How to Choose a Financial Advisor

As a society,  we’re generally uncomfortable discussing financial matters. 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 to come up with a financial plan, it may just be easier to sidestep the conversation instead of seeking professional assistance.

“There’s a lot of shame and guilt associated with past money mistakes and it can be hard to talk about,” says Cherie Stueve, PhD CFP® AFC® FFC® FBS®, a Financial Counselor & Financial Coach Practitioner, “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.

However, hiring the right financial advisor may feel intimidating. Only an estimated 35% of Americans use a financial advisor to help them manage their money.

Credentials from CPAs to CFPs may 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 qualified to provide financial advice or have their clients’ best interests. 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.

Financial advisors that help with debt and money management

Accredited financial counselor (AFC): If you need to establish credit or require assistance with debt management an AFC can provide guidance to 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 certification. 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.

Financial planning professionals

Certified Financial Planner (CFP): For comprehensive financial planning, a CFP certification is often considered the gold standard. They have a 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 completed the same coursework as a CFP; however, they are not required 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.

88% of Americans believe they could benefit from advice from a financial professional. 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 to help you pay off student loans or provide guidance on how to start investing or buy life insurance.

2. They know how to handle financial difficulties

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

“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.”

3. 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 of charging for their services so it's important to know their fee structure. Some may operate on a fee-only basis and provide a quote for a certain number of meetings. Others may 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. Additionally, local community programs, extension programs, and libraries also offer financial literacy resources that are low cost or free.

Some advisors may claim that 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 earn 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.

• BrokerCheck by FINRA: Look to see if a person or firm is registered to sell investments, and check to see if they have any regulatory marks on their record.
• Verify a CFP Professional: Check to make sure an individual holds a CFP certification.
• SEC Investment Adviser Public Disclosure: Search for disciplinary actions for an individual or entity.
• CPAverify by NASBA: Look up a CPA’s record to check for derogatory marks.

“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 with a qualified professional.