Finding Your Financial Ally: How To Pick The Perfect Advisor For Your 2024 Wealth Journey

Ever wonder why Olympic athletes have coaches? These are individuals at the very top of their game possessing unparalleled skill and expertise, and yet there is no single Olympic athlete out there who does not have a coach.

The answer is that there is tremendous value in having someone in your corner supporting you, someone who can provide you with a roadmap and hold you accountable, someone to act as an objective sounding board, and who can point out your blind spots and correct your form.

This is true across all aspects of life. Whether pursuing an athletic goal, a career goal or a life transition–there are coaches who can help you get there. In the world of personal finance, the coaches are financial advisors. But how do you determine whether and when you need one, what type of advisor is best for your needs, and how to select one? These are the questions this article aims to help you answer.

Understanding The Roles Of A Financial Advisor

A financial advisor is often described as the quarterback of your financial team. Their role is to survey the entire landscape of your financial life, encompassing your current financial position, portfolio allocation, goals, financial beliefs and values. Their leadership is crucial in prioritizing, strategizing and executing your plan to help you accomplish your goals. This could include engaging other experts such as an estate planning attorney or insurance broker, to ensure that all areas of your financial life are taken care of.

The cornerstone offering of a financial advisor is the financial plan, which illustrates how income, expenses, and short and long-term goals all interact to impact financial stability throughout your lifetime. With the help of the financial plan, an advisor can identify possible issues far down the road that require course correction today to avoid, and offer insights on proactive measures to navigate and plan for them. Whether it’s ensuring sufficient liquidity before welcoming a new family member, embarking on a sabbatical or planning for a home purchase or retirement, the financial plan serves as a navigational tool throughout the advisory relationship.

The best financial advisors will do more than crunch the numbers, they’ll also help you develop a framework for financial decision-making.

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When to Hire a Financial Advisor

There are several situations when you may consider hiring a financial advisor.

You have a large investment portfolio (above $250,000): The larger your portfolio, the greater the stakes.
You have a complex financial situation with several competing goals: A financial advisor can help you prioritize your goals and identify possible conflicts between them. For example, if you would like to have kids in the next few years and want to step out of the workforce to be a stay-at-home dad, a financial advisor can illustrate what needs to happen in advance to prepare financially, and the long-term implications of that decision.
You are navigating a life transition, such as marriage, divorce, retirement, loss of a spouse, or you’ve received a large inheritance: Any time that you receive a big windfall or experience a financial shake-up in your life, it makes a lot of sense to engage a financial advisor who can help you understand how the change in circumstance impacts you in the near and long-term.
You don’t have the time or desire to dedicate to your finances: There are some people who don’t want to deal with the minutiae of their personal finances and prefer that someone else manage it and tell them the one or two things they need to focus on. You could have a demanding job and children leaving no time or energy to devote to personal finance, or you may simply have little interest in the subject. If you fall into either camp, a financial advisor can help you stay on track financially, while you take care of the rest of your busy life.
You want a second set of eyes on your finances: Whether you’re early on in your money journey or you’ve been managing your personal financial affairs confidently for years, there can be great value in meeting with an advisor to get a second opinion to ensure that you are on the right track.

When To Consider DIY Investing

Understanding whether you can manage your personal finances independently depends more on your personality and inclination than the size of your portfolio. Consider DIY investing if you genuinely enjoy personal finance, actively oversee your savings and investments and are confident in portfolio allocation. If married, ensure both partners actively communicate and collaborate on finances to avoid imbalances in decision-making.

While interest and confidence are important, competence is crucial. Be honest with yourself about your knowledge and abilities. Even if you are experienced in managing personal finances, occasional consultations with a financial advisor for a comprehensive review may still be beneficial.

The Different Types of Financial Advisors

Financial advisors can be found in three general flavors, differentiated by their level of human involvement, cost structure and tailored advice.

Robo advisors are algorithm-driven platforms that provide standardized portfolio allocations based on risk assessments. They offer cost-effective solutions with benefits such as consistent portfolio alignment, and automated features like tax loss harvesting and ongoing rebalancing.

Online financial advisors, a tier above robo advisors, may offer additional access to a financial planning professional, while traditional financial advisors rely on human expertise and relationships for personalized advice tailored to individual client goals, risk tolerance and financial situations.

The choice between these options depends on your level of investible assets, preferences, financial goals and the level of human interaction you desire.

Key Factors To Evaluate Different Financial Advisors

When looking for a financial advisor, there are several important qualifications and details to assess.

Believe it or not, no credentials are required to hold yourself out as a financial advisor or financial planner. Therefore, it is especially important to look for credentials as an initial indicator of a professional’s commitment to the industry and competence. The gold standard qualification in the financial advisor profession is the Certified Financial Planner™ (CFP) designation. This certification demonstrates comprehensive knowledge in financial planning, including investments, insurance, taxes, retirement and estate planning.

Secondary to the CFP designation, other credentials that indicate a high degree of experience and expertise in the profession include:

Certified Divorce Financial Analyst (CDFA): A credential focusing on guiding individuals through the financial complexities of divorce.
Chartered Financial Analyst (CFA): A credential for investment professionals, focusing on portfolio management and financial analysis.
Certified Public Accountant (CPA): A professional accounting qualification that can be valuable for financial advisors, especially those involved in tax planning.
Personal Financial Specialist (PFS): A designation for CPAs who specialize in personal financial planning.
Certified Investment Management Analyst (CIMA): Emphasizes investment management and portfolio construction.
Registered Investment Advisor (RIA): While not a traditional credential, advisors registered with the SEC as RIAs must adhere to specific regulatory standards.

Fiduciary Duty

Just as not all professionals who hold themselves out to be financial advisors are credentialed, neither are they beholden to the same ethical standards. The highest ethical standard is called the Fiduciary Duty. An advisor who has taken an oath to act as a fiduciary (all CFP professionals) must put the client’s best interest ahead of their own, must act with diligence, prudence, and skill in managing the client’s affairs, and must provide full transparency in all actions.

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Experience And Track Records

While more experience does not guarantee quality, experience in both life and in the profession can help to broaden an advisor’s perspective and refine their skills.

Many advisors specialize in helping clients with specific needs, such as those going through a divorce, LGBTQ+, doctors, etc. It can make sense to work with an advisor who regularly works with clients in a similar situation, as they will have deep expertise in the unique challenges that you face.

Importantly, review an advisor’s Form ADV to check for any disciplinary history. The ADV Part 2 Brochure has particularly useful information relating to the way an advisor charges their clients and the services they offer. To find the Form ADV for any firm and advisor, use the SEC’s Investment Advisor Public Disclosure database. Disclosures indicate that there may be a customer complaint or arbitration, regulatory action, bankruptcy filing, or some other event of which you need to be aware.

Fee Structures

Financial advisors charge in various ways. At the highest level, fee models can be split into two buckets–fee-only or commission-based.

Fee-only advisors charge fees directly to clients based on a predetermined schedule and do not earn commissions on any investments or products they recommend. For example, if a fee-only advisor recommends that their client buy life insurance, they would not receive any compensation for the life insurance the client buys. The benefits of a fee-only arrangement are more transparent fees and a lack of conflict of interest with respect to recommendations.

The potential for conflicts of interest is one challenge associated with the commission-based model, and why it is not recommended. Advisors may be motivated to recommend products that generate higher commissions rather than those that best suit the client’s needs. Commission-based advisors most often work for either insurance companies or banks (this often includes the advisor who helps your company with their 401(k) administration).

Where To Look for Financial Advisors

It’s an excellent idea to speak with two or three advisors before making a selection. There are several trusted resources out there to help you curate an initial list of candidates.

Personal Recommendations: Odds are, many of your friends and family work with a financial advisor. Ask them about what services they receive, their advisor’s communication style and whether they are happy with the relationship.
Referral From Other Professionals: Your accountant, attorney or other professionals you work with may be able to recommend financial advisors. They often have a network of contacts and may know someone with the expertise you need.
Professional Organizations: Look for financial advisors who are members of reputable professional associations, such as the Financial Planning Association (FPA) or the National Association of Personal Financial Advisors (NAPFA). Members of these organizations often adhere to high ethical standards and professional conduct.

Questions To Ask Financial Advisors

It can be nerve wracking to meet with an advisor for the first time. Here are some questions to get the conversation started.

How often do you meet with your clients?
Who will be working with me?
What type of clients do you specialize in working with?
What licenses, certifications or credentials do you have? How long have you worked in the profession?
What services do you offer beyond investment management? Do you provide a comprehensive written analysis of my financial situation?
How is the firm compensated? Do you charge separately for financial planning?
Are you fee-only? Do you accept commissions and/or sell insurance products?
Are you a fiduciary?

When selecting an advisor, pay close attention to their communication style and responsiveness. An advisor’s prompt responsiveness serves as a good indicator of their diligence, and communication style will give you a sense of whether they will be a good personality fit.

Red Flags To Watch For

When hiring a financial advisor, there are several red flags to look out for.

Particularly around fees, a lack of transparency is a clear indicator that the advisor may not act in your best interest at all times. If the fees are not easily understandable, if fees are only quoted on a quarterly basis (for AUM fees) to make them appear smaller than they are, or if the advisor is not up front about potential conflicts of interest, these could all be red flags.

No explanation is needed, as you’ll know it when you feel it. If you feel that you are being pressured to make a decision that is a huge red flag.

Beware any advisor who guarantees returns at any level or who says they can consistently beat the market. Investing is inherently unpredictable and ethical advisors will not guarantee specific outcomes.

Bottom Line

Years ago, when assessing daycares for my then 4-month-old daughter, I was given good advice from another parent, who told me that “you likely won’t know for sure whether it’s the right fit until your daughter is actually attending. Once she’s enrolled and going every day, you’ll very quickly know.” The same could be said for finding a financial advisor. Because we’re talking about your hard-earned money here, it is a big decision and you should do your due diligence. However, there is also risk in letting analysis paralysis set in, and doing nothing.

Write down the top two or three things you aim to achieve via a relationship with a financial advisor, do some research to determine whether those can be accomplished via a robo, online or traditional advisor, interview/research a couple of options and make a decision. Once you begin working with the advisor, you will have a very good idea whether it is the right fit. And if it changes again in a few years as your situation evolves, you can always make a change.

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