skip to main content

See the results of our 2022 Personal Finance Study!

How to Choose a Financial Advisor

By
Ashley Altus, CFC
Ashley Altus is a personal finance writer who covered financial planning with a focus on money management and household finance for OppU. She is a Certified Financial Counselor through the National Association of Credit Counselors. Her work has appeared with O, the Oprah Magazine; Cosmopolitan Magazine; The Smart Wallet; and Float.Today.
Read time: 5 min
Updated on July 29, 2022
woman looking through binoculars to learn how to choose a financial advisor
Hiring a financial advisor can help you manage your finances in major life milestones from student loans to retirement.

As a culture, we’re uncomfortable talking about money. It’s common for people not to reveal how much income they make or to ignore rehashing their money mistakes. Even when we could use a hand coming up with a financial plan, it may just be easier to sidestep the conversation instead of reaching out to a professional for help.

“There’s a lot of shame and guilt associated with past money mistakes and it can be hard to talk about,” says Cherie Stueve, AFC, a doctoral candidate in personal financial planning at Kansas State University, “but many financial professionals really do want to help you achieve financial success and wellness.”

What does a financial advisor do?

Financial advisors can assist people in reaching their financial goals and handling their financial decisions. They offer services such as investment advice, debt management, estate planning, and more.

“A financial advisor can look at what’s going on and help you realize mistakes and help you see your financial blind spots,” says Nilton Porto, Ph.D., an associate professor of consumer finance at the University of Rhode Island.

But hiring the right financial advisor can feel intimidating. Only 17% of Americans use a financial advisor to help them manage their money, according to the 2019 Invest in You Savings Survey, while 75% manage their own.

Credentials from CPAs to CFPs can seem confusing if you’re unfamiliar with this world. With everyone claiming to be a financial guru, who can you trust to make sure your money is safe?

Understanding the different types of financial advisors

A lot of people choose to call themselves financial experts, but that doesn’t mean they’re fit to give you money advice or have their clients’ best interests at heart. For this reason, it’s important to take a close look at the credentials of a potential financial advisor.

The type of financial advisor you choose will vary based on your financial goals and needs. Some financial professionals may specialize in a certain area, such as taxes, retirement planning, or investments.

Here is a guide to different types of professionals who offer financial advice or financial planning services.

What's the difference between financial professionals?

Find out which financial professional best suits your needs depending on your goals.

Credential Focus Fiduciary Role
Accredited Financial Counselor (AFC) Debt and money management Yes Help clients create a plan to manage their debt and get their spending on track
Certified Financial Planner (CFP) Financial planning Yes Examines your financial situation by taking a closer look at your assets, income, insurance, taxes, investments, and estate plan
Certified Public Accountant (CPA) Taxes Yes Provides tax advice and planning
Chartered Financial Consultant (ChFC) Financial planning Yes Has broad knowledge on financial topics such as wealth management, insurance, and taxes
Enrolled Agent (EA) Taxes No Prepares tax returns and gives guidance on tax-related issues
Registered Investment Adviser Investment Yes Gives advice about investment while required to act as a fiduciary to their client
Registered Representative (broker, broker-dealer, stockbroker) Investment No Sell financial securities such as stocks, bonds, and mutual funds

Financial advisors that help with debt and money management

Accredited financial counselor (AFC): Maybe you need to build credit or need a plan to manage your debt. An AFC can help people overcome financial challenges from past mistakes.

Who can you talk to about your taxes

If your taxes are usually fairly simple -- for example, you have one source of income from a typical 40-hour-a-week job -- chances are you may be able to do your taxes yourself.

It may be worthwhile to seek out a tax preparer if you own a business, have multiple sources of income, or are self-employed.

Certified public accountant (CPA): Accountants are synonymous when it comes to tax planning and preparation, but not all accountants are CPAs. CPAs are required to pass a rigorous exam and complete educational requirements to earn their letters. CPAs can also offer guidance when it comes to financial planning.

Enrolled agent (EA): These advisors are licensed by the IRS and only focus on taxes. They can’t help you with other types of financial advising.

Financial planning professionals

Certified Financial Planner (CFP): For comprehensive financial planning, a CFP certification is often considered the gold standard. They have broad knowledge of cash flow management, lending, retirement, investment management, and life insurance. They’re one of the most common types of financial planners you’ll come across.

Chartered Financial Consultant (ChFC): Similar to a CFP, a ChFC has studied the same coursework as a CFP; however, they don’t need to pass the same comprehensive exam.

Investment advisors

Registered Representative (broker, broker-dealer, stockbroker): Brokers buy and sell stocks, bonds, and mutual funds for clients. They usually don’t offer the same type of comprehensive financial review that investment advisors provide. Registered representatives recommend suitable investments for their clients. They are required to take a comprehensive examination to obtain their credentials.

Registered Investment Adviser: Besides offering money management, investment advisors can also give clients comprehensive financial guidance. Generally, they operate with a fiduciary standard, which means they are required to act in your best interest and place your interests above their own. They also need to be upfront about their fee structure and disclose any conflicts of interest, which can be found by reviewing an investment advisers Form ADV Part 2A.

What are the benefits of using a financial advisor?

Even if you know a lot about personal finance, there’s still an upside to working with a financial professional.

78% of Americans believe they could benefit from advice from a financial professional, according to the National Foundation for Credit Counseling (NFCC). Here are some ways a financial advisor may be able to help you.

  1. They can educate you on financial topics

In recent years, financial issues like retirement have become more complex. Most American workers have full responsibility for their retirement savings today compared to the pensions of the past. Financial professionals can help you understand your employee benefits and how best to participate in your retirement plan.

They can also strategize with you to help you pay off student loans or provide guidance on how to start investing or buy life insurance.

  1. They know how to handle financial difficulties

Working with a financial professional can help you better navigate financial setbacks.

Two-thirds of adults who worked with a financial advisor reported they felt more prepared for a recession, according to the research from the Certified Financial Planner Board of Standards.

“Many people don’t know they should call their creditor instead of avoiding their bill and hiding,” says Karen Chan, CFP, a personal finance educator. “When you work with someone who knows the right approach, you’ll know the best course of action to take. Even if you can’t pay the bill, you may be able to avoid your interest rates going higher or a late charge.”

  1. They assess your finances objectively

Working with a financial professional can give you an objective view of your finances.

“Money is emotional, so a financial professional can help you make better financial decisions and overcome past financial mistakes that could be a roadblock,” Stueve says.

What to consider when looking for a financial advisor

Fee Compensation

Financial professionals have different ways to charge people, so you’ll want to know their fee structure. Some may operate on a fee-only basis and give you a quote for a certain number of meetings. Some advisors charge a percentage based on the assets they advise on, which you may see referred to as assets under management (AUM).

Some advisors operate on retainers, flat-fees, hourly rates, or sliding-scale models that are based on your income. Local community programs, extension programs, and libraries also offer financial literacy resources that are low cost or free.

Some advisors will tell you there is no upfront cost, but that doesn’t mean their services won’t cost you anything. They may sell you products and services such as life insurance -- and some will make a commission off that sale.

“Ethical financial professionals will be very transparent about how they’re being compensated,” Chan says.

Financial expertise

Anyone can claim they’re a financial advisor, but you’ll want to take a closer look at their credentials.

Only financial advisors who are investment advisors, broker-dealers, or those who sell insurance products will need to register with state or federal authorities. The following resources can help you find out more about a potential financial professional.

“With so many people calling themselves financial advisors, it’s hard to know who to trust,” Porto says. “You can check FINRA before you see someone to make sure they have your best interest in mind.”

The right fit and putting your best interest first

Even if an advisor charges the right price and has expertise, it’s important you feel comfortable with your advisor’s personality and communication style.

“There are a lot of great CFPs and AFCs out there, but you want to be with someone who is going to be a good partner and explains things to you in a way you can understand them,” Stueve says.

Most financial advisors will want to get to know you to see if you’re a good fit before they take you on as a client. If they’re promising you exaggerated high rates of return or use high-pressure sales tactics to force you into a rushed decision, it’s probably a red flag.

“Your first meeting shouldn’t be about your money,” Porto says. “They should want to talk about your life situation and family. If they bring up money immediately, they may not be looking out for your best interest.”

The bottom line

The right financial advisor can give you support when it comes to things like money management, making large purchases, and retirement. Verify your professional’s credentials and expertise to ensure you’re partnering up with a qualified professional.

 

Article contributors
Nilton Porto is an associate professor of consumer finance in the College of Health Sciences at the University of Rhode Island. His research interests include financial decision-making, consumer behavior issues, and financial well-being.
Cherie Stueve, MBA, CPA (Inactive) AFC® is a Ph.D. candidate in personal financial planning at Kansas State University and a private practice financial counselor. Her research interests center on how consumers can identify the most appropriate qualified financial professional to help with questions or concerns.
Karen Chan has a master’s degree in consumption economics. She also holds the Certified Financial Planner™ designation, but she teaches rather than working with individual clients. Her goals are to make even complicated financial subjects easy to understand, and to help people make wiser decisions with their money.

California Residents, view the California Disclosures and Privacy Policy for info on what we collect about you.