One frequent question I hear when I introduce myself as a financial coach is how what I do differs from what their financial advisor does. It’s an understandable question. And my situation is further complicated because I’m also a CPA, yet I don’t prepare taxes. So here’s my primer on financial professionals and which is appropriate in a given situation:
Financial coach or money coach
These two terms are interchangeable. You would come to a financial or money coach if you’re looking for truly unbiased personal finance advice for which you pay an hourly fee (or a fixed fee for a set number of meetings). A financial coach should not be selling you products or investing your money.
With most of my clients, we first work to identify all of your financial goals, and assess where you are with each of them right now. Then we take a look at changes that you might want to make. Often our discussion revolves around choices such as whether to increase a 401(k) contribution or save for college; or which debt to pay off first; or how to save for a house down payment while also paying student loans.
Keep in mind that there’s no official “financial coach” certification, so if you think a financial coach might be the professional you need, make sure to understand the background and experience of anyone you’re talking to.
Who needs a money coach? Here are some situations that often lend themselves to financial coaching:
- You think you’ve been managing your money pretty well on your own, but you’d like an independent, expert look at your financial picture as a check-up.
- You’re struggling with debt and aren’t sure how to get out.
- You’ve had a financial windfall (such as an inheritance or large raise) and you want some unbiased guidance on how to be a good steward of your money.
- You’re facing a life transition and aren’t sure what your finances are going to look like on the other side.
Financial planner or investment advisor
These two terms are not entirely synonymous, but these folks are in the investment arena, and often focus on how to invest for long-term goals, such as for retirement. They can provide valuable guidance on both how to invest, as well as what your cash flow might look like in retirement. They make reports with lots of graphs that should help you visualize how your financial future will look, if you continue on the path that you’re on. There may be some overlap with the types of things that a financial coach will do, particularly in the area of understanding your financial goals, although their focus is to make investment recommendations and often manage your investments for you. There are a variety of designations that folks in this business have, such as CFP, RIA, ChFC. There are dozens more.
One important thing to understand about your financial advisor is how they get paid. You have every right to know how your advisor gets paid. The two most common ways are commissions (from selling you products) or fee-based, which means they take a percentage of the assets that they’re managing for you as the fee (1% per year might be a typical fee). I think either method of compensation is fine, as long as you – the client – understand it. I personally would rather have a fee-based advisor, because then I know their best interests are in line with my own.
So who needs a financial advisor? Some people are perfectly capable of investing their own money. Others believe that it’s wiser to pay an expert in the field for their expertise. I typically advise that if you want to be able to call someone if you have questions or concerns, then a financial advisor might be a good fit for you. They will sit down with you annually (or more often, if you wish) to review your long-term goals and progress towards those goals. It can be a very valuable service to have someone take such a close look at your long-term financial health.
If I have an advisor, why would I need a money coach? The answer is that you might not need both. However, not everyone is a good fit for a financial advisor. You need to have investable assets (meaning money!) in order for a financial planner to take you on as a client. If you’re busy paying off debt, or your net worth is mostly in real estate or tied up in your employer 401(k), most financial planners can’t work with you. And some advisors have very high minimums as far as amount of assets they require for you to come on board as a client. Some will work with someone who is just starting to save and invest – they might have a minimum of just $5,000, but I’ve seen minimums as high as $750,000, even in Maine.
Accountant or CPA
CPA stands for Certified Public Accountant, so these two terms are somewhat interchangeable, although someone can refer to themselves as an accountant without being a CPA. The public generally thinks that CPAs are all tax preparers, which isn’t the case at all. Most of the CPAs I know work in the finance department of businesses or other organizations, and may not prepare even their own taxes, let alone other people’s.
A CPA at a public accounting firm is often a great resource for a small business owner, who needs guidance in how to structure their business, and other tax-related advice. And if you don’t want to prepare your own taxes, a CPA in public practice can be a valuable resource. Besides preparing your annual tax return, they should be able to give you helpful advice about tax planning and help you throughout the year if you’re going through a situation that will have tax consequences.
If you’re not sure whether a money coach is right for you, please reach out to me and we can have a chat. If someone calls me who really needs the services of a different financial professional, I am happy to recommend someone who can help them better than I can.