Financial Adviser or Financial Planner: What’s the Difference?

A financial planner explains what to look for when asking someone for help managing your money.

The financial world is full of confusing acronyms and titles, and it seems everyone touting financial advice has a myriad of bewildering designations after their name. One of the most widely used titles is financial adviser. This label is problematic because it is generic and entirely too broad.

Insurance agents, stock brokers, investment advisers, accountants, bankers, and even some attorneys often refer to themselves as financial advisers. The term is so expansive that it typically covers any area of financial assistance. Unfortunately, there is no regulatory guidance or rules for using such a title. So, when you hire a financial adviser, you should also ask about any areas of specialization. You might find that if you want to hire someone who charges a fee for financial advice, your insurance agent — who calls herself a financial adviser — will not be able to help you.

When people ask me what I do for a living, I say, “I am a financial planner.” They typically respond by saying something like, “Oh yes, my financial adviser is with XYZ Company.” This always makes me cringe a bit because I am not just a financial adviser, but I specialize in financial planning. While financial adviser is a broad category, a financial planner — specifically a Certified Financial Planner (CFP) — specializes in providing comprehensive financial planning services (Full disclosure: I am one). Granted, your financial planner may also offer financial products like insurance or investments, but the key difference is he prepares a comprehensive written financial plan.

There are primarily two reasons why hiring a financial planner is important.

1. It minimizes some conflicts of interest. 

Several years ago, a potential client told me I was the third financial adviser he had interviewed. He said the first two said they would provide retirement projections for him at little or no cost. He wondered why I charged a fee for the plan I provide. I asked him one simple question: “How do you think they will be compensated for their time and expertise?” The answer was clear. They had to sell him something in addition to the plan to make the engagement worth their while.

You expect to pay your physician for his advice, and would never go to one who only is compensated if you fill the prescription that he writes. When I deliver a custom financial plan and am paid for my time and expertise, the plan stands on its own. I do not need to sell additional products or services. If the client decides to implement the plan with me, I can certainly help. If, however, he goes elsewhere, it was a fair and profitable engagement for me; I have already been paid for my advice and the client has a working plan.

2. A comprehensive written financial plan can uncover often overlooked but critical financial issues.

Imagine going to your physician with a complaint of chest pain. After the obligatory blood pressure and pulse readings, he places his stethoscope on your chest, listens to your heart and states, “Let’s schedule you for open-heart surgery tomorrow morning.” What would you think? Obviously, you would want some additional testing before jumping to the conclusion that you need open-heart surgery. Just as recommending surgery without a comprehensive medical exam would not be wise, providing investment advice without a full fiscal exam is equally imprudent.

Tax laws are complex, the investment landscape is volatile, and changes in one part of your plan could wreak havoc on another part. You should have a plan that covers all areas of your financial life and clearly shows how each area is impacted by your decisions to implement one or more financial strategies. Just completing a two-page investment questionnaire from your financial adviser is not enough to ensure high-quality financial advice.

[Editor’s note: Knowing your credit score is a key part of understanding your financial health. You can see how you’re doing with our free credit report snapshot, which includes two free credit scores, updated every 14 days.]

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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How to Know When It’s Time To Hire a Financial Adviser

young couple worried at home in stress accounting bank payments

Hiring a financial adviser might even seem counterintuitive to someone struggling to make ends meet as it is. How can you possibly afford to hire an expert when you already feel financially strained? And how can you be sure that the cost of hiring a professional will be worth it in the long run?

Finding the right adviser for your needs can be the most difficult part of all. A May 2016 survey by financial advisory firm McAdam found that one-third of Americans don’t even know what a financial adviser does.

The good news is that financial advisers aren’t necessarily only available to the uber-wealthy. Many firms today allow their clients to choose services a la carte and pay flat fees or an hourly rate, making professional financial advice more attainable than ever.

Read on to find out what a financial adviser is and the pros and cons of hiring one for your financial needs.

What is a financial adviser and why might you need one?

A financial adviser is a blanket description for a professional who offers advice on how a person should manage his or her money. (Unlike a certified financial planner, a financial adviser does not need to be licensed to provide financial advice.) An adviser can help you establish financial goals and educate you on how to meet them. Financial advisers guide clients through a number of topics, including helping people make career choices based on how it will impact their finances, retirement planning, tax planning, and insurance needs. First and foremost, a solid financial adviser will also help you manage debt and create a budget that will help you meet your future goals.

A financial adviser can be helpful for anyone who is facing a major financial crossroad, such as getting married, having a child, starting a job, sending their child to college, or retiring.

“You don’t even need to have money set aside to invest,” says Gerri Detweiler, co-author of Invest in Your-SELF: Six Secrets to a Rich Life. “An adviser can help you find a way to start putting money aside, or provide that motivation [to save] or encourage you to start a side gig to save for future goals.”

Types of Financial Advisers

Working woman worried stressed

You’ve probably seen the titles of financial advisers, financial planners, stockbrokers, and insurance agents all used interchangeably. It’s important to know the differences between each to ensure you’re working with the right professional for your needs.

Planners: A financial planner is a kind of financial adviser who helps people set and meet their financial goals. Certified financial planners (CFPs) are licensed and regulated individuals who are required to stay up-to-date on financial planning through regular classes. They have a fiduciary responsibility to their clients, meaning they have to work in the client’s best interests. Along with investments, CFPs handle retirement, tax, insurance, and estate planning, and help clients to maintain and enhance personal cash flow.

Important note: New fiduciary rules issued by the Department of Labor will go into effect in April 2017 and will require that any adviser who provides retirement investment advice to 401(k) and IRA account holders abide by a fiduciary standard. That means they will have to put their clients’ best interests ahead of their own profits.

Stockbrokers: Stockbrokers only give advice on — you guessed it — stock investments. They can sell financial products to clients, and they do not have a fiduciary duty to them. Instead, stockbrokers operate under a “suitability standard,” which means they are only required to know enough about a client’s financial situation to recommend or sell investments that are “suitable” for that person. Stockbrokers also earn a commission for each product that they sell.

Insurance agents: Some insurance agents are also licensed to sell securities or investments, and they might call themselves financial planners. However, their investment options on offer may be limited, and they are not fiduciaries. Insurance agents either get paid by commission or through their insurance firm. Insurance agents sell different types of insurance to clients, which tends to make up part of a financial plan. They can represent one or multiple insurance agents.

How Financial Advisers Are Paid

Another thing to consider before entering into an agreement is the adviser’s pay structure.

Below are some of the different ways a financial adviser can be paid:

Fee-only: A fee-only adviser charges an hourly or flat rate for services. Fees vary by location, the experience of the adviser, and the complexity of the client’s needs. For example, Julie Ford, a fee-only financial planner based in New York City, offers several packages to her clients. Her lowest-cost package costs $450 and includes basic offerings like two 60-minute meetings to discuss financial goals, ask questions, and start a customized action plan.

For clients looking for more in-depth financial planning expertise, Ford offers an Ongoing Financial Planning package, which costs $500-$1,500 along with a monthly subscription fee of $80-$350.

Fee-only advisers have a fiduciary responsibility to their clients to act in their best interest. You should always ask an adviser how they are paid and whether they are a fiduciary upfront, Detweiler says. To find a fee-only financial planner in your area, check out NAPFA or a planning network like XY Planning Network or Garrett Planning Network.

Percentage-based: A percentage-based adviser charges a percentage of the amount of money being managed. You’ll most likely run into this fee if you are hiring a financial adviser who will help you manage your investment portfolio. This fee is charged in addition to any fees associated with the client’s underlying investments. Most investment adviser fees range from 1% to 2%.

Commission-based: A commission-based adviser earns money by buying and selling securities like stocks, bonds, and exchange traded funds (ETFs) or by selling clients insurance and annuities. Commission-based advisers might steer clients toward investments that would also benefit themselves because of how they are compensated.

Flat rate: A flat-rate adviser is a good option if you are looking for an adviser who can help you to complete a single task related to your finances, like setting up a retirement account. The adviser will help you establish a plan for that one aspect of your finances for a set amount of money that is not tied to the value of investment or insurance products that he or she may sell. Always ask an adviser for the flat rate upfront and confirm whether or not questions or follow-up meetings are included. A flat-rate adviser charges a single fee regardless of the time and amount of assets one owns.

Hybrid fee structures: Some advisers may offer a variety of services and have different payment structures. They often go by the term “fee-based” and they do sell financial products. Fee-based advisers make their money through compensation from fees paid by clients and fees or discounts from the products that they sell. They are not required to provide their clients with details on how they are paid.

Not Quite Ready to Call in a Pro?

Source: Mint.com
Source: Mint.com

You may not need a professional adviser to help you with basic financial tasks like creating a budget or paying down debt. There’s a bevy of free resources out there that can help track your daily spending, like Mint.com or Learnvest.

There are plenty of free resources online as well aimed at helping low-income people tackle debt and improve their finances.

Several renowned universities offer free money management courses. Coursera is another great source for free online courses in personal finance. Currently, the University of Florida is offering a free course on personal finance and family financial planning that begins Sept. 26. You might find free or low-cost financial planning seminars and workshops in your community.

Also, check your employer’s 401(k) plan perks. Some employees might be able to find financial counseling as a perk of a 401(k) plan.

Below are some pros and cons of hiring a financial adviser.

Pros:

  • They will hold you accountable. Once you come up with your financial plan, your adviser will make sure you stay on track.
  • They will steer you away from making rash decisions with your finances and help you properly diversify your investments.
  • They are there to protect you when the worst happens. They’ll make sure you’re saving enough for an emergency fund and that you have set up important documents like a will, a power of attorney, and other estate planning needs.

Cons:

  • There’s a potential for a conflict of interest on your financial adviser’s part, depending on their fiduciary status and fee structure. A simple way to avoid this is to ask if your adviser is held to a fiduciary standard and know upfront how they are paid.
  • Hiring a financial adviser is expensive and usually costs upward of $1,000, according to AdvisoryHQ, a news media organization for the investment and financial adviser industries. Consider the cost versus the benefit of hiring a professional to manage your money for you.

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What’s the Best Way to Pay My Financial Adviser?

financial_adviser

Q. I’m going to work with a financial planner and I have two ways I can pay the 1% management fee. Either I can pay cash (then it’s deductible) or it can be taken from my retirement accounts (then it’s not, but it’s not a cash flow issue). What are the pros and cons?
— Unsure

A. There are definitely pros and cons in terms of what accounts you use to pay your financial planner, but there are other things to consider before making that decision.

There are many types of payment models for financial services professionals, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

He said some get paid commissions and fees based on products they sell to you, while others charge a percentage of the assets they manage, while others may even charge hourly or on a retainer basis for investment management and/or financial planning services.

It depends on the financial services professional, the organization they work for, and of course, the preferences of the client, Rossi said.

He said one of the most common ways for a fee-only or fee-based planner to assess fees is based on assets under management (AUM).

“Most investors and financial professionals feel that this model aligns the motivations of both parties because it’s win-win if the value of the portfolio increases,” Rossi said. “That said, it’s not without its cons.”

Rossi said dissenters will point to situations when a financial professional recommends an investor transfer assets from a 401k into an IRA so that the financial professional could include the assets in his or her AUM.

No compensation model completely eliminates conflicts or issues, Rossi said.

“The best way to pay your financial professional is via a model that aligns with your specific situation and needs,” Rossi said. “It pays to ask a lot of questions about fee structures before signing on the dotted line.”

If you’re not sure what to ask, the National Association of Personal Financial Advisors (NAPFA) has a list of tips and questions for consumers to ask when interviewing financial planners.

When paying via an AUM model, some things are not as clean cut as they may seem.

If you pay the fee out of a taxable account, Rossi said, it’s generally deductible to the extent the investment-related expenses — along with your other miscellaneous itemized deductions — exceed 2% of your adjusted gross income (AGI).

“The caveat is that the portion of the expense that is deductible needs to be tied to investment management and not financial planning,” he said. “Sometimes it’s not clear where financial planning services end and investment management work begins, which is why a 1% AUM ‘bundled’ fee can cause some questions if you were to get audited after taking the deduction.”

Some people prefer to pay the fees via a retirement account because taking it out of the retirement account (assuming it’s pre-tax) can reduce Required Minimum Distributions (RMDs) in the future, Rossi said.

He said others prefer to pay fees from a pre-tax account such as an IRA because that money has not been taxed and when it is paid to the financial adviser, it’s one of the few times earned income is never taxed.

“The major caveat with paying fees from an IRA is that the fees should be for investment management services on the IRA,” Rossi said. “When an IRA’s assets are used for other non-IRA expenses, it is deemed to be a distribution from the account, and in extreme situations could cause the IRA to lose its tax-qualified status.”

Most financial planners can set up AUM billing per account, so a blended approach may work best if you want to realize some of the benefits of paying from an IRA, Rossi said.

[Editor’s Note: Remember, it’s good for your overall financial health to keep on top of your credit, because good credit can help you save money over time on financing — whether it’s a mortgage, car loan or a line of credit. You can check your credit reports for free every year through AnnualCreditReport.com and monitor your credit scores for free on Credit.com.]

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What’s a Money Coach & Should I Have One?

what-is-a-money-coach

When Joni McClain and Tammy Lorraine got engaged in January 2015, money, wedding costs and potential debt, were not things they were thinking about, much less the services of a money coach. They were in love and, like most couples, that took up a huge chunk of their time and brains. The giddy pair, from Austin, Texas, decided on a wedding date about 18 months away so they’d have plenty of time to plan.

But then things happened and money – not just the costs of getting married – became top of mind.

“The possibility of debt, became a real factor when Joni was laid off in July of 2015 and was out of the workforce until January of 2016,” Lorraine said.

“All my spare income that was coming in as a photographer now had to be directed toward living expenses, so it was a wash,” McClain said. “Then Sam [the couple’s dog] got very veterinary-emergency-hospital-sick-in-the-middle-of the-night sick. Making sure he was going to be all right cost us half of what we’d saved for the wedding.”

While the couple has been fortunate to have friends and family contribute their time, talent, money and even the venue for their wedding and reception (thus avoiding a lot more debt than they thought they’d have to take on for the wedding) they realized they might need to look at present and possibly future money stresses. They wanted to get their marriage off on the right financial footing and eventually decided to hire a money coach.

They chose a friend from their church whom they describe as strong and powerful. (Their money coach was unavailable to be interviewed for this article).

“For us, it’s more than just experience or knowledge that a coach will provide,” Lorraine said. “There’s got to be a personal, intuitive, and for us, spiritual element our coach had to have. It’s important to us to work with someone who shares our belief system about what money is and what it represents to us, and our coach is a great match for that.”

The couple’s approach to choosing their coach sounds like it was just right, according to Karen McCall, a financial recovery counselor and founder of the Financial Recovery Institute, which specializes in training certified money coaches.

“Hooray!” McCall said. “What they’re looking for is somebody who’s speaking to them in terms of their values and can tune in to them with the numbers but also more on that emotional, spiritual basis. If they both feel they’ve found someone that is going to be able to listen to both of them and work in that way, they’ve done themselves a good service.”

It turns out, getting down to those emotions that surround money for a lot of people is what really differentiates money coaching from other forms of financial guidance.

Is a Money Coach Right For You?

Money coaches aren’t for everyone. For example, they’re not necessarily a good choice for people having money issues because of one-off financial occurrences, according to Mikelann Valterra, a certified money coach in Seattle, Wash. So, if you got into debt because of medical bills or other extenuating circumstances, you may just need a lawyer, accountant or other financial professional to help you resolve the situation, she said.

“I think the perception that’s hopefully changing is that people do what they do around money solely because of lack of skills,” Valterra said. “But if that were true, everyone would go out and read a book on how to handle money better and then no one would have any issues around money. The reality is, money is a very, very emotional topic because it hits on survival issues and self-esteem issues – people are so afraid that if they really look at their money situation they’re going to have to make huge changes in their life.”

So how can the average person tell if they need a money coach?

“The issue isn’t debt, because people get out of debt all the bloody time. Money coaching looks at patterns,” Valterra said. “So, if you have refinanced your house three times, there’s a pattern going on. If you have paid off your credit card debt, but three years later you’ve racked it back up, a money coach would be perfect. If you just got a raise, but you still have nothing in savings, if you’re tired of being stressed around money, tired of feeling guilty about spending…feeling out of control, a money coach is perfect.”

Valterra, who works primarily with executive women around the Seattle area, said coaching addresses more than just money management.

“I deal with both the earning side and the spending side of the equation,” Valterra said. “Are people underselling themselves and are they making enough money and that’s very complex. Part of it’s skills, part of it’s emotional mindset and what we feel like we deserve to have and why we undersell ourselves.”

Amanda Clayman, a financial therapist based in New York City, suggested other good times to consider a money coach are situations where you have goals around money that you haven’t been able to achieve, changes that you haven’t been able to maintain, or you just feel stuck and unhappy.

“One of the benefits that a coach can provide is they give you some feedback about appropriate goal setting,” she said.

Finding the Right Money Coach

It’s important to speak with a few coaches to make sure you feel a connection, Clayman said. “You want to be thinking ‘How engaged do I feel with this person, and do I feel like this person really understands me?…or do I feel like this person is just trying to sell me a package or results, but I don’t really feel heard in this exchange.’”

When beginning your search for a money coach, Clayman advised:

  • Know what your goals and objectives are
  • Know the kind of working relationship you want (i.e. Are group sessions OK or would you prefer one-on-one sessions?)

It’s also good to keep in mind that money coaches are not regulated. They’re not required to have any kind of specific education or licensure, so do your homework and watch for red flags. You want to make sure you find a reputable person to help you. While money coaches aren’t regulated, there are many groups throughout the country that train money coaches and issue certifications.

“Anyone can call themselves a coach,” Clayman said. “So you might want to ask a coach about their training, look at their testimonials or ask if there are other people they’ve worked with that you could talk to about their work.”

Basically, if you find anything unsettling about a money coach, that’s a strong indicator you should look elsewhere, Clayman said.

“Anything that sounds too good to be true probably is,” Valterra said.

Also watch out for coaches for whom you can’t find any referrals, she said, and take a close look at their qualifications.

“Education and training is important, and if they’ve helped people get the results they wanted, that’s huge,” she said. “I’d recommend people look for someone who has done training as a money coach or training as a financial counselor.”

And, as Clayman said, finding a coach who feels like a good fit is key.

“It’s such personal, intimate work, so you want someone who you really like and trust, who you really like the way they communicate,” Valterra said. “It’s pretty all-encompassing, looking at long-term, deep change in terms of thinking and behaviors and feelings around money.”

How Much Should I Pay? 

Costs for a money coach vary from region to region and from coach to coach based upon their expertise, level of education and experience, but the typical range is from $50-$250 per hour, which could be too much for some people looking for help with their money habits.

“A common question is ‘I have money problems, how can I afford a money coach?’” Valterra said. “And one answer is that people tend to save more money very quickly in working with a money coach than they’re actually spending on the money coach. Even though that is often true, I’ve still had many cases where I’ve referred someone that my services would be too expensive and might harm them, either to a new coach who’s charging less or sometimes their situation is just not appropriate for a money coach, they just need a quick fix.”

There’s also the option of working with a money coach who lives in another region and may charge less — if you’re comfortable with email, video chats and other electronic means of communicating.

Finding a student money coach who is working on their certification is also an option.

“A very cool thing that very few people know about is that new money coaches do have to work with what we call practice or supervised clients for a reduced fee,” Valterra said. “That’s definitely a win-win for everyone.”

According to McCall, coaches in training can cost between $25 and $50 per hour. She personally supervises the coaching being done by trainees under her guidance. Before she lets students interact with clients for the first time, McCall ensures they are really well grounded in the process, that they are empathetic and understanding, and that she feels clients will be comfortable with them.

How Long Should You Work With a Money Coach?

How long you might need to work with a money coach depends on your specific situation and needs, but Valterra, for example, has clients she’s worked with for many years.

A relationship that can start off with regular sessions can, of course, end once a client achieves his or her goals. Or it can become a lasting relationship that turns into to quarterly or even annual “tune-ups.”

“I keep my clients for years and years and years,” Valterra said. “I’m like the family doctor; they just don’t see me as often as they used to.”

For McClain and Lorraine, the answer to how long they would work with their coach was simple. Kind of.

“Until I can resist buying new patio furniture for our new house?” McClain said, sheepishly.

“Until I embody the principles my coach embodies as well, or I’m out of debt,” Lorraine said

“Yeah, that,” McClain agreed.

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How to Do a Background Check on Your Financial Adviser

Deciding to hire someone to help manage your money requires a lot of trust, and not all people in the industry deserve yours.

About 7% of financial advisers have been disciplined for misconduct or fraud, though that rate is much higher at some firms, according to a working paper from the University of Chicago. Of those who have been disciplined, 38% are repeat offenders.

The Financial Industry Regulatory Authority (FINRA) requires people registered to sell securities or give investment advice to “disclose customer complaints and arbitrations, regulatory actions, employment terminations, bankruptcy filings and criminal or judicial proceedings.”

There are 23 categories of disclosures, and while disclosures don’t necessarily indicate misconduct, they’re good to know about if you’re considering giving that person significant control over your finances. Of those 23, the University of Chicago researchers focused on six that indicate misconduct, including customer disputes that end in favor of the customer, regulatory action and employment separation after an allegation.

The paper, “The Market for Financial Adviser Misconduct,” evaluated data from BrokerCheck, a public tool managed by FINRA, which allows people to see disclosure history for an individual adviser or a firm.

You can also see how long the person has been in the industry and previous firms they have been registered with. It’s a straightforward search tool, allowing you to look up advisers by name, Central Registration Depository (CRD) number, firm or location. Say you’re looking for an adviser within 5 miles of your ZIP code: You’ll likely get a long list people you could potentially work with, but going through the records could help you identify someone you may not want to hire.

Research is crucial whenever you’re making a significant financial decision, whether that’s applying for a credit card, saving for retirement or hiring an investment adviser. To minimize the chances you run into problems in the future, take your time getting as much information as possible so you feel confident whenever you make your decision.

You can monitor your financial goals (like building good credit) for free on Credit.com.

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