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
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.
What to avoid in a financial advisor? ›
These 10 statements can help you identify an advisor who is better to walk away from:
- "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."
Here are some things to think about when selecting a financial advisor:
- Get Recommendations from a Trusted Resource. ...
- Ask the Financial Advisors You Interview About Their Strategies and Approaches. ...
- Consider a Financial Advisors Certifications. ...
- Consider Their Compensation Structure.
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 much money should you have to consider a financial advisor? ›
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.
Is a fiduciary better than a financial advisor? ›
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.
What type of financial planner is best? ›
IARs may call themselves financial advisors and may be fee-only or fee-based. Some may have additional credentials, including the certified financial planner (CFP) designation. “The certified financial planner designation is really the gold standard in the financial planning industry,” says Van Voorhis.
How do I know if my financial advisor is a fiduciary? ›
1 – Ask them directly: A genuine fiduciary will straightforwardly affirm their role and commitment to act in your best interests. 2 – Review the advisor's credentials: Certifications such as CFP® (Certified Financial Planner) or AIF® (Accredited Investment Fiduciary) often indicate a fiduciary standard.
What is the best financial advisor company? ›
You have money questions.
- Top financial advisor firms.
- Vanguard.
- Charles Schwab.
- Fidelity Investments.
- Facet.
- J.P. Morgan Private Client Advisor.
- Edward Jones.
- Alternative option: Robo-advisors.
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.
What is the best way to pick a financial advisor? ›
But learning more can help you narrow your options and feel more confident about your selection.
- Assess your financial goals. ...
- Start your search for a financial advisor. ...
- Check the credentials of any financial professional. ...
- Dig into the details of their financial products.
You should meet with your advisor at least once a year to reassess basics like budget, taxes and investment performance. This is the time to discuss whether you feel you are on the right track, and if there is something you could be doing better to increase your net worth in the coming 12 months.
What is the 80 20 rule for financial advisors? ›
The 80/20 rule retirement emphasizes the importance of focusing on actions that yield the most significant results. When planning for retirement, concentrate on the 20% of your efforts that will have the greatest impact on your financial future.
Is 1% too high for a financial advisor? ›
While 1.5% is on the higher end for financial advisor services, if that's what it takes to get the returns you want then it's not overpaying, so to speak. Staying around 1% for your fee may be standard but it certainly isn't the high end. You need to decide what you're willing to pay for what you're receiving.
Should I get a financial advisor if I don't have much money? ›
Bottom line. While not everyone needs a financial advisor, many people would benefit from personalized advice to help them build a strong financial future. You don't need to have a lot of wealth to take advantage of a financial advisor.
What makes a bad financial advisor? ›
Optimize Your Wealth
To help you select a good financial advisor, it is essential to know what makes a bad one, so that you know when to run for the hills. Warning signs of a bad advisor include the absence of qualifications or necessary experience, unclear fees and services, and poor communication skills.
How safe is your money with a financial advisor? ›
Many, but not all, registered investment advisors use an independent firm as their custodian. This means they don't take actual possession of your money. The investment manager may have the discretion to buy or sell securities and in what quantity for your account, but the custodian holds the assets.
What is the risk of financial advisors? ›
Significant loss threats include advisor death or disability, key person loss, an unexpected disaster (natural or otherwise), lawsuits, and failure to plan for business succession.
