Save and Invest

A 6-step guide to choosing the right financial professional for you

It's not worth paying for active management that simply replicates an index.

Nothing makes Americans happier than having their finances organized.

At least that's what 92% of U.S. adults said in Northwestern Mutual's 2019 Planning & Progress Study — they are happiest and most confident when their "financial house is in order."

While it may seem like ice cream or puppies would be more likely to elicit that kind of response, other surveys and studies have shown that Americans generally do feel more confident and secure when they know they're on track with their financial goals. Perhaps unsurprisingly, those with a financial advisor are even more likely to feel that way.

Getting help on your financial decisions isn't a bad thing. But with so many professionals and options out there, how do you go about choosing the right expert to work with?


1. Determine if you need a financial advisor

Financial professionals can be a big help when you're trying to map out your future, but you don't need to hire one to be successful with your savings and investment goals.

If your employer provides a 401(k), for example, many times the plan will offer the option to invest in target date funds. These types of investments will keep your retirement savings on track without too much required oversight from you or a financial professional.

You still may need additional investments, such as an individual retirement account and a taxable brokerage account. If you're the kind of person who likes to be super hands on, you can sign up for one of the brokerage firms such as Charles Schwab and TD Ameritrade.

Yet creating and maintaining a balanced, diversified portfolio can take a lot of time and research. If that feels overwhelming, you can always work with the so-called robo-advisors, which typically manage your money for you. These platforms — which include Betterment, Schwab Intelligent Portfolios, Vanguard Personal Advisor Services, Ellevest and Wealthfront — are generally less expensive than working with a human financial advisor, but they may not provide the same level of customized advice and solutions.

Maybe you don't want to map your financial future on your own, or you have a more complex financial situation, such as stock options or perhaps you help out with family financial obligations. That may require a face-to-face conversation with a human financial advisor or planner.

And these professionals usually go beyond just building portfolios. They offer a wide range of services to help achieve your goals, such as helping create a budget and plan to save for a home or selecting the right 529 college savings plan for your family or even creating tax efficiencies with your investments.

Thomas Barwick

2. Consider what type of professional you want to work with

There are two types of legally defined financial professionals: brokers and investment advisors.

Generally, brokers are registered with the Securities and Exchange Commission and overseen by the Financial Industry Regulatory Authority, a self-regulatory agency for the financial industry. Brokers are allowed to buy and sell stocks, bonds, mutual funds, annuities and other investment products on behalf of their clients.

Traditionally, brokers were considered sales personnel under the law and only needed to recommend investments that were suitable for you, even in cases where better options existed. Under rules rolled out by the SEC over the summer, these professionals must now act in your best interest when working with your money. But some consumer advocates claim that the new rules are weak and don't go far enough to eliminate conflicts of interest that can arise, such as accepting payments for recommending specific products.

But financial professionals can also be registered as an investment advisor and, in that role, are overseen by the SEC and state securities agencies. Investment advisors can manage investment portfolios — including buying and selling stocks and funds — and provide advice on your investments. Under SEC rules, these professionals need to act as a fiduciary, which means they must put your interests ahead of their own and eliminate conflicts of interest as much as possible.

Here's where it gets tricky: No one really uses these terms on their business cards. Because that would be too easy, right? Financial professionals these days go by a lot of titles: financial advisor, financial planner, money manager, wealth manager, etc. And many are registered as both brokers and investment advisors.

If you're looking for someone who will provide holistic financial advice, experts usually suggest you work with a certified financial planner. Those with a CFP designation have a bachelor's degree and have passed a rigorous exam to verify that they understand all of the core aspects of financial planning.

Typically, financial planners are registered as investment advisors and need to adhere to a fiduciary standard. Plus, under the new rules that went into effect in October, all those with a CFP must act in the best interests of investors.


3. Gather some names

It can be easy to simply walk into your bank, or stop in at the local Charles Schwab office with the plan of finding a financial professional to work with. And while those can be good options, you should still do some research and gather a robust list of candidates from a variety of sources. Many times, there are unaffiliated financial professionals who may better suit your needs, even if that means adding another financial firm to your roster.

Talk to your family and friends to get a few recommendations. Roughly one in four Americans get financial advice from their parents and friends, so you're in good company turning to those closest to you for tips.

Another good starting point is looking at the major industry associations. The Financial Planning Association and the National Association of Personal Financial Advisors offers tools (the Planner Search and Find an Advisor, respectively) where you can look up professionals in your area.

You can also search advisor directories operated by the Garrett Planning Network or the XY Planning Network. Both organizations provide the option to hire a financial planner who works by the hour if you're just looking to get some specific questions answered.

You may also come across financial professionals with an alphabet soup of designations after their names. Keep in mind that not all of these certifications are equal. But there are a few that require advisors to master a range of subject areas and pass rigorous tests, including the CFP, the Chartered Financial Analyst (CFA) and Chartered Financial Consultant (ChFC).

The governing body behind these designations can also be a smart place to look for a financial professional for you. The CFP Board offers a helpful search tool where you can customize your results by the planner's specialties, compensation model, primary language and how much you have to invest. Meanwhile the CFA Institute has a searchable member directory.

Check out your advisor's employment history, disciplinary records, and registrations through BrokerCheck.

4. Do a background check

When hiring a financial professional, make sure you do some research before hiring anyone to manage your money. The industry makes it a bit easier for consumers by making financial advisors' professional backgrounds available to search.

You can look up advisors via BrokerCheck. The site shows you how long they've been in the industry, which firms they've worked for and whether they've had any consumer complaints or regulatory issues, referred to as a "disclosure event."

Those who are registered as investment advisors will also have a record with the SEC, so make sure you check out that information as well. You can access the SEC records through BrokerCheck or do a separate search through the SEC's investor information website.

If the professional does have a disclosure, it may not be a deal breaker. Sometimes financial advisors and planners have consumer complaints, but they have been resolved or the event pertains to a personal bankruptcy. If there is anything listed, make sure to investigate it fully before making a decision.

In addition to running their name through BrokerCheck, if the financial planner is a CFP, the organization offers a search tool in which you can verify their status, as well as see if they have any disciplinary history and bankruptcies.

Do a quick Google search on any of the professionals you are considering as well, and pay attention to local news and information released by state securities agencies. Many times if a financial advisor or planner is going through a civil or criminal case, their records may not reflect it until the case is wrapped up.

Hero Images | Hero Images | Getty Images

5. Set up an introductory call or meeting

Beyond doing your homework online, it's also helpful to meet the advisors in person before you hire them. This is someone you're going to take financial advice from and potentially working with for years to come, so it's important that you understand how they conduct business and make sure you click with their approach.

To prep for the meeting, the CFP Board has a helpful questionnaire you can use when interviewing financial advisors.

In addition to asking them about their education, qualifications and experience, you may want to ask about all the services they provide and what type of clients they typically work with. For example, if the advisor usually works with high-income lawyers and you're barely scraping by, their specialized advice may not be as helpful for you.

At the end of the day, you need to feel comfortable with your advisor, so take the time to thoroughly interview any candidates. If working with them makes you feel like you're going to the dentist for a root canal, you're less likely to take their advice and regularly meet with them.

6. Ask how they get paid

During the initial meeting, you need to find out how the advisor makes money and the all-in costs you can expect to pay to work with them. It can be awkward to ask, but it's critical that you understand what their expense structure is like, as it can affect how they give advice.

Many financial professionals will bill themselves as fee-based or fee-only. On a whole, financial professionals earn money for their services one of five ways:

  1. Assets under management: Investors pay advisors a percentage of the amount of money they manage. Typically investors with less than $1.5 million in assets pay between 1% and 1.5% in fees, according to Boston-based research firm Cerulli Associates.
  2. Flat annual fee: A retainer-like expense paid by investors and is generally between $1,500 and $3,000
  3. Hourly fee: Expense paid by investors and offered as a pay-as-you go option of advice
  4. Per-plan fee: Typically a one-time fee investors pay for a comprehensive financial plan
  5. Commissions: Fees paid to an advisor based on selling a specific product or trading securities

Financial planners who operate on a fee-only basis only receive payment from their clients — that can take the form of AUM, a flat annual fee or an hourly fee. In theory, if a financial professional is fee-only, it means that their advice is not conflicted because they're not receiving compensation from outside sources that could sway their recommendations, such as mutual fund companies and insurance firms that offer annuities. However, these planners may be more expensive for you to hire, so you should review their fee and feel comfortable with the payment level.

Fee-based financial professionals, on the other hand, can include financial advisors and even some financial planners, particularly if they're associated with your bank or one of the big brokerage firms. These advisors earn their paycheck not only from you, but also through compensation such as securities spreads, insurance commissions and mutual fund shares. They can be less expensive on the outset, but if they're providing conflicted advice, it may cost you in the long run.

Not quite sure how a potential financial advisor is compensated? You can typically search their firm's SEC filings, which includes comprehensive breakdown of the company, including how their professionals are compensated.

All things equal, most investors should opt for a fee-only financial professional, even though these planners may be more expensive for you to hire on the outset. That's because they won't have any additional revenue streams to offset their prices. At the same time, you'll be able to feel more confident about their motivations and that the comprehensive advice they give can help you find your best financial path forward.

Don't miss: New federal rules aim to protect investors, but here's how to find a financial advisor who already does

Like this story? Subscribe to CNBC Make It on YouTube!

Suze Orman: 'Throw away your financial to-do list'
Suze Orman: 'Throw away your financial to-do list'