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How to find a good financial advisor

Stop. Before you read this post, go read the article on what "financial advisor" even means, if you haven't already. There are lots of different types of financial advisors out there, and lots of combinations of those types -- you need to know what you're looking for before you can learn how to find it!

Go ahead. I can wait.

Done? Good. I'm going to assume that you're in agreement that a "fee-only financial planner and investment advisor" is the way to go; otherwise, this article isn't going to be terribly helpful!

Having said that, there are a few more decisions you're going to want to make before starting your search.

What services do you want?

Do you want comprehensive financial planning, investment advising, investment management, or all three? I recommend everyone engage in financial planning, whereby they work with an advisor to analyze cash flow projections, retirement, insurance, taxes, estate plan, debt management, and any other appropriate financial issues. 99% of financial planners will also provide investment advice, where they work with you to create an asset allocation and high level Investment Policy Statement. However, some specifically do not; if you have any investments, I highly recommend you find a financial planner that does at least investment advising, as well.

Investment management, however, is a different story. I know many folks who are quite happy to take an asset allocation and manage it themselves; if you're one of those, more power to you! In this case, you'll need to make sure that you find a financial advisor who's not going to insist on managing your investments, which segues into the next question...

What fee structure do you want?

As discussed in the aforementioned article on financial advisors, there are several ways that you might pay for services, even among fee-only financial planners, and each of them has their own potential conflicts of interest. So do you go with a flat-fee model, an hourly rate model, or a percentage of AUM (assets under management)? In making that decision, I would keep the following in mind:

  • With flat-fee, you don't have to worry about being "nickel and dimed"; you can always reach out to your advisor for anything, and you don't have to rush or skip items that you don't feel are worth what you'd be charged for bringing them up. However, a flat-fee structure often has a steep up-front cost; while it's a fantastic investment (with the right advisor), it can be intimidating, and rightly so.

  • With hourly, you know that your advisor isn't likely to ever cut corners; if a particular issue deserves more time and effort, your advisor is incentivized to take all the time they need. (Of course, that cuts two ways!)

  • With AUM, you get the flat-fee benefit of not being nickel-and-dimed, and you also don't have to worry about your fees affecting your cash flow. However, an AUM structure requires that the financial advisor directly manage your investments; if you'd prefer to manage your investments yourself, you're out of luck. Also, if you don't have a lot of investment assets, you may find that you simply don't meet the "asset minimum", and will (politely!) be shown the door.

As you can see, there's no one clear right answer. (That's partly why Seaborn has a mix of all three; we charge a flat fee for financial planning and investment advising and a percentage of AUM for investment management, and have something like an hourly component in the form of our "office hours". This lets clients pick which they're most comfortable with and go from there.)

Virtual or in-person?

"Virtual" advisors -- not artificial intelligences, but advisors who are willing and able to meet with clients all over the nation via web conferencing, e-mail, etc. -- are becoming more common in the 21st century. If you don't mind the idea of meeting virtually, you can greatly broaden your search for an advisor; rather than focusing on someone who matches you geographically, you can find someone who fits your niche. Looking for someone with deep expertise in issues pertaining to real estate? Small business? Teachers? Tech professionals? A certain religious affiliation? Associations like XY Planning Network are specifically geared to helping you find someone who matches your niche -- no matter where in the country they are!

That said, if e.g. you live in Texas, you might find that an advisor in California has a very different approach to financial advising, and vice-versa. For example, differences in probate costs mean that any good Californian financial plan will likely include a living trust, while in Texas those rarely make sense. So even if you're OK with a virtual advisor, you might consider one who has direct experience with clients in your state.

So if you prefer in-person face-to-face contact, there's a lot to be said for that, and chances are that if you live in or near a large city, you can still find someone who's a good match for you. do you find a good financial advisor?

So you've narrowed down your search. You know what kind of advice you want, how you want your advisor to be paid, and how narrow or wide your search is going to be. There's still a huge question on the table: how do you know if you're going to get the most out of your money? No matter how they're paid, financial advisors cost a significant amount of money; while a good one will provide one of the best returns on investment around, you're making a not-insignificant bet! Here's the process I recommend you use:

1. Cast a wide net and get as many names as you can.Talk to friends, family, and coworkers, announce on Facebook, and use other methods to get recommendations from your "natural network". Make sure they know exactly what kind of advisor you're looking for, how you want them to be paid, etc.

Also, take a look through advisor directories, apply appropriate filters, and see who comes up. Below are my three favorites:

  • NAPFA, the National Association of Professional Financial Advisors, consists entirely of fee-only CFP® professionals.

  • XY Planning Network also consists entirely of fee-only CFP® professionals, but focuses primarily on gen-X and gen-Y clients. Their members hence often use a flat-fee model, rather than charging a percentage of investments managed. Also, their find-an-advisor portal allows you to specify the niche you're looking for!

  • The Garrett Planning Network also consists entirely of fee-only CFP® or CPA professionals, but their twist is that their members must have an hourly service offering as a core component.

2. Eliminate anyone who doesn't meet baseline requirements from the list. Table stakes: are they a fee-only CFP® (Certified Financial Planner) professional, working for (or as) an RIA? Getting the CFP® marks means that the individual in question has a baseline level of experience, expertise, and ethical restrictions; see the CFP Board's site for details. A CFP® designation is rapidly becoming the de facto baseline standard for financial planners, similar to CPA for accountants. The "fee-only" part ensures that they aren't paid commissions, and working for a firm that's a Registered Investment Advisor (or working as a single-person RIA) is a legal requirement if they're going to give fee-only investment advice. Added bonus: RIA's are required to act as fiduciaries!

Even if you didn't get the name from an association that has the above baseline as a requirement, it's relatively easy to verify credentials. You can verify a CFP certificant's status via CFP Board, and you can check an RIA (or RIA representative) via the SEC. Both of these will also reveal any disciplinary history, which can be useful as well! The fee-only part is less cut-and-dried; you'll need to dig into their SEC registration. Forbes has written up an excellent article that walks you through the process step-by-step.

3. Narrow down the list to 3-5 of your favorites. Look at their directory profile and their website. Which resonate most with you in terms of their approach to personal finance, their service offering, and their communication style? Be aware of your cognitive biases -- the halo effect can draw you towards attractive people in nice clothes without you realizing it -- but if your gut is actively steering you away from someone, give it serious consideration. Interpersonal relationships are one place where intuition can really shine, as there's a lot of really subtle data to process!

4. Conduct an interview with each person on your list. (If they were recommended by someone you know, interview your contact, as well.) In addition to confirming everything you think you know about them (sometimes websites are out of date!), ask them questions about how specifically they have helped people like you in the past. Interviewing is a terribly inexact science, but the more specific examples you can glean of actual past behaviors, the more confidence you can have that you're making a decision based on good data. Again, be aware of your cognitive bias, but also listen to your gut; it may pick up on signals that your conscious mind is unaware of.

One tip: beware of phrases like "I like to do X"; this isn't necessarily a yellow flag, but I recommend that you follow up with question like, "and can you tell me about sometimes that you've done X in the past?" It's easy for someone to say they do something, but have they actually done it before?

Also, don't be afraid to ask hard questions. No good professional will be offended, and most will be eager to clear up any potential points of conflict before they become issues!

5. If at least one of them appeals to you, pick the best match. If not, go back and get more names. It's worthwhile to take your time and do it right, so if you don't like anyone you interview, don't just settle for the "least worst". Having said that, once you've done your due diligence, press forward! You can always back out if you find that, despite your best efforts, you ended up with a "dud". Meanwhile, though, you're getting hit with the opportunity cost of not having a fully-optimized financial plan. A financial plan isn't like an estate plan, where you just have to make sure it's in place before you die; the sooner you have a (fully-optimized and systematically adjusted over time) plan in place, the more wealth you will build over your lifetime!

How about you? If you have a financial advisor, how did you go about finding yours?

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

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