7 questions to ask when choosing a financial advisor

Alyssa Pry
Personal Finance Reporter

When it comes to making decisions about your money, you may be looking for some extra help.  That’s where a financial advisor comes in. Whether you’re a seasoned investor or someone in the beginning stages of your financial life, a financial advisor can help you manage your money and reach your financial goals.

But the first step is finding the perfect fit. Kimberly Palmer, a credit cards and banking expert for NerdWallet.com, shared her advice for how to choose the right financial advisor.

When do you need a financial advisor?

Palmer says a big myth about financial advisors is that you need to be wealthy to hire one. In reality, advisors can help people at all financial levels, and can provide an important perspective when it comes to your finances.

“Sometimes you face a point where you feel like, ok, I need an outside perspective, and it’s often when you’ve gone through something really big, [like] launching a business, or maybe you’ve gone through a divorce, or something that has really upended your finances,” Palmer said.

People should also consider hiring an advisor to help them reach financial goals they may be working towards if they’re not making enough progress on their own.

“Maybe you’re trying to pay off debt or save to buy a home and you just feel stuck,” she said. “Are you self-disciplined enough to make your own budget and follow it, or do you need an outside coach who’s in your corner helping you?”

How to find the right fit

As your first step, Palmer recommends asking friends and family for referrals or recommendations, since they may have similar financial concerns or challenges.

Palmer also recommends using a resource like the National Association of Personal Finance Advisors (NAPFA), which allows you to filter advisors by specialty and location.

“It’s a great resource to go to if you do have a special concern, like running a small business,” she said.

When it comes to credentials, an advisor may be a CFP, or “Certified Financial Planner.” This means they’ve taken a course in financial planning, passed an exam, and have at least three years of financial planning experience. Not all financial advisors are required to have a CFP certification, and there are a variety of other licenses and certifications financial professionals can receive. Palmer says you should understand and educate yourself on their qualifications before you hire them to help you with your finances.

The Financial Industry Regulatory Authority has a complete list of financial professional designations and what they mean.

Once you find someone you may want to work with, Palmer says you should run a web search on their name, research their credentials and even call to ask if you could speak with their other clients.

“You’re really doing your due diligence to make sure you’re going to work with someone you can really trust,” she said.

Calling your advisor

Once you think you’ve found a fit, Palmer says the first thing to ask is how your advisor will be paid.

“Because there’s such a variety of ways you can pay an advisor, that’s an area where people tend to get stuck and confused, so you always want to ask and make sure you understand,” she said.

Palmer said advisors can be paid by “fee-only,” which means they will be paid based on the time they spend with you, or from a percentage of the assets they’re helping you manage.

Another option is commission-based, which means they’re paid based on the products and services they’re selling to you. Palmer said no one payment structure was better than the other, but it’s important to understand how you’ll be billed so there are no surprises.

Palmer also recommends asking your potential advisor what their communication style is: will you meet with them once a year, or keep in contact through email or social media.

“You want to really find an advisor who matches your communication style so you feel like you’re in tune with them,” she said. “You shouldn’t feel intimidated to call them and ask them a question.”

Meeting your advisor

If you think you’ve found the perfect fit, you should ask your advisor for a free first meeting.

“Especially for someone in their 20s or 30s who doesn’t have a ton of assets accumulated already, this can be something you ask for: Will you talk with me free of charge as I’m choosing an advisor?” she said.

Palmer says this meeting is often less about money and more about identifying your financial goals.

“That can be something that’s not too intimidating or overwhelming because you’re really talking about those big picture things,” she said. “Where do you hope to be in one year, in five years?”

Once you start working with your advisor on a professional basis, Palmer says you can expect to pay around $200 an hour for their services.

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