in fees would be reduced to $599,734.

A qualified advisor with low fees can be important to reaching your retirement goals.

Retain a registered investment advisor

Every registered investment advisor (RIA) is legally required to act in your best interest.  RIAs must minimize conflicts and disclose any they may have. 

Qualifications matter 

Ask your financial advisor about their qualifications.  Here are some of the most impressive ones: 

Certified Financial Planners earn their CFP® designation by having two years of experience before offering financial planning services and following a code of ethics set by the Certified Financial Planner Board of Standards

CFP candidates must hold a bachelor’s degree from an accredited college or university.  They must pass two rigorous examinations consisting of 3-hour sessions over one day. 

Certified Financial Analysts (CFAs®) are required to pass a rigorous three-part examination covering ethics and professional standards, investment tools, asset classes, portfolio management, and wealth planning.  They must commit to a 4-year program or more and 300+ hours of study for each of the three examinations.

Certified Public Accountants (CPAs) must pass a rigorous exam with a 50% passing rate, focusing on financial accounting and reporting.  CPAs must complete 120 hours of education every three years to stay certified and be able to practice.  The qualifications to become a CPA is why businesses often seek them out as trusted advisors

Although many qualified financial advisors are not CPAs, there are advantages to involving a CPA in financial planning.  The background of a CPA makes them especially well-qualified to advise on tax projections and other issues involving tax laws. 

Specialization

Some financial advisors focus their practice more narrowly.  They may specialize in retirement planning, small business planning, or particular occupations, like the medical profession or academics.  It’s important to retain a financial advisor whose expertise matches your requirements.

You may find it helpful to interview several financial advisors before making a decision.  You can find a helpful list of interview questions here.

Darrell Armuth founded Sensible in 1994. Since then, he has served hundreds of clients. Darrell is a Certified Public Accountant certified by the state of Nevada.