In this article:
Financial planning isn't always taught in school or at home, leaving many of us on our own to figure out how to manage money in adulthood. For those who want guidance or a second opinion on how to budget, manage debt or save for retirement, there are professionals who can help.
Financial advisors and financial coaches both provide financial advice. Financial advisors specialize in wealth building, while financial coaches help you work toward nearer-term goals while providing accountability and encouragement along the way. Below we discuss what both types of financial professionals do and when one or the other might be right for you.
What Is a Financial Advisor?
A financial advisor is a general term that describes someone who offers advice on money management, investing and more, usually for a fee. Depending on what licenses an advisor holds, they may also be able to handle buying and selling of securities for you. Financial advisors may charge a flat fee, an hourly fee, an annual retainer or a percentage of the assets they're managing for you.
Financial advisors go by many different titles. For example, investment advisors are a type of professional registered with the Securities and Exchange Commission (SEC) who offer advice on how to invest in securities such as stocks and bonds, and may completely manage your portfolio. A certified financial planner (CFP) is a type of advisor who creates customized financial plans, which could include the best ways to allocate your assets, plan for retirement, pay down debt or manage an inheritance.
Financial advisors may or may not be fiduciaries, which are advisors who are bound by law to only make financial recommendations that are in the client's best interest. That's why it's important to ask whether an advisor is a fiduciary, especially if they earn a commission from investment products sold (since those commissions could influence their financial recommendations).
Pros and Cons of Using a Financial Advisor
Below are the advantages and disadvantages of working with a financial advisor.
- You may get professional, personalized advice on investment strategies.
- You may receive ongoing portfolio analysis and investment recommendations.
- You may get advice on protecting wealth through insurance and tax planning.
- A financial advisor may directly buy and sell securities on your behalf so you can take a step back and leave your finances to the pros.
- Financial advisors can be expensive. For example, the average annual asset under management (AUM) fee for a portfolio valued at $100,000 was 1.12% in 2021, according to AdvisoryHQ. This fee might seem small but can add up year after year and as your portfolio's assets grow in value.
- Anyone can call themselves a financial advisor. Financial advisor qualifications and certifications can vary, so you should request credentials and check regulatory databases before working with someone. Research the different types of financial advisors so you'll know what qualifications to look for.
- Not all financial advisors are fiduciaries. People who call themselves financial advisors may not be held to a fiduciary standard, which is why it's important to ask what their duty to you is before working with one.
What Is a Financial Coach?
A financial coach, sometimes called a money coach or financial counselor, reviews your financial situation and guides you in setting and achieving money goals. Financial coaches may charge an hourly rate or flat rate depending on the service.
Sessions with a financial coach might include direction on setting up and maintaining a budget, saving for emergencies or paying off student loans. Coaches will also help you work on your money mindset and financial habits to address your behaviors and attitude towards money—important steps toward improving your financial life.
A person doesn't need a specific certification to call themselves a financial coach, but they can choose to get certified to improve their credibility. For example, the Accredited Financial Counselor (AFC) certification is a reputable financial counseling and coaching accreditation. To get certified, coaches must pass an exam, have 1,000 hours of financial counseling experience and adhere to the Association for Financial Counseling & Planning Education (AFCPE) code of ethics. AFCPE maintains a database you can use to hire an accredited financial counselor.
Pros and Cons of Using a Financial Coach
Thinking about working with a financial coach? Here are the pros and cons.
- You have someone to help you set money goals, track progress and hold you accountable.
- You can get help navigating challenging financial situations.
- Financial coaches may be more affordable to hire than financial advisors.
- Coaching credentials vary, so it's important to do a background check on a coach you're considering and ask for qualifications before hiring.
- Financial coaches may not be qualified to offer the wealth-building advice and portfolio management that some financial advisors can.
Should You Hire a Financial Advisor or a Financial Coach?
Whether to hire a financial advisor or financial coach depends on your financial goals. If you're looking for someone to help you achieve big-picture goals like a flush investment portfolio or retirement account, a financial advisor could be better suited to give you the advice you need to allocate your cash and manage your portfolio.
That said, financial advisors can be costly. If you're just starting out with a smaller amount of money to invest, using a robo-advisor could be more affordable. Robo-advisors automate your investments based on your risk tolerance and time horizon, and can cost a fraction of what a one-on-one advisor might cost. For example, the annual fee for digital advising through Betterment and Wealthfront robo-advisors is 0.25% of your portfolio per year.
A financial coach could be a better choice if, say, you want guidance to improve your credit to buy a house, need accountability in growing emergency savings or simply want support in making certain money decisions. Ongoing sessions could help you get on a better financial track. And the support and skills-building aspect of financial coaching could uplift and encourage you if you're feeling discouraged about your financial situation.
The Bottom Line
No matter what financial professional you choose, you should do your own homework on the strategies and investments they recommend to ensure they're giving you sound advice. You also shouldn't give someone access to your life savings to invest without knowing if they're licensed by the Financial Industry Regulatory Authority (FINRA).
Asking around for recommendations from friends and family is a good way to find a legitimate financial advisor or coach. When it's time to interview a financial professional, hop on a call to find out what their pay structure is, and ask what their financial philosophy and strategies are to make sure they align with what you believe in and want to achieve.