This is the first article of a two-part series on how to choose a financial professional.
Getting your finances in shape can be a tall order. It’s not the most exciting topic for many people and it can be extremely confusing to try to make sense of all of the details without making a mistake. Many people seek out professional help to organize, manage, and optimize their finances. But, what type of financial professional should you use?
Focus On Services Provided
It may be helpful to visualize the different service providers on a continuum. On one end of the spectrum, you have professionals that traditionally specialize in clients with little to no savings who may provide a very hands-on level of service. On the other end of the spectrum, you have professionals that focus on clients with savings who may be less actively involved in helping you make day-to-day financial decisions. And then there are professionals who fall somewhere in the middle.
Financial Coach Or Counselor. A financial coach or counselor typically focuses on fundamental financial issues or habits. “A financial coach works with a client to change behaviors around money,” said Stephanie Genkin, CFP® and founder of My Financial Planner. “That might be helping a client see where they can reduce spending to create more savings, or helping them get out of debt or understanding their emotions around money, which may have created obstacles to good financial management.” The client may meet with the coach or counselor on an ongoing basis to try to change negative habits – similar to the approach of a personal trainer.
Rebecca Wiggins, Executive Director of AFCPE, an organization that certifies financial coaches, added, “Unless the financial coach is also licensed as an investment advisor, they often focus on areas of financial management rather than investments and wealth-building. Whatever area they’re focused on, I believe in the importance of financial coaches having both rigorous and comprehensive training to ensure they have the skills they need to successfully help their clients.”
People seeking this type of service may just be starting out in their careers and may not have much or any money at all.
Financial Advisor. At the other end of the spectrum are services provided by financial advisors that may be hands-off and purely transactional or product-focused. Think of financial professionals at large brokerage houses, such as Morgan Stanley MS -0.78%, Bank of America BAC -1.26%, and UBS that may manage your investments for a fee plus typically commissions on product sales. They may meet with you quarterly to give you an update on your portfolio and answer a question or two about other financial topics throughout the year, but your relationship with them is focused on your investment portfolio, and specifically, the assets that they manage.
Carol Sankar, for example, uses a financial advisor. She said, “My financial advisor offers products to ‘house’ my investments. My advisor often sells the product that they know best, hence, although they know my goals, they only sell the options they have and rarely give me any alternate advice.”
Financial Planners. There exists a large grey area in between these extremes where many professionals fall, and they’re often referred to as financial planners. Unlike financial advisors, who traditionally focus on a client’s investment portfolio, a financial planner generally analyzes a client’s entire financial life across cash and debt management, insurance, investments, tax, and estate planning. Eric Hutchinson, a financial planner and managing director of Hutchinson Financial, described financial planning as “a disciplined process to clearly define financial goals, gather information about resources available to meet those goals, and developing a plan to achieve them.”
These professionals generally charge fees based on a percentage of assets under management or a fixed fee and in some cases, could receive commissions from product sales as well.
The Lines Are Blurring
In the past, financial planners and financial advisors typically required a minimum asset level to begin servicing a client; hence, they targeted clients with savings. However, there is a growing group of financial planners through an organization called the XY Planning Network that is focusing on clients in generation X and Y – a demographic that may not have acquired much assets to date. These planners do not require clients to have a minimum asset level to work with them and as a result, are beginning to move into the space traditionally serviced by financial coaches and counselors.
One example is Jason Reiman, who previously held a financial coaching certification through the AFCPE and is currently a CFP® and an enrolled agent. He said, “I provide financial coaching and planning within my practice. Since the true value of a coach is the ability to bring out the very best in a person, I don’t think it would be sufficient to provide coaching and not planning, and vice versa.”
Hutchinson agreed, “A good financial planner will often be in the role of coaching their clients to do the right things, in the right way, and at the right time.”
At the same time, there are financial coaches who initially focused on cash and debt management, but – as their clients came to successfully generate savings – have expanded their focus. Some of these coaches are now helping long-time clients grow and manage their savings, similar to a financial planner.
But buyer beware. “Financial coaches who charge for their services and give specific advice to individuals or families are walking a very thin line if they give investment advice and are not registered as an investment advisory firm,” said Scott Smith, a financial planner and founder of Olympia Ridge. That’s because any financial professional that is in the business of giving any type of investment advice, for compensation, must register as an investment advisor with either their state or the SEC and be subject to rigorous compliance requirements. The definition of investment advice is extremely broad, and can include even recommending a simple asset allocation or suggesting someone put money into a certificate of deposit (“CD”) instead of a savings account.
Putting It All Together
It can be daunting to make sense of the financial services ecosystem. To simplify the process, first figure out where you are in your life and what services you need. Specifically, consider whether you need help saving money or getting out of debt, growing existing savings, or a more comprehensive view of your finances across many different areas.
While traditionally you may go to a financial coach to help you save money, a financial advisor to help you grow that money, and a financial planner to look at your complete financial life, the lines are blurring. Don’t limit yourself by titles that other people give themselves.
As you research financial service professionals, be sure to look at their qualifications, such as educational background, relevant work experience, and certifications, to get a better understanding of what makes a particular person uniquely positioned to provide you with financial advice. Be sure to understand their areas of expertise and limitations, as well as how they are compensated.
The second article of this two-part series will dive deeper into the factors to look into when choosing a financial professional.