Choosing a financial advisor is a major life decision. It can determine your financial trajectory for years to come.
A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.1
The value of working with a financial advisor varies by person. While advisors are legally prohibited from promising returns, research suggests that people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.2
Consider this example: A 2019 Vanguard study found that, on average, a hypothetical $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.3
Hiring an advisor could increase your returns by 2x
Assuming 5% annualized growth of $500k portfolio vs 8% annualized growth of advisor managed portfolio over 25 years.
The hypothetical study discussed above assumes a 5% net return and a 3% net annual value add for professional financial advice to performance based on the Vanguard Whitepaper “Putting a Value on your Value, Quantifying Vanguard Advisor’s Alpha”. Please carefully review the methodologies employed in the Vanguard Whitepaper. To receive a copy of the whitepaper, please contact compliance@smartasset.com. The value of professional investment advice is only an illustrative estimate and varies with each unique client’s individual circ*mstances and portfolio composition. Carefully consider your investment objectives, risk factors, and perform your own due diligence before choosing an investment adviser.
SmartAsset’s no-cost tool can help you avoid some of the common mistakes in looking for an advisor. How does the free tool work? It’s easy:
Short questionnaire takes just a few minutes
Match with up to three fiduciary financial advisors
Compare your matches and choose the one you feel is best for you
The fiduciary financial advisors you match with serve your area and are legally bound to work in your best interest. You may even be able to instantly connect with an advisor for a free retirement consultation. Advisors are rigorously screened through our proprietary due diligence process.
We made our tool because finding an advisor can be tough. A good advisor can give you great peace of mind; avoiding these seven blunders could save you years of stress. Scroll down for the list.
1. Hiring an Advisor Who Is Not a Fiduciary
A fiduciary is defined as an individual who is ethically bound to act in another person’s best interest. Fiduciary financial advisors must avoid conflicts of interest and disclose any potential conflicts of interest to clients. Our free tool will only match you with registered or chartered fiduciary advisors.
Hiring an advisor who is not a fiduciary means they could recommend decisions that may not be in your best interest.
If your advisor is not a fiduciary and constantly pushes investment products on you, use this no-cost tool to find an advisor who has your best interest in mind.
2. Hiring the First Advisor You Meet
While it’s tempting to hire the advisor closest to home or the first advisor in the yellow pages, this decision requires more time. Take the time to interview at least a few advisors before picking the best match for you. Our platform seamlessly matches you with up to three advisors, allowing you to compare each to help you determine which is best for you.
3. Choosing an Advisor with the Wrong Specialty
Some financial advisors specialize in retirement planning, while others may be most helpful for business owners or those with a high net worth. Some may specialize in helping young professionals starting a family.
Be sure to understand an advisor’s strengths and weaknesses before signing the dotted line.
4. Picking an Advisor with an Incompatible Strategy
Similarly, each advisor has a unique strategy. Some advisors may suggest aggressive investments, while others are more conservative. If you prefer to go all in on stocks, an advisor specialized in bonds is not a great match for your style. Our quiz will ask you some questions that may help start this conversation - but it's important you bring it up with any advisor you speak to.
FAQs
Choosing the right advisor depends on what help you need. If you need specialized advice, look for an advisor with expertise in that area. Meet with several potential advisors. Choose one that you're confident has the experience, expertise and credentials to help you reach your financial goals.
What to look out for when choosing a financial advisor? ›
Choosing the right advisor depends on what help you need. If you need specialized advice, look for an advisor with expertise in that area. Meet with several potential advisors. Choose one that you're confident has the experience, expertise and credentials to help you reach your financial goals.
What financial advisors don t tell you? ›
10 Things Your Financial Advisor Should Not Tell You
- "I offer a guaranteed rate of return."
- "Performance is the only thing that matters."
- "This investment product is risk-free. ...
- "Don't worry about how you're invested. ...
- "I know my pay structure is confusing; just trust me that it's fair."
In your initial meeting, ask questions about the types of services they provide, their investment philosophy, how much they charge, whether they have a fiduciary duty, what investment benchmarks they use, whether they offer robo-advisor services or access to new technologies, what custodian they use, whether you can ...
How do I know if my financial advisor is honest? ›
An advisor who believes in having a long-term relationship with you—and not merely a series of commission-generating transactions—can be considered trustworthy. Ask for referrals and then run a background check on the advisors that you narrow down such as from FINRA's free BrokerCheck service.
How do I know if my financial advisor is doing a good job? ›
Here are five steps you can take to gauge your financial advisor's performance:
- Step 1: Evaluate the performance of your investment portfolio. ...
- Step 2: See if the financial advisor conducts an annual tax review. ...
- Step 3: Check if the advisor is aligned to your risk appetite. ...
- Step 4: Ensure your financial advisor listens.
Generally, having between $50,000 and $500,000 of liquid assets to invest can be a good point to start looking at hiring a financial advisor. Some advisors have minimum asset thresholds. This could be a relatively low figure, like $25,000, but it could $500,000, $1 million or even more.
What is a red flag for a financial advisor? ›
Red Flag #1: They're not a fiduciary.
You be surprised to learn that not all financial advisors act in their clients' best interest. In fact, only financial advisors that hold themselves to a fiduciary standard of care must legally put your interests ahead of theirs.
When to leave your financial advisor? ›
Poor performance, high fees, strained communication and stagnant advice are among the reasons to look for a new advisor. Kevin Voigt is a former staff writer for NerdWallet covering investing.
How much should you spend on a financial advisor? ›
Most financial advisors charge based on how much money they manage for you. That fee can range from 0.25% to 1% per year. Some financial advisors charge a flat hourly or annual fee instead.
Fiduciaries are obligated to act in your best interest, whereas the title “financial advisor” implies no legal obligation. When looking for a financial advisor to help you develop your custom financial plan, you should ensure that your financial advisor is a fiduciary.
Should you tell your financial advisor everything? ›
It might come as a surprise, but your financial professional—whether they're a banker, planner or advisor—wants to know more about you than how much money you can invest. They can best help you achieve your goals when they know more about your job, your family and your passions.
How to tell a financial advisor no? ›
Key takeaways
- Breaking up with a financial advisor can be emotionally charged, but remember it's a business decision.
- Notify the advisor in whatever way makes you feel the most comfortable.
- Review the paperwork to understand fees and requirements before parting ways.
If a financial advisor you previously trusted exhibits any of these behaviors, it is worth having a conversation with them or even considering changing advisors altogether.
- They Ignore Your Spouse. ...
- They Talk Down to You. ...
- They Put Their Interests Before Yours. ...
- They Won't Return Your Calls or Emails.
Tips you don't have to give
Swann clarifies that professional service providers—financial advisors, doctors, lawyers, teachers, veterinarians, therapists, or life coaches—should not be offered tips. Similarly, some workers cannot accept tips.
Does a financial advisor look at your bank account? ›
Regardless of whether they work for a bank or a financial planning firm, your financial advisor cannot access your account without your permission.
What is the most important attribute when selecting a financial advisor? ›
Ultimately, the most important thing is to make sure you're comfortable with how your adviser's compensation structure works before deciding if they should handle your portfolio directly. Choose a financial advisor who listens to your concerns and responds to your questions.
What should you look for in a financial advisors credentials? ›
The first step you want to take when vetting a financial advisor is to ask for the person's credentials. And when you start looking for a financial advisor, you will see initials like CFA, CFP, CPA, CLU, and CAIA listed after their names.
What percentage should a financial advisor get? ›
Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee. But psst: If you have over $1 million, a flat fee might make a lot more financial sense for you, pros say.
What is the difference between a financial planner and a financial advisor? ›
Generally speaking, financial planners address and keep tabs on multiple areas of their clients' finances. They develop long-term, strategic plans in these areas and update them on a regular basis over the years. Financial advisors tend to focus on specific transactions and short-term situations.
