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How do I choose a financial planner?

Choosing the right type of financial advisor for you can feel overwhelming. Like choosing your doctor, accountant or auto mechanic, choosing the right professional advisor can make a big difference in your life.

  • How are they compensated?
  • How do their fees compare to other financial planners?
  • What is their communication style?
  • Are they a "real" financial planner?
  • What is their investment strategy?
  • It is all about trust.

Read more about what to look for in your financial planner and how to find the right advisor for you.

Here are some important questions to ask your potential financial advisor. There is no "right" answer, but what are you looking for and what are you comfortable with? The perfect advisor for your neighbor, may not be the right fit for you. A good financial advisor should appreciate you asking these questions and want to make sure he/she is the right fit for both of you. Like a family doctor or honest auto-mechanic, a good financial planner should be with you and your family for many years.

How are they compensated?
Financial advisors can be compensated in many different ways. Some of them are described here. But beware of the "free" financial planning services. As you might realize, no professional service is ever truly "free". If it is worth anything, you should be willing to pay for it. Most of these "free" services do so by collecting commissions or management fees on your money.

  • Commissioned - Some financial advisors are compensated by taking commissions on financial products they sell to you. This is most common with insurance products, but commissions can be hidden in many other types of financial products. Of course, if you are seeking unbiased and objective financial advice, that is less likely from a commissioned sales person.
  • Fee-Only - Many financial advisors are known as "fee-only" which is supposed to give you a warm-fuzzy feeling because they do not take commissions. Unlike commissioned advisors, fee-only advisors are likely less biased in their product recommendations. However, most fee-only advisors take an asset management fee which in some cases can be a real drain on your wealth.
  • Flat-Fee - Instead of charging a percentage of your assets, which is typical of full-service asset management. Some financial planners are moving to a flat-fee approach. This means you pay a "flat" monthly or annual fee for planning services instead of a percentage of your assets.

Asset Management
This is a more traditional compensation method for financial advisors. You typically transfer your assets to a preferred custodian and authorize the advisor to manage assets on your behalf. They typically charge a fee of 1.0-1.5% annually for asset management. While this may not sound like much, if you consider a portfolio averaging 8% returns, this is 12.5% of your earnings. Over a long term, this can erode a substantial portion of your earnings. It's compounded even more in retirement, when you might only be able to withdraw 3-4% of your assets each year, the fee amounts to 25-50% of your annual withdrawals.

Self-Directed
If you have a 401k and have had to change your asset allocations or choose new funds, then you know what self-directed is all about. A growing trend in financial advising is to allow the client to enter the trades based on professional advice. It is estimated that as much as 50% of an advisors time can be spent on administrative tasks and record keeping required with full-service asset management. With self-directed advising, you manage the accounts, freeing the advisor to spend less time on administrative tasks and more time on research and analysis, passing the savings unto you.

What is their communication style?
This is mostly about your personal preferences. What communication style are you comfortable with? Is a quarterly and annual email enough, or do you prefer a phone call? Do you like texting or want instant alerts when the market changes? Do you prefer to closely monitor your money or more hands-off unless a decision needs to be made? There is no right answer, but making sure your financial planner understands your expectations can avoid a lot of frustration later.

Are they a financial planner?
Financial planning is a critical part of your success and achieving your life goals. Even with the best investment management, if you do not have a sound financial plan you probably will not reach your goals. Many financial services claim to offer financial planning to their clients. Sadly, some financial advisors simply use software to produce a plan without a deeper understanding of your circumstances or what the information means. Be sure that you are choosing an advisor that has expertise in financial planning and guiding you through the process and not just handing you a flashy report with charts.

Investment Stategy
What is their high-level investment strategy? Do they make frequent trades or invest in individual stocks. Do they engage in risky trading strategies or swing trading? Do they invest for the long term, allocating your portfolio in different asset classes and making few trades each year. Do they invest in individual stocks, mutual funds, ETFs? Do they have a strategy for reducing fund management fees that erode your wealth?

It is all about trust.
Trust your "gut" when hiring any financial advisor. It's your money and in most cases this will be a long term professional relationship. If you are uncomfortable from the beginning, it is not going to be a good fit. It does not mean the financial advisor is a bad advisor, but perhaps their communication style or investment strategy is not right for you.