How to Choose A Financial Advisor: Top Tips You Can Follow

By Daniel Lee

January 10, 2024   •   Fact checked by Dumb Little Man

how to choose a financial advisor

Finding someone you can trust to give you sound financial advice is not easy. That’s probably why 75% of Americans manage their own finances. Whether they could benefit from professional advice is not the point, though. More often, people avoid advisors because of issues related to financial transparency.

Take fees, for example. We all expect to know the price of a good or service upfront, but the financial services industry has a lot of unknown fees. One survey showed that 40% of investors didn’t know what they were paying for advice or mistakenly thought it was free.

A lack of transparency in the financial services industry hasn’t been good for investors. And with the rise of social media and the availability of information, people expect brands to be open, accessible, and honest. Whether the financial service industry will adjust its practices remains to be seen. Regardless, there’s a lot you can do to ensure you’re working with a transparent and trustworthy financial partner.

Transparency Issues in the Financial Services Industry

choosing a financial advisor

Every financial advisor claims to be transparent. It’s only later, once the partnership has grown and matured, that you may realize an advisor was dishonest. That said, it can be difficult to know how to vet a financial advisor.

Luckily, there are several red flags that might suggest a potential partner isn’t fully transparent. Beware of:

  • Advisors who work on an incentive structure that puts the company’s interests above your own. That sort of relationship is about exploitation rather than mutual benefit.
  • Advisors who hide their fees or costs and then claim they don’t exist at all. If an advisor says he or she has zero fees, it’s probably too good to be true. And if advisors aren’t forthcoming about their rates, you shouldn’t trust them with your money.
  • Advisors who force you into specific investments that benefit the advisor more than the investor. Those investments frequently come at a very high cost to you, which means you’re just financing someone else’s success.
  • Financial institutions that charge you small fees for routine actions, like withdrawing money from an account. Who wants to be nickel-and-dimed by supposed partners?
  • Financial institutions that push you to sign up for as many services as possible. Good partners will try to serve your needs rather than maximize your value to them.

Even when you know the red flags to watch for, understanding how to find a financial advisor you can trust is no easy task. Instead of taking a risk when you pick a financial advisor, you should only work with advisors who are fiduciaries.

Fiduciaries are legally required to act in their clients’ best interests. That doesn’t mean they always give perfect advice, but it does mean they always work on your behalf and practice financial transparency. If not, they face serious penalties.

Fiduciary advisors are required to act with undivided loyalty, disclose all material facts, and avoid conflicts of interest. They also can’t use a client’s assets to benefit themselves or other clients. To put it simply, fiduciaries are required to be as transparent as you want and need them to be.

How to Choose a Financial Advisor

in choosing a financial advisor

There are thousands of places to turn for financial advice. So how do you go about picking a financial advisor you can really trust?

As mentioned, you should always make sure they’re a fiduciary and get it in writing. Advisors known as certified financial planners and chartered financial analysts are also considered fiduciaries, but you should still get a statement in writing.

For help finding a fiduciary in your area, you can consult the directory on the National Association of Personal Financial Advisors. Ultimately, working with a fiduciary will be drastically different, and better, than working with any other advisor.

Even with a fiduciary, however, it’s important to ask a lot of questions. Request to see the advisor’s Form ADV, a document required by the Securities and Exchange Commission. It outlines where advisors have money invested and any potential conflicts of interest.

And don’t forget to ask about fees. Fiduciaries work only through fees (not commission) and they should be eager to explain exactly how their fee structures work.

Finally, don’t hesitate to ask for referrals. Good advisors have satisfied clients. Consider it a major red flag if an advisor is unable or unwilling to provide referrals. If the advisor is really great, clients should be happy to sing his or her praises.

The good news for people who are eager to work with a financial partner?

Advisors will likely become a lot more proactive about advertising their fiduciary status. People want honesty and transparency from their financial partners rather than vague promises and unrealistic expectations. If you’re looking for someone you can trust over the long term, ask questions and pick a fiduciary first.

See Also: Seven Top Tips for Retirement Planning

Daniel Lee

Daniel Lee, CFA, CFP(R), is an experienced financial planner who is dedicated to helping busy people make intelligent financial decisions. He is a senior wealth manager at Plancorp, a full-service wealth management company serving families in 48 states, and leads Plancorp's Silicon Valley office. Daniel is an award-winning instructor at UC Berkeley Extension and is a member of the CFA Society of San Francisco and the Financial Planning Association of San Francisco.

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