Financial advisors can be a great help in getting a handle on debt. They're experts at helping their clients get their finances in shape for today and the future, and managing debt is a key component of that puzzle.


A person overwhelmed with debt is like a person bleeding from an open wound; the first step is to stop the bleeding. A financial advisor can map out a client's cash flow and identify the problem areas.

The client should bring all relevant papers to the meeting to make sure the advisor gets the full picture. This includes bank statements, credit card bills, installment loan statements, pay stubs, tax returns for the past few years and anything else that may have an impact on the situation.

Some people might feel like it's intrusive and hurtful to have a person they just met criticize their spending habits and past money decisions. For the meeting to be productive, a client needs to recognize that he's there to be told some hard truths.

Once the client gets past this obstacle, the financial advisor can draft a new balanced budget that covers the essentials while not adding more debt to the pile. This typically involves trimming off any unnecessary expenses, so any excess funds are available to pay down existing debt.

Analyzing and Restructuring

There are many different types of debt. Some are relatively benign, such as mortgages (low interest rate and full tax deductibility,) while others are downright toxic, such as credit cards with high interest rates and delinquent accounts generating penalty fees on top of exorbitant interest.

After analyzing the client's debt, the financial advisor can proceed to prioritize the client's debts. The most expensive and delinquent accounts go on top, while the more modest ones go to the bottom. For example, if a client has $600 a month to pay off existing debt in the new budget, the bulk of it should go to pay off the debts causing the most additional costs. It is important to continue making minimum payments on the lower-interest accounts too, so that they don't backslide into delinquent status and start racking up penalties.

The financial advisor also looks at the options for restructuring debt into more beneficial options. For example, a homeowner with equity in his property may be able to take out a second mortgage and use that money to pay off three credit cards in one fell swoop. The lower interest rate of the second mortgage then enables the homeowner to pay off a chunk of the new principal each month instead of just keeping up with the interest payments. Be prepared to make the phone calls yourself, though; most financial advisors just tell their clients what to do, leaving the legwork to the clients.

Another benefit of getting the debt under control is that the client's credit score suffers every month he has high-balance or delinquent accounts. As the new budget takes effect, the accounts become current and the balances gradually sink. His credit score increases accordingly, which opens the door to renegotiated terms with creditors (at lower interest rates) and may even lower seemingly unrelated things, such as insurance premiums.

Planning the Future

The goal of meeting with a financial advisor isn't necessarily to help the client pay off all debt as quickly as possible. While the initial focus is debt reduction, there are often other considerations that arise once the immediate fires are put out. Each situation is different, and it's the financial advisor's job to take a holistic view in order to establish a long-term plan suited to each client's specific needs.

For example, a person with dependents may need life insurance to provide for them in case of his premature death. The financial advisor may recommend paying down a couple high-interest accounts first and foremost, but then slow down the debt payments to start a sturdy life insurance policy. The next step may be starting a retirement savings account once a few more debts are fully paid off.

The client should leave the meeting with a written plan explicitly spelling out the course of action. Ideally, the financial advisor should provide milestones to check off and red flags to watch out for, so that the client can check his progress and catch any potential missteps early.

Finding a Good Advisor

The decision to hire a financial advisor should not be done lightly. Make sure that the person is indeed certified to give financial advice. The best bet is looking for a Certified Financial Planner (CFP). A Chartered Financial Consultant (ChFC) has less education, but he is also well-versed in personal finance and insurance. Membership in the National Association of Personal Financial Advisors (NAPFA) is a good sign. It indicates he is a fee-only advisor, meaning that he doesn't receive kickbacks of any sort that could bias his advice.

Your financial advisor should also be a fiduciary. That means he is obligated to act in your best interest at every turn. A person can be a financial professional and know everything about money, but if he isn't a fiduciary, he's basically just required not to trick you. It may seem like a minor detail, but it could be the difference between being advised to pay down a 25% interest credit card or starting a brokerage account at $200 per month. The latter may technically not be an unsuitable product and thus not wrong, but a fiduciary would in all likelihood recommend paying down high-interest debt before making any new investments.

Narrow down your list of local advisors by asking around for referrals. Start by talking to friends and family who have received help tackling debt in the past. A tax preparer is certain to know several financial advisors, too.

How Advisors Are Paid

With the immediate focus being debt management, the financial advisor's pay structure should be an hourly rate. Commission-based advisors depend on selling insurance policies and the like, which creates an obvious conflict of interest. Percentage fees are less problematic than commissions that way. Advisors using this system are typically paid an annual 1% of the asset portfolio. This can make sense for a millionaire who is looking for help to manage his wealth, but it means slim pickings for the advisor helping someone who is drowning in debt.

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