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How to Choose a Financial Advisor

Mar 22, 2021 5 Minute Read Zina Kumok

Key takeaways

  • Find an advisor who specializes in your concerns and needs.
  • “Financial advisor” can cover several specialties, each with their own strengths.
  • Understand how an advisor charges for their services to avoid overpaying.

 

Choosing a financial advisor is no small task. When you're looking for someone to manage your money and guide you through life's most important financial decisions, you want to know that you’re getting good financial advice.

There are some key factors to consider in your search, from when to get an advisor to what type of advice you'll receive from the one you select. By knowing what to look for, you can ease some of your concerns and have a better chance of receiving the right advice for your needs.

 

 

What to look for in a financial advisor

Choosing a financial advisor is like choosing a new physician. You want someone who understands your concerns, answers your questions without judgment and can help you plan for the future. There are also times you might need a specialist for help solving a very specific concern.

You should find an advisor who specializes in your needs and has other clients like you. For example, if you're in your 30s and want to save for retirement and a child’s college education at the same time, you’d likely prefer an advisor whose clients mostly include young families. If you’re nearing retirement, work with someone who manages money for preretirees and retirees alike.

You’ll also want to find someone near you, who’ll know your local and state tax laws. They'll also be familiar with the local economy, which can be helpful if you’re trying to buy a house, for example.

 

Types of financial advisors

The term “financial advisor" or “financial planner” often serves as a large umbrella, covering several different specialties, each with their own expertise. Often financial advisors will have several licenses and certificates; to the untrained eye it can look a lot like a credential jumble. To help clarify those designations, here’s a look at common credentials you might come across.

 

Certified Financial Planner (CFP®)

To become a Certified Financial PlannerTM, an advisor must pass a rigorous exam and accrue a certain number of hours under professional supervision. They also need continuing education hours to keep their license active.

A CFP professional will have a “fiduciary” duty to the client—they can only recommend products and investments that best serve the client's interests.

 

Certified Public Accountant (CPA)

Certified public accountants focus on tax planning and preparation and can offer more specific tax guidance than the average financial advisor. If you have a complicated tax situation, run your own business or owe back taxes, an advisor with a CPA license may be a good fit for you.

 

Enrolled Agent (EA)

Enrolled agents have a high level of expertise on tax issues, allowing them to represent you against the Internal Revenue Service (IRS). If you’re audited by the IRS, hiring an EA can help you sort out the paperwork, protect your rights and ensure you don’t overpay in the process. Many EAs are former IRS employees.

 

Retirement Income Certified Professional (RICP)

A retirement income certified professional specializes in helping consumers create a savings plan for retirement. They focus on developing retirement saving strategies, diversifying saving vehicles for retirement and creating estate plans. They differ from other advisors due to their sole focus on retirement and related concerns.

 

Registered Financial Consultant (RFC)

A registered financial consultant has expertise in building and working with clients to achieve financial plans. To qualify as an RFC, they also must have another designation, such as a CFP or CPA, along with specific securities licenses, among other requirements. They're particularly helpful if you seek a financial plan—they can build the plan and help you stick to it.

 

What kinds of services do you need?

Ensure that the advisor you hire can answer the questions most pertinent to your current financial picture. These will range from personal financial planning to estate planning. Most advisors will provide a range of these services.

 

Personal financial planning

Establishing a budget, creating a debt payoff plan, preparing to buy a house, investing, taxes and even estate planning can all fall under this category. A financial plan is a look at every part of your financial life, to determine how they can work together to reach your goals.

A financial advisor can also answer questions like whether or not you can afford to quit your job and start your own business, have kids or go back to grad school. If you’ve received a large inheritance, a financial advisor can also show you the best way to allocate the funds and minimize your taxes. Personal financial planning can also help beginners start out on the right foot.

 

Retirement planning

A financial advisor can explain how much to save for retirement, the kind of retirement account(s) you should open and alternative ways to supplement your retirement.

They'll evaluate your complete financial picture, building a snapshot of your entire life’s savings and money goals. They can provide guidance, like when to take Social Security, when to buy an annuity, whether to save through a Roth IRA, and what retirement account withdrawal rate works for you. A financial advisor can also recommend the best ways to roll over an old workplace retirement account like a 401(k).

 

Estate planning

The right kind of estate plan can help you minimize your personal tax burden and maximize how much your heirs will receive. A financial advisor can determine if you should set up a trust for your assets, and help create it, if appropriate. They can also help you with other areas of your estate, like potentially buying life insurance or creating a donor-advised fund, which provides you a tool to give more to charity.

 

Investing

Investing properly is key to building wealth, but most people don’t want to spend their free time analyzing funds, reading quarterly reports and rebalancing portfolios. That's where a financial advisor comes in. They can help you manage your portfolio, which can include ensuring your investments have the right return targets and level of risk so you can more safely reach your financial goals.

A financial advisor will recommend changes to your portfolio as you get older and recommend the best types of retirement accounts to use.

Having a real person advising you on your investments will prevent you from making rash decisions, like selling all your holdings in a market downturn or cashing in everything you own to buy a hot stock. A financial advisor will manage your investments while providing regular updates.

 

When should you get a financial advisor?

Determining whether you need a financial advisor isn’t always straightforward, but almost everyone can benefit from professional advice at some point in their life.

You don't have to wait until you’re close to retirement to hire an advisor. In fact, not only could they help you reach your financial goals sooner, they can also help during major life transitions like marriage, having children or starting a business.

After you’ve had your initial meeting, consider visiting a financial advisor annually for a portfolio tune-up and to check in on other financial or life goals.

 

Decide how much you can afford

Before you hire a financial advisor, examine your savings to see how much you can afford (or want) to pay for the service (read on for more). If you're starting your financial journey, you can often hire an advisor to build a specific type of plan for you for, say, retirement, buying a house or rolling over 401(k)s. This usually comes with a one-time fee, as the advisor won’t be managing your accounts.

 

How much does a financial advisor cost?

How much you'll pay depends on the level of service the advisor provides and their fee structure.

Many financial advisors are "fee only" or charge a fee based on the amount of assets they manage for you, which is usually reflected as a percentage. The average fee Opens in new window comes in at 1% a year, but you could get a discount if they manage larger amounts.

Other advisors charge lower rates or provide service for free thanks to commissions they receive on products—like mutual funds and life insurance policies—they recommend to you. These advisors have a fiduciary duty to put your interests first, but you’ll want to ensure the products they suggest still have low fees and work with your financial goals.

Other advisors may charge a flat hourly rate or a project fee. Make sure to ask what you should expect to receive in return, if you agree to such an arrangement. Also ask if the fee includes follow-up questions after your meeting. Each advisor has their own methods and rates, so don't assume they’ll all charge the same.

 

What you can do next

Once you determine your needs and evaluate how much you can afford or want to pay, pick the type of advisor who can help you reach your goals. For local guidance, consider contacting a Prudential financial professional near you.

Footnotes

Zina Kumok is a freelance writer specializing in personal finance. She has written for the Associated Press, Indianapolis Monthly and more. She also writes a blog about how she paid off her student loans in three years.

 

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