How to Know Whether You Need a Financial Coach or a Financial Advisor

In our current, complex financial landscape, different kinds of financial professionals are needed. Do you need a financial advisor? Do you need a financial coach? Or… both???

Duties of a Financial Advisor

Financial advisors:

• Educate their clients on different financial products and services.
• Develop a personalized financial plan for each of their clients.
• Sell financial products and services.
• Evaluate financial products and find the right one to fit your needs.
• Strategize and manage investments and build wealth for long-term goals.
• Focus on asset allocation, portfolio management, and market analysis.

What You Should Expect from a Financial Advisor

It’s reasonable to expect that your financial advisor is well-trained and experienced in the financial products they sell, as well as the potential tax implications of those products.

Help When They Can

Your financial advisor should be aware of the scope of their work. If your question or concern would be better addressed by a CPA, health care provider or attorney (for example), your financial advisor should feel comfortable referring you to another professional. Seasoned financial advisors have developed an extensive network for this reason.

Paying Off Debt

Not all financial advisors will offer guidance on paying off debt. Some certainly do, so if this is something you’d like to focus on, be sure to ask this question early on in your work with them.

Fiduciary or Not

Whether they are a fiduciary or not, your financial advisor should always be acting with your best interests as their North Star.

Understanding the fiduciary responsibilities is important as well. If your financial advisor is a fiduciary, they are legally bound to put your interests above their own. That doesn’t mean that a life insurance salesperson or non-fiduciary financial advisor won’t put your interests above their own, of course.

Have a License

Financial advisors are required to have the appropriate license(s) to sell the products they are recommending. Requirements for licensure are determined state by state. Financial advisors can be licensed in multiple states.

Ask About Your Money

You should expect that they’ll ask about your income. And if you’re talking large amounts of money, they will be required to report those transactions. This is for your own protection. As well as to prevent fraud, money laundering, terrorism, and general criminality and chicanery.

Verify Your Identity

You should expect that your financial advisor will verify your identity in the process of selling you a product. No financial advisor, planner, or life insurance salesperson should ever make you a guarantee of a return.

Good Experience That Will Serve Your Needs

Outcomes are often far in the future in financial advising, so you should expect your financial advisor to talk up their strengths, expertise, investment knowledge, and achieving specific financial targets. They should be able to talk about how they’ve served clients with circumstances and goals similar to yours.

How Financial Advisors Make Their Money

In general, financial advisors make their money in three different ways:

Paid-per-product/Commission

The advisor (or life-insurance salesperson) makes a percentage of the face value of a product or policy they sell you. That percentage is based on a multitude of factors but can include where they are in their company’s hierarchy, the product itself, the company that they work for, etc.

Pay structures within financial firms vary greatly but may involve an upline and downline. If that’s the case, a small percentage of the commission your advisor or salesperson receives will also go to the person above them in the hierarchy, and a smaller percentage to the person above them, and so on.

Basically, the more they sell you, the more they make.

Fee-ONLY

According to Nerdwallet, “A fee-only financial planner is paid directly by clients for their services, be it a flat fee, hourly rate or a percentage of assets under management. The latter is typically around 1% of a client’s portfolio’s value each year.”

Fee-based

Again, from Nerdwallet, “A fee-based financial planner gets paid by the client but also via other sources, such as commissions from financial products that clients purchase. This can set up a conflict of interest, as the advisor charges you for advice while steering you toward investment products from which the advisor profits.”

Who Can Use the Title “Financial Advisor”?

The title “financial advisor” is not a protected title. Anyone can wake up one morning and decide they are a financial advisor. It falls on the consumer to make sure the financial professional they are working with is licensed for the kind of work they are doing. It is always ok to ask for a professional’s license number!

You can check to see if your financial advisor or planner is licensed through FINRA.

Limitations of a Financial Advisor

They may not feel comfortable or have experience working with their clients to build a budgeting plan. Their advice on smaller financial decisions and budgeting is predictably one-size-fits-all.

If you and your partner are struggling to communicate around money, a financial advisor may not be the right choice. However well-meaning they might be, it may be best to seek out a couple’s therapist or a financial coach who is experienced working with couples (full disclosure, this is what I do).

Financial advisors are not in the business of exploring things like financial trauma, financial dependency, or your relationship with money. It’s not that they’re holding out on you, it’s just that these soft skills and concepts are not their job.

The work of implementing or integrating financial changes into your life will largely be left to you. Some firms will not work with you unless you have a certain net worth.

Duties of a Financial Coach

A financial coach, on the other hand, will:

• Build customized financial systems with and for you.
• Teach you how to trust yourself with money.
• Offer strategies for saving money and paying down debt.
• Collaborate with you on how to change your money mindset.
• Offer tools to change spending behavior without shame or punishment.

What You Should Expect from a Financial Coach

Your financial coach must take the time to understand both your short- and long-term financial goals. Ideally, they use an adaptive curriculum that is capable of meeting you where you are right now and teaching you the tools to get where you want to go.

Building a Personalized Budget

Pre-made budgets do not work for the vast majority of people. If your financial coach is recommending a percentage-based (spend 15% of your income on housing, 10% on food, etc.), you may want to ask some more questions. Your budgeting system must be built with you and for you.

Soft Skills for Decision Making

While financial literacy is an important pillar of any coaching curriculum, soft skills (problem solving/ decision making) must be represented as well. Your financial coach must be concerned with your comfort and should endeavor to keep your financial and personal information private whenever possible.

Guided by Your Best Interests

Even though not legally bound to do so, your financial coach must have your best interests as their driving force.

Specific, Focused Advice

Although this isn’t the case with all financial coaches, if you are specifically wanting a trauma-informed, client-focused financial coach, they should never direct, correct, or shame you. (Full disclosure, Pacific Stoa is a trauma-informed financial coaching curriculum.)

Help Put Theory in Practice

Expect that your financial coach will teach you how to implement and integrate financial changes into your life.

Show Experience that Will Serve Your Goals

Your work with a financial coach must be a collaboration. They are not the authority in your life… you are. They should be able to speak clearly on how they coach without judgment, how they offer guidance, and empowerment, and address emotional blocks. As with a financial advisor, a financial coach must be able to talk about how they’ve helped people in similar circumstances to yours.

How Financial Coaches Make Their Money

How you pay your financial coach will be determined by how the work of coaching is done. If you’re attending a retreat, class, or intensive, you will likely be paying by the event. Otherwise, you should expect to pay by the session, week, or month.

Be cautious with the subscription model of financial coaching. If you have to pay whether or not you attend classes/sessions or see any outcomes at all, they might not have your best interests at heart.

Free financial coaching is available typically through nonprofits. It’s also more and more common in recent years for financial firms to offer classes or coaching for free that typically end in a sales or sign-up pitch. This pattern is so consistent that if you’re offered free classes or coaching that aren’t through a nonprofit you can expect a pitch at some point.

Many, but not all financial coaches offer a money-back guarantee.

Who Can Use the Title “Financial Coach”?

As above for financial advisors, literally, anyone can call themselves a financial coach. On the coach side, however, there is no governing body as there is with financial advisors. Many coaches have gone through training in a specific philosophy or program. A few (myself included) built their curriculums from the ground up.

Ask questions of any potential financial coach. If they balk at those questions, they are likely not a good fit. More about what to expect from financial coaching here.

Limitations of a Financial Coach

Paid financial coaches should not be selling financial products as this represents a conflict of interest. Your financial coach’s scope must be clearly defined. You should know when they would refer you to a therapist, CPA, attorney, financial advisor, or other professional. Some will ask about your income, spending, and budgeting at or even before the first session.

Depending on their specialty, a financial coach can elect not to work with you depending on your situation. This is preferable to a financial coach who will take on anyone as a client.

How to Know Whether You Need a Financial Coach vs a Financial Advisor

In this exercise, you’ll be gaining a deeper understanding of what is important to you and then use a multiplier to get a “score” for financial coach vs financial advisor. Grab something to write on and something to write with! (Or scroll down for the interactive, online version of this exercise). Give each of these needs a score from 1-5 (1 being least important to you, 5 being most important).

Now that you’ve got your scores for each of the prompts, multiply each by two numbers, first the financial advisor (FA) multiplier, then the financial coach (FC) multiplier. Then add those numbers down the columns (FA subtotals and FC subtotals).

If one score is higher than the other, you might consider interviewing professionals in that line of work. If the scores are essentially equivalent, you might consider working with both a financial coach and a financial advisor!

You can access an interactive version of this exercise here:

Financial Advisor or Financial Coach Calculator

When Both a Financial Coach and a Financial Advisor Can Play a Role

This may not be a financial coach vs financial advisor kind of situation! It’s very possible that you need BOTH! If you went through the grid exercise above and the numbers were fairly close, spend some time exploring the idea of interviewing both kinds of professionals.

The emotional foundation and implementation of tools from a financial coach could be needed to make the best use of a long-term financial plan from a financial advisor. Or a policy/product from a financial advisor to complement the savings and budgeting goals you’ve developed with your coach.

Whichever direction you choose to go with the financial professionals in your life, it’s important to remember that they are on YOUR team and should be working to be of service to you!

In Conclusion

Having access to an integrated, holistic team means that your unique life, goals, and circumstances will be addressed. Taking the time now to understand the differences and commonalities between a financial coach vs a financial advisor means YOU are in control!

Let’s Have a Conversation:

Have you been wondering whether to get a financial advisor or coach on your team? Which one of the two have you investigated to date? Do you think your situation is more suitable for one over the other – or might you need both?