Until Dave Ramsey came along, I had no idea what a Financial Coach was. I knew there were financial advisors, but how does that differ from a Financial Coach? That's just what we're going to explore in today's edition of the House on the Rock Blog!
There are two types of financial advisors, and one type of Financial Coach. All three are selling financially-related services. Knowing how each one works helps you decide which one you need and when.
Quick snapshot of differences between traditional / fiduciary financial advisors, and Professional Financial Coaches
Traditional Financial Advisor
Ok, the term financial "advisor" is a little misleading. Yes, financial advisors can advise you about your finances. Many of them can be super helpful in helping you invest your money. But you need to know that they are selling financial products to you. When you invest in the opportunities they present before you, they will make money on your investments.
For example, if you choose a mutual fund they are selling, they and their company will take a percentage of your investments each year as earnings, whether or not your investment earned any money. This is not necessarily bad, but you need to know that, while they would love for your investments to grow, they will get paid even if they don't.
Here's what happens. You will sit down with them, and they will present the various investment options that are available. After some discussion, you will agree on what direction you would like to take. You will then sent them money. Often, they will take a cut off the top, then each year a cut based on the expense ratio. This could be up to 3% of your investment value per year.
If you choose to invest yourself, however, you could easily find financial products, called index funds, that will track the overall market. These tend to be far less cost than mutual funds. For example, the Charles Schwab S&P 500 index fund has an annual fee of 0.02%. That's not 2.00%, but 0.02%! This is just an example of an index fund that tracks the S&P 500 index.
I am not trying to say that all traditional financial advisors are out to get you. But I am saying that it is important to know what the person is selling, and how much it will cost. Be sure to consult with a number of advisors if you choose to go this route.
Fiduciary Financial Advisor
A Fiduciary Financial Advisor, AKA "fiduciary," does not get paid for the specific investments you make. Rather, they get paid for the time they spend with you based on their hourly rates. They will advise you on how to invest your money, then help you do it. They may offer to make the investments for you, but will not get paid over time for the investments you make.
There are some legal requirements for which fiduciaries have to comply. According to Fee Only Network, a website dedicated to advancing the cause of fiduciaries, "Fiduciary advisors must disclose any instances in which they are compensated for making a certain recommendation." This helps to avoid a conflict of interest.
Fiduciaries naturally can be more open-minded about helping you make financial decisions. Instead of having a specific portfolio of products they are selling, they can truly advise you on the various financial investment opportunities that exist across the entire spectrum. They may even advise you to prioritize non-investment opportunities, like paying off debt, before investing. A traditional financial advisor may or may not do that, as he only makes money by taking your investments.
I prefer fiduciaries over traditional financial advisors, as I believe they can have less bias in their investment choices for you. That said, there are many financial advisors who are a real help, so you have to decide what is right for you.
Professional Financial Coach
While financial advisors help you invest money you have, a Professional Financial Coach can help you have money to invest. A Financial Coach looks at your entire financial picture to help you make decisions about all aspects of your finances. At the end of the day, investing is only one aspect of your financial life. Until you have paid off all of your non-mortgage debt and have 3-6 months of expenses as cash in a savings account, you should not be investing.
A Financial Coach will help you build a total-life plan, which includes being generous with money, paying off your debts, and building sufficient short-and-long-term savings. They can also help you determine which insurance products, like life, disability, and long-term care insurance, are right for you. Finally, they can help you look to the future when you will pass on your wealth through estate planning.
Like fiduciaries, Financial Coaches sell their time to give recommendations on your financial situation. They are interested in understanding your total financial situation, rather than one aspect of it.
How to Choose Which One to Use
Traditional Financial Advisor
Choose a traditional financial advisor when:
You have money to invest
You have already paid off all non-mortgage debt
Have 3-6 months of expenses in savings
You have a close contact or company that you trust
You know how the expenses work for the investment products they offer, and you believe them to be reasonable
Fiduciary Financial Advisor
Choose a fiduciary financial advisor when:
You have money to invest
You have already paid off all non-mortgage debt
Have 3-6 months of expenses in savings
You want the least bias in investment advice, and you want options from a variety of companies
You know how the expenses work for the investment products they offer, and you believe them to be reasonable
Professional Financial Coach
Choose a Professional Financial Coach when:
You have or don't have money
You have a lot of debt
You don't have much savings
You don't have a long-term financial plan
You have a long-term plan, but want a financial health checkup
You just want to be sure you're doing the right thing with your finances.
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