One of my most asked questions is “Should I hire a financial advisor?”
Honestly, the answer to this question largely depends on who you ask. It also depends on your current financial situation; a financial advisor provides a very specific service, and if you aren’t ready for it, you may be paying for something you either (A) don’t need, or (B) you could do yourself.
For those who are new to Break Your Budget, I am not a financial advisor. I am a financial coach, which is quite different and serves a different purpose. My background is in finance, as I have a Bachelor’s Degree in Finance, and I have worked in the finance/investment industry now for 3 years. Throughout my college education, work experience, prior work with financial advisors (both as a job role, and through directly working with one that I hired), I’ve learned a lot about personal finance, how to manage money as a young adult, and the proper steps to take right out of college so set yourself up for success.
But like I said, I’m not a financial advisor. I’m a coach. So when you think of a “coach” you probably think back to your high school basketball coach or something of the like. What purpose did that coach serve you? She trained you. She taught you better ways to drill the ball. She taught you proper form to land a basket (idk if that’s the right term I don’t do sports). She held you accountable and made you show up to practice. She guided you to be the best player you can be. But she never did it for you.
That is the main difference between a financial advisor and a financial coach. An advisor does the work for you; you just give them the money. A coach trains you, educates you, and hold you accountable to reach your goals on your own. Is one better than the other? Nope. It all depends on what you need. Let’s get into the nitty gritty.
An Advisor vs. a Coach
A financial advisor is a licensed professional who provides advice on financial decisions for clients, for a fee. They can offer a variety of services, from general investment managed to tax planning, estate planning, and more. Basically, an advisor tells you exactly what to do with your money and then manages it for you, usually in the form of making investment decisions on your behalf. They do this through choosing investments they see as the best fit based on your needs and goals (stocks, bonds, mutual funds, annuities) and then charging a percentage of the assets they are managing for you (AUM).
Generally, advisors will put together a customized financial plan for you before you actually hand over the money to invest (though this is also usually for a fee). This could include planning for retirement, building up a nest-egg portfolio, planning to purchase a home, setting up 529 accounts for your (future) kids, etc. Their main focus is to help you build wealth and grow your money for your future, and it is common to work with an advisor for many, many years.
While financial advisors make decisions and do a lot of the work for you, they also come at a cost. Depending on the practice, expertise, and tenure of an advisor, financial plans can cost anywhere from $1,000-$3,000. In addition to the plan, if you choose to invest your money with them, they will also charge an AUM fee, which can be up to 1% (sometimes more). This means that if you invested $10,000 you are paying your advisor 1% of that each year, approximately $100. It doesn’t seem like a lot, but as your money grows so does what you’re paying, and that is on top of any fund fees that the actual investments your money goes into charges.
A financial coach is not licensed, and therefore is not allowed to give you financial advice, specifically pertaining to investments. They offer a variety of services that pertain to helping clients understand the fundamentals of personal finance, and how to apply them to their own lives. Financial coaches are focused on teaching the basics of money management, from creating a budget that works for you, to paying off debt and developing a strong relationship with money.
Coaches will usually work with clients either during a one-time consultation (which I offer! check out my services page), or over a period of several weeks. The process generally includes understanding the obstacles a client is facing, whether it be poor or irrational spending patterns, an in ability to save any money or living paycheck to paycheck, or to learn the best strategy for paying off multiple forms of debt. Their main focus is to help you learn proper money management skills, so that you can make empowered financial decisions on your own.
Financial coaches provide a variety of services, and as a result, their fees can vary greatly. One-time consults can range anywhere from $50-$500, depending on what is included. Coaching packages, where you’d meet regularly, can range anywhere from $500-$2000, again depending on what is included and the length of the package.
The Bottom Line
Financial advisors and financial coaches serve two different purposes. Advisors help you with investing and building wealth, while coaches help with personal money management skills. Advisors provide specific investment advice, while coaches educate and empower.
So how you do you which is right for you? It depends what you are struggling with. Do you have money set aside you can invest? Are you struggling to create a budget that you can stick to? Do you want to be involved in the financial decisions, or do you prefer to be hands-off?
These are all questions to consider. In short, an advisor manages and grows wealth that already exists. A coach helps put clients in a position where they are equipped with knowledge to create that wealth in the first place. The right fit for you depends where you are in your journey at this point of time.