Find the Right Financial Help

The following is part of our 21 Days to Improve Your Financial Life special report.

The financial advisory profession is an awfully big and confusing tent. It encompasses people who are focused primarily on investments and those who construct comprehensive financial plans. Some may do both. Commission-based brokers can call themselves financial advisors, but so do many fee-only folks who never touch commissions.

The industry hasn't necessarily helped extinguish the flames of confusion. Despite a Department of Labor rule that would require all advisors to be fiduciaries when consulting on retirement matters--that is, be legally bound to serve their clients' interests ahead of their own--some parts of the industry have pushed back against such a standard. Today, the financial advisory space remains a wild west of confusing titles, designations, and compensation schemes.

The good news is that selecting an advisor who's a good fit for your needs doesn't have to be an overwrought process. Here are the key steps to take.

Step 1: Determine what type of advice you need. Are you seeking broad financial-planning guidance--on your investment portfolio, but other parts of your plan as well? If so, a financial planner is appropriate; look for someone who has earned the right to use the certified financial planner designation.

On the other hand, if you think your financial plan is in good shape overall but you need help selecting and overseeing your investments, an investment advisor may be the way to go. Such individuals are frequently registered investment advisors or are employed by a firm that is; these advisors and advisory firms are held to a fiduciary standard. (More on this below.) If finding someone with investment acumen is your key goal, look for someone who has earned the chartered financial analyst designation.

Be aware that there's not always a bright dividing line between financial planners and investment advisors. Many financial advisors provide both financial-planning guidance and investment advice.

Step 2: Establish whether you need ongoing advice or onetime/periodic help. What specific items do you need help with? If your needs are focused--for example, you'd like a review of the viability of your retirement assets given your anticipated spending but then you'll be set for the next five years or so--you'll want to seek an advisor who is willing to work with you on an hourly or per-project basis. This model will be particularly appropriate if you are willing to do at least some of the heavy lifting for your plan, such as organizing your investments and tracking them on an ongoing basis. Financial planners are more likely to employ hourly or per-engagement billing than are investment advisors.

On the other hand, if you expect that your advice need will be ongoing and you don't have the time or inclination to be too involved in keeping your financial plan on track, paying a recurrent fee--say, annually--may be more cost-effective than paying for advice on an a la carte basis. Most advisors who charge in this way levy their fees as a percentage of your assets; the percentage may decrease the more assets you have under management with an advisor. Both investment advisors and financial advisors charge for services in this way. Another model that is gaining traction is the so-called retainer model, whereby you pay your advisor a monthly or annual dollar-based fee rather than a percentage of your assets--much as you would do with a gym membership or cable TV.

Step 3: Decide if you want face-to-face help or are OK with a long-distance relationship. While many advisors still meet face to face with their clients in their offices, technology is changing the advice industry fast.

If you're very comfortable with technology, you may be able to shave your investment-management fees by employing some type of technology-driven advice such as a robo-advisor. Some financial planners employ a hybrid model, charging their clients for customized financial-planning advice while outsourcing the investment-management piece to a very low-cost robo-advisor. If you have a specialized advice need and don't live in a big urban center, being willing to meet with the advisor via Skype or another technology platform may enable you to get the specialized help you need.

If you'd like more face-to-face interaction, focus your search on financial advisors who work in your same locale.

Step 4: Do some basic screening. If you've decided you need a planner, the Financial Planning Association's tool can help you search for Certified Financial Planners in your location. You'll be able to see the planners' areas of specialties as well as how they charge for their services. (More on this below.) Meanwhile, the website for the National Association of Personal Financial Advisors allows you to search for fee-only financial planners by geography and specialty. Garrett Planning Network is a group of fee-only financial planners who charge for their services on an hourly basis.

Many financial planners will also consult on your investments: If you primarily need investment advice, the above resources can help you search for advisors, too. Alternatively, you can ask your accountant or attorney for recommendations.

Step 5: Check up on fiduciary standard. Advisors are held to one of two distinct standards when making recommendations: a fiduciary standard or a suitability standard. Investment advisors who are registered investment advisors--or work for firms organized as registered investment advisors--are already fiduciaries. Certified financial planners are required to act as fiduciaries when offering planning advice, but they may not be when they're selling securities. (I know, too confusing.) Your job is to ask the question outright: Are you a fiduciary, and will you be one in every context in which you'll serve me? Investors who work with a fiduciary have a higher level of legal protections than if they work with an advisor who's held to the lower "suitability standard."

Step 6: Investigate fee structure. Another key question to get to the bottom of is whether the advisor is fee-only, fee-based, or commission-based. Fee-only means the advisor is compensated by charging fees for various services and is never compensated with commissions. Commission-based advisors obviously accept commissions for recommending products. Fee-based advisors may charge primarily fees for services they provide, but may also accept commissions.

Advisors who accept commissions shouldn't automatically be marked with a skull and crossbones. But receiving commissions for products can introduce conflicts of interest, incentivizing advisors to recommend products that aren't necessarily in clients' best interests. The fee-only model is cleaner.

If you've decided to go with a fee-only advisor, you still need to ask about the specific business model, as well as a dollar estimate of what you'll pay for the advisor's services in a given year. (Ask for an estimate that includes underlying investment fees, too.) Advisors may charge on an hourly, per project, percentage of assets, or retainer basis; this article takes a closer look at who such arrangements are right for.

Step 7: Check up on record and disciplinary history. Make sure any prospective financial advisors are properly registered and have not had any disciplinary issues. The CFP Board's website enables you to see if a planner has earned the CFP designation, as well as whether he has faced an disciplinary action.

Registered investment advisors are regulated by either the Securities and Exchange Commission or the securities regulator for the state in which they have their principal place of business. You can go to the Investment Advisor Public Disclosure website to view what's called a form ADV; that document provides details about the advisor's business, prospective conflicts of interest, and any disciplinary actions. If you can't find the form online, ask any prospective advisor to send their ADV to you.

If the advisor is also a broker, the Financial Industry Regulatory Authority has a Brokercheck tool that enables you to see if that person or firm is appropriately registered and has a clean disciplinary record.

Step 8: Look into designations. Don't be blinded by a long list of letters after the advisor's name; some designations, such as the following, carry more heft and have heavier requirements than others. (There are other several other worthy designations for advisors, such as chartered life underwriter [CLU], but they're not as broadly applicable as the following.)

Certified Financial Planner: In order to use the CFP designation, planners must complete an educational program, pass a comprehensive exam, and log extensive financial planning-related work experience.

Chartered Financial Consultant: Much like the better-known CFP, this is a broad financial-planning designation. Chartered financial consultants must complete an educational program and a series of exams, while also logging related work experience.

Chartered Financial Analyst: In order to use the CFA designation, people must log substantial work experience involving investment decision-making and take courses on subjects such as economics; financial reporting and analysis; ethical standards; equity and fixed-income investments; and portfolio management. They also must pass a series of rigorous exams requiring substantial study time.

Step 9: Interview the prospective advisor. Finally, spend a few minutes interviewing the advisor. Ask if the advisor has experience with situations like yours, and get a feel for whether you click with that person and are comfortable confiding in him. Also ask any straggler questions that you have, including the following:

• Are you primarily a financial planner or an investment advisor?
• Are you a fiduciary?
• How do you charge for your services?
• What designations/credentials do you have?
• What’s your backup plan in case something should happen to you?