Here’s the quick answer:
A financial advisor, whether they are a registered financial advisor (RIA), financial planner, or broker, manages the money you’ve already saved.
Financial advisors are licensed to sell securities and financial products and provide specific investment advice that is tailored to your financial situation, age, and risk tolerance. They are also licensed to make investments on your behalf.
An investing coach does not manage your money. Their job is to help you to create your wealth in the first place. They focus on your financial education and help you build the skills necessary to understand investing and wealth building and to make informed investing decisions.
Most investing coaches are not licensed to sell financial or investing products. Their only role is to provide guidance and education.
Keeping the education and the actual investments separate is a good thing. You’ll learn why later in this article.
Now that you understand the basic differences, let’s now continue with a deeper understanding of both financial advisors and investing coaches.
NOTE: You will be reading about many red flags regarding financial advisors, planners, and brokers.
My intent is not to imply that these finance professionals are unethical and out to take your money. There are many people in the financial services industry that deeply care about their clients’ financial well-being, and do work hard to provide excellent advice and services.
But as you’ll see, the whole system is not set up to provide investors will the best choices, but rather, to build the businesses of these financial services providers.
My intent is purely educational – to teach you about the many inherent conflicts of interest in the financial services area so you can make informed decisions when it comes to hiring someone to handle or invest your money.
Financial advisors and financial planners provide financial planning and asset management services for clients. They deal only with the money you have already accumulated in an investing or retirement account.
It is a lucrative profession, with the average advisor making $99,920 in salary, plus bonuses, according to a 2013 article in the U.S. News and World Report. There are over 300,000 financial advisors in the U.S. alone.
As mentioned earlier, most are licensed to sell securities and financial products and provide specific investment advice that is tailored to your financial situation, age, and risk tolerance. They are also licensed to make those investments on your behalf.
It’s very important to realize that working with a financial advisor or planner is much less about education and more about actually investing your money in specific stocks, bonds, etc.
This is where the problems start….
First, it is not really their job or function to educate you on investing. Their job is to invest the money based upon the client profile they create for you.
If you know little to nothing about investing, this is a huge risk, because you have to trust that they are investing your hard-earned money wisely.
If you don’t have an overall understanding of money and investing, or don’t understand all the financial jargon they may throw at you, you are gambling with your money and your financial future.
Second, many advisors’ recommendations will be for you to invest in paper assets in the form of stocks, bonds, CDs, and mutual funds.
Many will not or cannot recommend purchasing real estate, tax liens, or physical gold and silver because they can’t make commissions or fees on those types of transactions and assets.
The truth of the matter is this: A financial advisor’s real focus is building a profitable business for him or herself.
The whole financial services industry is based upon individuals and companies making money off of the financial assets you’ve accumulated. Their livelihood depends on your fees and commissions continuing to support themselves and their employees.
They are in business to make money just like any other business.
So, in order to generate revenue, a no-fee low-cost solution may not be offered to you if they cannot profit from it. Many times a higher-cost, higher-commission version is presented to you even if it’s not the best solution to your problem.
It’s not uncommon that advisors may steer you to investments that are in their best interest, commission-wise. Many get compensation from mutual fund companies in the form of revenue-sharing payments, or get incentives from banks and insurance companies to feature their products.
Yes, serving clients is part of the job, but they also need to make money from clients in fees or commissions to stay in business. No matter how ethical or well-meaning an advisor is, this is a conflict of interest that is not easily avoided.
Most financial planners and advisors use financial planning software that enables them to create a financial plan based on your income, risk tolerance, age, and other factors that you provide.
Their software systems are set up and managed through brokerages and financial services companies. It is through these systems that your accounts are managed and commissions and fees are collected.
They input your data into their planning software and it creates a “customized” investing plan for you. I say that because you are basically getting a preset plan that Wall Street’s computer simulations say is right for you, based upon personal info like your age and income, and your answers to the risk profile questionnaire you were required to complete.
Unfortunately, this investment advice is based on mathematical formulas that don’t always work in real life.
Remember the financial crisis of 2007-2009? What caused it was overly optimistic Wall Street-generated mathematical forecasts that led banks and other sophisticated institutional investors to load up on mortgage debt securities and other leveraged products.
These forecasts of course turned out to be completely wrong, sending major Wall Street giants like Lehman Brothers, New Century, and Washington Mutual to bankruptcy, banks like IndyMac and Countrywide into hastily arranged marriages with larger banks, and industry giants like AIG and Fannie Mae into government receivership.
None of Wall Street’s computer simulations predicted the 50% drop in stocks and almost equal drop in bonds and real estate. What happened was considered a “black swan” that mathematically was considered an impossibility… until it actually happened.
So, financial planners and advisors use these Wall Street-based investing scenarios to come up with an investment allocation plan for you. Just know that the plan they provide for you may not work out as you hoped.
Because of the inherent conflicts of interest between consumers and financial services companies, more than 70 years ago lawmakers passed a series of standards to help protect the public from being taken advantage of by the financial services industry.
People who are entrusted with investing your money – financial advisors, financial planners, brokers, and registered investing advisors – are required by law to adhere to certain standards of conduct with regard to clients.
There are two standards of conduct: the suitability standard and the fiduciary standard.
The suitability standard only requires that investments fit a client’s investing objectives, time horizon, and investing experience. That’s it.
That means they are free to recommend anything as long as it fits your client profile.
They are under no legal responsibility to disclose that the investments they choose for you are not the best ones for you.
They are under no legal responsibility to disclose that the investments they choose for you have the highest commissions or fees.
And it’s important to know that they do not have to disclose that there is even a conflict of interest in the first place in terms of their intent or commissions.
Also know that brokers who work for a brokerage do not legally have to put your best interests first either. Brokers are not obligated to work under the fiduciary standard (see next paragraph).
The fiduciary standard is much more strict. Fiduciaries must put their clients’ best interest first. If two financial products will get the job done but come with different fees, the fiduciary is bound to advise you to purchase the less expensive one, even if it will result in less fees or commissions.
The sad thing is that most consumers are not even aware that advisors fall under these two standards, so they don’t know to ask what standard their advisors adhere to.
I highly recommend reading the following short article on the fiduciary standard:
http://www.bankrate.com/finance/investing/fiduciary-standard-1.aspx
Financial planners are granted certifications based on the type and amount of education they receive. Following are the main designations:
Registered Investment Advisors are advisors who pledge to act as fiduciaries under standards laid out in the Investment Advisers Act of 1940. They act to minimize all conflicts of interest and act to disclose any potential conflicts. The best ones are not aligned with any financial firms and are not brokers of any kind.
FYI: Advisor fees are usually tax-deductible, depending on your tax bracket.
Investment Advisor Representatives are advisors who work for a registered investment advisor and are licensed to provide investment advice.
Certified financial planners have the most stringent education requirements. They must pass a national test covering insurance, investments, taxation, employee benefits, and retirement and estate planning. They must also meet continuing education requirements and abide by a code of ethics.
Chartered financial analysts are financial analysts who have passed exams in economics, financial accounting, portfolio management, security analysis, and standards of conduct. These planners tend to specialize in picking stocks or bonds.
A stockbroker is a financial advisor licensed as an agent to buy or sell securities on behalf of clients. They must pass the Series 7 exam to become a registered representative authorized to sell securities.
FYI: Broker fees are usually not tax-deductible.
Financial planners and advisors get compensated for their work in four ways: fee-only, fee-based with commission, fee-offset, and commission only.
Fee-only planners charge a set amount to provide their services. Their compensation is either through an hourly fee, a flat fee, based on AUM (meaning assets under management, or how much money they manage for you), or as an annual retainer.
Fee-only planners do not earn any commissions from products they sell.
Hourly rates generally run from $150 to $300 an hour. AUM fees generally range from 0.5% to 1.5% of your account. However, some AUM fees for wealthier clients (with assets over $1 million) can run 2% of the account’s value.
One thing you have to watch is that when fees are based off of your account balance, the amount you pay each year will grow as your account grows.
For a $1 million account, that can be $20,000 (2%) annually in fees! You’d better be getting first-class advice and service for that money. Over a 30-year period, that could add up to as much as $600,000 in fees!
Most advisors deduct fees automatically from your account without you writing a check, so it’s easy to forget how much you are paying vs. the performance you are getting.
These planners charge a fee and collect commissions on the financial products or services you buy from them.
These planners offset the commissions they earn against the flat fee they charge clients. This helps align the planner’s financial interest with the clients.
These planners work on commissions alone.
If you decide to work with a financial advisor, make sure you find someone with the following:
NAPFA, The National Association of Personal Financial Advisors is the leading professional association of fee-only financial advisors. You can locate an advisor at https://www.napfa.org/.
They also publish a series of important questions to ask prospective advisors. You can find these questions on the infographic at: http://www.napfa.org/HowtoFindAnAdvisor.asp
The Garrett Planning Network is another nationwide network of independent fee-only financial planners. You can learn more at http://garrettplanning.com/
Let’s now switch to learning more about investing coaches.
An investing coach’s job is to teach you how to build your wealth, whether you are just starting out or already have accumulated a substantial portfolio. Their job is to educate, guide, and teach you what you need to know to invest confidently, safely, and profitably.
They focus on financial education so you can make informed decisions with your money and take control of your financial future.
An investing coach doesn’t invest for you, manage your money, or have any direct interest in your investments. That is the job of a qualified financial advisor or planner.
A good coach provides the “big picture” overview of money, investing, and wealth building. This can include help with budgeting, saving, and tax-reduction strategies as well as investing strategies.
They help guide you up the investing mountain towards your investing goals. They provide a clear step-by-step roadmap that teaches you all the investing options available.
They also keep you on the path and help you avoid the costly mistakes that can send you falling down the side of the mountain.
The coaching process is really about education and building confidence so that you can reach your financial goals. Whether your goal is to save for retirement or create more income, the end result is teaching you to become independent and empowered to make your own decisions.
A personal coach helps you understand all the asset classes you can invest in, including stocks, bonds, real estate, tax liens, and gold and silver.
Most financial planners only focus on stocks and bonds, as those asset classes are easily managed and commissions collected on them, year after year.
A good coach helps get people to do what they know they must do.
They focus on the person, not the person’s money. A coach helps them to move past any “mental blocks” that are holding them back from financial abundance and get them to start out on the right path.
For example, your main money issue may be that you’re spending too much and not saving enough. You know that you need to save more, but you don’t.
A coach can help you work towards finding ways to spend less and save more so you can invest more.
Most financial advisors won’t help you in this regard; their focus is on investing the money you’ve already saved, not helping you create more money to invest.
A good coach is someone who is 100% on your side without conflicts of interest from commissions or buying or selling any specific investment product or service.
Unlike with financial advisors, there is a barrier between the education and the actual investments. Most coaches are not licensed to sell investment products, which helps remove any conflict of interest in terms of compensation, fees, or commissions.
It’s important to understand what a financial coach does not do with clients.
A financial coach cannot recommend or advise you to any specific stock or bond investment; only licensed securities salespersons can do this.
They also cannot provide specific asset allocations for your portfolio; however they can help educate you on how each asset class works towards building wealth.
A coach will also not make recommendations on choosing any personal advisor; rather they will help you understand what makes a good financial advisor so you can make an informed decision yourself.
Coaching programs are usually set up as a set number of coaching calls per month, usually 3 or 4 calls a month. The monthly fees usually range from $1,000 to $2,000. Monthly coaching programs usually include email support between calls.
Most coaching programs require at least 3-4 months for clients to learn what they need to do and take action on what they learn.
Some coaches offer group coaching at a reduced rate.
Look for someone who will do a free phone strategy session consultation to make sure there is a good fit between coach and client. This session is designed for both coach and client to get to know each other better, set goals, and create the beginnings of an action plan.
You will, by necessity, be sharing some confidential information, and you want to make sure you feel comfortable with your prospective coach.
Though in sports not all successful coaches were once players, when it comes to money, your coach needs to be a player and be in the game. They have to be financially successful, doing what they teach.
In my opinion, you should only work with someone who has walked the walk and talked the talk. Anyone can call themselves a coach; but the thing you should look for is financial results for themselves and their clients.
Here are some questions you should ask any prospective coach:
You’ve learned the differences between a financial advisor and an investing coach.
In a nutshell:
Both can play an important part in creating your overall investing plan and putting it into action toward reaching your financial goals.
No matter if you choose to work with one or the other, remember that no one cares as much about your money as you do. Make sure you get the best financial advice that you can!
I hope you use what you’ve learned in this article to put yourself on the path to reaching your financial goals.