There are a variety of financial professionals that are trained to offer specialized financial advice.
The following are four types of financial advisors available to the public, and details on the types of services they provide:
Financial advisors and financial planners are often used interchangeably. However, they are not the same thing.
Simply put, financial advisor is an umbrella term that refers to anyone who helps clients manage their money. Financial planner, on the other hand, refers to a specific type of financial advisor that can help individuals and companies put together a plan to meet their financial goals.
Client goals can be anything from paying off debt, saving for university, estate planning, or investing for retirement. Financial planners can give clients a big picture of how the financial market works, explain complex financial terms in simpler language, and counsel their clients on the risks of different investments. Some financial planners only give advice, and some give advice as well as sell products.
Many financial planners decide to focus on one specialization, such as taxes, estate planning, retirement, or investments. There are various designations and licences they are able to obtain as well, such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC), or Certified Investment Management Analyst (CIMA). These designations and licences require further education. Most clients prefer to hire certified financial planners (CFPs) who are also fiduciaries (this means that they are legally obligated to act in a client's best financial interests even if they make less money).
Hiring a financial planner isn’t cheap. However, hiring a financial planner can be worth the cost in certain situations, such as:
Wealth Management Advisors - If an individual earns a substantial amount of money, it makes sense to hire a financial planner to help with coordinating all the accounts, saving on taxes, investing wisely, and planning the estate.
Self-Employment - If an individual is a small business owner or a freelancer, it is hard to budget and to deal with issues such as quarterly tax filings, self-employment taxes, special deductions, employee pay and benefits, and retirement plans. A financial planner can help with sorting these issues out, and more.
Retirement - Individuals that are planning to retire need to sort out how much money they will need to live on, how to withdraw money from retirement accounts, and how to maximize Social Security benefits. Those who are younger and want to retire at a certain age with a certain amount of money available to them will need to know what to invest their money in, and how much they will need to put away each month in order to make that happen.
Family Planning - Individuals that are getting married and having children need to know how to combine finances, file taxes jointly, budget for their children's university expenses, purchase life insurance, and plan their estate.
There is often a bit of confusion between what a financial planner can do for a client vs what an investment advisor can do. Both are alike in that they can help their client with managing their assets, however the services an investment advisor provides are strictly focused on investments.
Individuals needing help making investment decisions and managing their portfolio often seek the advice of an investment advisor. An investment advisor focuses specifically on helping individuals choose the best investments, and makes investment recommendations or conducts securities analysis in return for a fee. Investment advisors advise their clients on what types of securities to invest in (like stocks or mutual funds), and on the risks associated with each type of investment and the expected rate of return. They also let their clients know what types of taxable income their investments will generate and how to make their investments as tax efficient as possible.
Most investment advisors focus on wealthy clients. According to U.S. News and World Report, in 2013, 65% of all clients with investment advisors had at least $100,000 in investable assets. With a client's authorization, investment advisors will purchase investments on their client's behalf.
Interesting note, however, that while some investment advisors are fiduciaries, who must put their clients’ interests first, there are others that abide by a much lower standard called 'suitability'. This means that they are only required to make recommendations that are 'generally' appropriate for a client's needs, so are free to recommend whichever one gets them a higher commission. A fiduciary investment advisor, on the other hand, recommends investments that are specific for a client's situation and beneficial for them. Registered investment advisors are registered with the Securities Exchange Commission (SEC) and are legally bound to act as fiduciaries.
'Fee-only' advisors make all their money directly from their client, based on the amount of assets they're managing for their client. For example, if a client has $500,000, they may pay an investment advisor one percent of that, or $5,000 annually, to manage it for them. This type of investment advisor has incentive to help their client's assets grow as much as possible, as the more money the client has, the more money the investment advisor makes. Fee-only investment advisors can charge between 0.5% and 2.5% based on the size of their client's portfolio.
'Fee-based' advisors make a portion of their money from fees and a portion from commissions on the sale of securities or stocks. These types of investment advisors charge lower fees, however they have an incentive to sell products to their clients that aren't necessarily suitable for them in order to earn the commission.
As of 2018, investment advisors or investment firms operating within the U.S. with assets totalling $100 million or more must register with the SEC. Investment advisors with lesser amounts of assets are still eligible to register but are only required to register at the state level.
While financial planners assist individuals that already know what they want from their money and just need advice on how to achieve it, money coaches teach individuals the necessary life skills needed to have a good relationship with money and also keep their clients accountable.
A money coach (or financial coach) is a cross between a financial planner and a psychologist - they look at how a client's behaviours, personal habits, and beliefs affect their ability to earn, save, and invest their money. Similar to financial planners, money coaches can help their clients look at the big financial picture, however they mainly focus on the personal aspect.
Some individuals feel like their finances may be out of their control, and want to learn how to get a handle on their spending and on their debt. A money coach can help these clients determine their financial goals, figure out where their money is being spent, uncover unhealthy spending habits, help develop a budget, teach how to monitor spending, and explore personal issues.
Money coaches don't only work with people that need help with bad money habits. A money coach can also help individuals who need advice on how to accelerate their financial life by earning more money, by starting a business, or by achieving financial independence.
Unlike many financial professionals, money coaches don’t need specific qualifications or training. There are various coaching courses one can take, but no formal licensing process. Fees for money coaches vary widely. U.S. News & World Report says a typical rate for money coaching is at least $150 per hour. Todd Tresidder of Financial Mentor charges clients either $1,750 for three coaching calls per month (usually over the first two to three months with a new client) or $1,200 for two calls per month.
Credit counselors (also known as debt counselors) help individuals that are overwhelmed with debt by setting up a budget for them, consolidating the debt, and developing a plan to pay the debt off. They often help people with financial difficulties due to poor money management, wage loss, unemployment, increased expenses, or divorce. Whether individuals simply have a few questions or would like extensive help managing their financial situation, a credit counselor can be of help since credit counselors can help clients access financial tools and resources to stay in good standing with their credit.
“Typically, credit counseling is a free resource provided by nonprofit financial education organizations. It is a review of your household budget, credit reports and consumer debt with the goal of improving your financial situation,” explains Thomas Nitzsche, communications lead at credit counseling agency Money Management International.
If need be, credit counselors can negotiate a debt management plan with a client's creditors, where the client pays a set amount per month to the credit counselor and that money is then distributed to the creditors. This is especially useful for dealing with credit card debt and medical debt. When the debt management plan is set up by a credit counselor, penalties can often be waived for previous late payments and lower interest rates can be negotiated.
In order to become a credit counselor, one must obtain training in credit counseling and repair, which can be done by becoming a certified financial planner. To become a certified financial planner, one needs a bachelor's degree, three years of experience in a financial industry, and to pass a financial planner exam.