I’ve had a lot of potential clients approach me over the years in the early stages of their financial life, perhaps with a large amount of school debt or a brand new career with their first salaried job. They tell me they’re looking to work with a “financial advisor” and they are wondering if my services can compare—if I can help them create a financial plan or start looking at investments. In my head, I am thinking I can help! You’re in the right place! But I have to explain that I’m a financial coach, not an advisor. And they wrinkle their eyebrows in concern because they have been told that they need an advisor, not a coach.
In truth, it’s not a matter of either/or. There are different reasons why it would make sense to work with a financial coach or financial advisor at different points in your life. Ideally, you would find those professionals at the right time and the work you do with each of them would complement the other. But often, that’s not what happens. I’d like to clear up the confusion once and for all, but this dilemma is definitely complex and compounded by people out there who benefit from the myths that have clouded the financial profession for decades.
Why This Is So Confusing
You’ve seen memes like this one that ask why we are learning Algebra 2 in high school, but not how to file our taxes or create and follow a budget. There is an assumption among some finance professionals (and school boards) that basic personal finance is something we all learn at home. However, because the options for individual finance have become so complex, and because our parents can’t prepare us for every life situation, most of us don’t learn enough to even understand all our options, much less make the best decisions. This is the gap that financial coaches like me are working to fill, and these ambiguities can make it really difficult to find the right coach to work with.
Another piece that makes this confusing is the advising world’s monopoly on vocabulary; terms like “financial advisor,” “financial plan” and “assessment” mean something very specific in that industry that isn’t obvious to the average civilian. But more on that later.
Why Financial Coaching
A financial coach should be able to meet you wherever you are in your financial situation and education, though some choose to specialize in specific areas. A coach will begin by getting to know what’s going on in your life and what’s important to you. They will ask what your money is doing right now and what you would like it to be doing, possibly help you clarify those priorities, and then help you understand and carry out strategies to start moving in the right direction.
For example, a financial coach can help you budget for big purchases like a house, college education, starting a new business or paying off debt, and they take into account what’s really feasible with the assets and tools available to you right now. A coach can look at your pay stubs with you and discuss what might happen to your take-home pay if you raise your 401k contribution. Ideally, both types of professionals should understand your values and help you plan accordingly, but the kinds of actions they take to carry this out are very different.
Why (and When) Financial Advising
A financial advisor will assume that you have a certain level of financial literacy. They may not, for instance, help you understand what an Annual Percentage Rate (APR) is. However, when you are established in your career, have your personal finance ducks in a row and are getting serious about planning your long-term financial future in terms of investments, that is when a financial advisor will be able to help you. Most financial advisors are certified financial professionals or securities licensed to sell life insurance, stocks, bonds and mutual funds.
A financial advisor will typically begin by working with you to assemble a financial plan, or a snapshot of your current financial situation. It might include your current net worth, a projection of your lifetime earning potential and all of your assets, investments and debts. It will help you understand what you’re doing well and where you need help. And inthe process of working together, they help you develop an investment portfolio for long-term savings. And that is definitely worth the investment!
Problems with Both
While financial advising is more heavily regulated and clearly defined, that doesn’t mean financial coaching is any less valid of a service—or that all financial advisors are completely above board. The industry is very highly regulated, so it doesn’t take much to get the basic license to practice financial advising. The sentiment that you shouldn’t pay to work with a financial professional who is “less” credentialed than a financial advisor is outdated and doesn’t account for the full picture of the financial needs you will experience in your lifetime.
But not all coaches are worthy of your trust either. Because there’s insufficient oversight here, someone can watch The Secret and decide overnight that they’re meant to be a financial coach. What makes a financial coach great is their life experience and knowledge of the tools and strategies that make up personal finance, from the most basic types of bank and credit union accounts to various types of credit and loans, mortgage, investment accounts and more.
The Bottom Line
No matter what kind of financial professional you’re looking for, you will find a wide array of ethics and outlooks, and credentials and licenses do not indicate altruistic motivations. They may charge a fee for their work or they may earn commission based on what they sell you. It might sound like a better deal to get their consultation for free, but with a non-fee-based advisor, there’s a better chance they are more motivated by their commission than your best interests.
And last, what I tell anyone and everyone who will listen, is never to trust a finance professional to make decisions for you. Your money, your values, your goals and your responsibilities are still in your hands. It’s 100% fair to not want to manage it all yourself, but to protect yourself and your integrity, you should at least understand what your money is doing and feel empowered to say yes or no.
So where are you? Do you need to get a better working knowledge of your financial situation, or are you realizing there’s a lot more out there that you don’t know? Get in touch with me and let’s talk it out.