myFICO: How to Find and Vet a Financial Advisor

SAN JOSE, Calif.--()--Hiring a financial advisor can seem like an extravagant investment that’s only available to the rich, but many people can benefit from (and afford) professional advice. Whether you’re looking for a plan that you’ll implement on your own or want to outsource your money management, financial advisors can offer a range of services.

However, you want to make sure you hire someone who has knowledge that matches your needs. And, of course, you want to make sure you’re not overpaying. With these five steps you can feel confident that you’re making an informed decision, presented by myFICO.

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Have a specific goal in mind

Your first step is to figure out exactly what you want so you can find someone with experience and credentials that align with your goal. People might want to work with a financial advisor when they are:

  • Struggling to create or stick to a budget.
  • Creating or revising an estate plan.
  • Hoping to save money by making their finances more tax efficient.
  • Uncertain about how to manage a financial windfall or increased income.
  • Trying to figure out where to invest or whether they have a good portfolio.
  • Looking for help with a large goal, such as buying a home or saving a college fund.
  • Thinking about retirement planning, either focused on saving for retirement or managing finances as you approach and enter retirement.

Financial advisors may specialize in a particular area, such as investment advice or estate planning. They may also further specialize in helping a specific type of client, including young professionals, families, immigrants, retirees, or a cross-section of different groups.

Learn a few key terms

The financial planning world is filled with different credentials, names and acronyms. It can all get confusing quickly, and there’s a lot to learn, but you can start here:

  • Financial planners versus advisors: Neither name has one official definition, but financial planners tend to focus on holistic financial planning and management (e.g., managing your investments with several of your goals in mind). A financial advisor may focus more narrowly on investment strategies and advice. However, people may use the terms interchangeably, and it’s best to ask the firm or professionals you reach out to about their approach and services.
  • Fiduciary: A fiduciary is a person or organization that manages your money and has a legal responsibility to act in your best interest. For example, they can’t suggest you make a subpar investment because they earn a commission. Most financial advisors are fiduciaries, but it’s best to ask.
  • Robo-advisors: Automated platforms that invest and manage your money with a less-personal touch and lower fees than traditional (i.e., human) advisors. These can be an affordable option if you’re looking for someone to manage your investments. There are also “hybrid” platforms that may cost a little more but also give you access to live advisors if you have general questions.
  • Assets under management (AUM): A financial advisor’s AUM is how much client money the advisor manages. You don’t have to let an advisor manage all your money, but some advisors have a minimum required AUM.

You’ll undoubtedly come across other terms that you don’t know in your search for an advisor. There are many educational resources online, but you can also ask advisors questions during an initial consultation and use their response to gauge whether you want to hire the person.

Know how the fee structures work

Financial advisors often use one of three fee structures:

  • Commission-only: You don’t pay the advisor anything, but the advisor makes money when you purchase certain investments or other financial products.
  • Fee-only: The advisor earns all their money by charging you a fee for their services.
  • Fee-based: A combination of the two that could lead to lower costs but also might limit which products the advisor suggests.

Many advisors are moving toward the fee-based and fee-only models, and experts often suggest looking for a fee-only advisor to avoid potential conflicts of interest. However, there are also different ways that you might pay a fee-only or fee-based advisor. Based on Kitces’ 2020 survey data, the common structures and amounts are:

  • Based on AUM: You pay a percentage of the money that the advisor manages for you every year, which is around 1% for clients who have less than $1 million in AUM.
  • Subscriptions: You pay a monthly, quarterly or annual subscription — the median cost is $4,000 a year.
  • By the project: Pay a set amount for a specific project, such as $1,800 to $2,500, for a comprehensive financial plan.
  • Hourly: You might prefer paying an hourly rate if you have a one-off question or smaller project, and the rates often range from around $200 to $250 an hour.

Some advisors may also offer a combination of different fees. For example, you might pay an advisor a subscription or percentage based on AUM, but also have to pay an additional hourly or project fee for a one-off project.

Use screening tools to find potential planners

Once you have a goal in mind and understand the basics, you can start searching for an advisor who will meet your criteria and offer affordable sources. You can start your search by looking for advisors who are part of certain associations or networks, and the groups’ search tools often let you narrow in on members based on your zip code or goals. Some options include:

These groups may have specific focuses or requirements, which can help you quickly narrow down your list of potential advisors. For example, XY Planning Network is for advisors who focus on Gen X and Y clients and offer fee-only planning. The Garrett Planning Network is also for fee-only advisors who are fiduciaries and don’t require long-term commitments or have minimum AUM or income requirements.

Look for and verify the planner’s credentials

Once you have a short list of people you want to work with, you can use several tools to check and verify their credentials. Many advisors have a certification that’s related to financial planning, and there are more niche certifications for advisors who specialize in particular topics, such as college or retirement planning.

FINRA has a database of professional designations that can help you decode the alphabet soup. Each designation has different requirements for experience, exams and ongoing education. You can also check an advisor’s current credentials to ensure they have the credentials that they claim.

Here are three common designations with links to their verification tools:

You can also use the FINRA BrokerCheck to look up advisors or firms and find out if they’ve had any disciplinary actions or complaints filed against them.

The bottom line

A financial advisor can offer you expert advice and ongoing financial management, but the term is broad enough that you’ll have to narrow your focus to find a good fit. Start with your goal, look for advisors who could be a good match and then verify their credentials before setting up initial meetings.

If you’re having trouble finding an affordable advisor, you could also look into alternative options, such as a robo-advisor. Credit counselors may also offer free or low-cost services if you’re looking for help managing a budget, paying down debt or improving your FICO® Score.

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myFICO Contact:
Elizabeth Warren


myFICO Contact:
Elizabeth Warren