three steps to choosing a financial advisor

ONE: Write the Job Description

Don't go into a meeting with a potential planner without a list of your specific service requirements. Every financial advisor is different and has different expertise and service offerings for his or her practice. Financial planning is an extremely broad field that includes everything from planning stock options for executives to budgeting for a young family. Here are some of the possible areas of service:

  • Investing
  • Planning retirement
  • Planning for education costs
  • Budgeting
  • Debt management & reduction
  • Tax planning
  • Estate planning
  • Insurance review and planning
  • Managing options and restricted stock

TWO: Choose Your Preferred Service Arrangement

The investment world is a complicated one with regard to compensation. There are several types of arrangements; it is important to understand each one to determine whether it is a fit for you.

Traditional Commission-Based Representative

In this situation your financial advisor makes money from the sale of financial products or from buying and selling investments in your account. This type of advisor will often advertise a "free" financial plan because they don't try to make money from the plan, but rather from the products they recommend you buy when you work through the financial plan.

Percentage of Assets under Management

Advisors working in the AUM model charge a fee based on your account value. For many advisors that fee is somewhere between 1% and 1.5%. For example, an account with $500,000 would be billed $7500 per year on the 1.5% model. Many of these advisors have minimum account values, making it difficult for younger people and start-up investors to get access to their services. Also, some AUM models reach as high as 2%, significantly eating into your investment returns.

Monthly Subscription

A more recent option for financial service is the subscription model. In this scenario, you sign up for a monthly subscription, usually $100-$350 per month, and receive on-going service. This approach allows service for anyone, regardless of account size.

Hourly Service

In the hourly service model, advisors simply charge by the hour to provide the specific financial planning services desired. The hourly rate of most CFP® practitioners is $150-$300 per hour. 

step three: find the planner that fits

Now that you have a clear sense of the type of service you are looking for as well as the type of service arrangement you prefer, look for a planner with experience in your areas of concern and a personality that works for you. Not everyone works equally well with every personality. Don't be pressured into any arrangement. Stay in control of your financial future. Remember, you are the boss! You are looking to hire someone, not be sold something (even if you need a product, I believe this holds true).

Financial services may feel opaque and even shady. It is not always clear how the advisor is getting paid. Sometimes you may be pressured into buying a product that significantly limits your financial choices for the next 5-8 years because of surrender charges and fees. Never be afraid or ashamed to get a second opinion about a product or service. You are the boss!