Even wealthy clients struggle with financial literacy

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Advisors spend hours educating clients about financial wellness, but it’s still not enough. Many are uninsured or underinsured, are living paycheck to paycheck and struggle with basic financial literacy.

These are just some of the findings in Financial Planning’s inaugural Financial Wellness Report. In this comprehensive survey, advisors share their most pressing concerns about their clients’ financial health. They also divulge their best solutions for helping clients succeed.

Age helps … but not entirely
Although younger, less-affluent clients are the most likely to benefit from a financial plan — and a budget — some older and high-net-worth clients need budgeting help as well. “Sometimes clients do not accept my advice,” laments one financial planner. Fewer than 10% of clients over 65 are living paycheck to paycheck, according to the advisors surveyed. By contrast, 50% of younger clients between the ages of 25 to 34 were living that way.

Still, while age tends to bring financial stability, financial risk cuts a swath across all income levels. Surprisingly, 24% of advisors say at least 50% of their high-net-worth clients, those with more than $1 million in investable assets, are living paycheck to paycheck. A financial emergency would spell catastrophe for 40% of clients, according to the survey. Another 26% of clients have emergency savings, but not enough to weather a real money crisis. Of those clients who are not prepared, almost half (48%) have less than $250,000 in investible assets.

One financial advisor makes a straightforward plea to clients, telling them, “Make sure you are able to pay for insurance.”

"New clients are often a breath away from financial ruin," one planner says.

Clients who are working with an advisor for the first time can present particular challenges. “New clients are often a breath away from financial ruin,” says one planner. “The whole topic is very arcane to them. I try to guide them toward financial stability and economic freedom in their retirement years.”

More prepared for education expenses than retirement
Higher education costs loom large for clients, many of whom prioritize saving for a child’s education, perhaps at the expense of putting away enough money for their retirement. Advisors surveyed say 28% of clients who are saving for college are putting aside more than enough to meet their savings goals. But just 26% of clients have saved more than enough for retirement.

Overall, about 39% of clients have not saved enough for retirement. As a result, about one-quarter must keep working. That should worry clients — and it concerns financial advisors. Says one, “I am worried about my clients' financial wellness because my clients are like family to me.”

Why aren't more clients saving? It stems from reasons such as helping a child with major expenses, including college (27%); not saving enough (25%); or helping a parent (24%). In response, 22% of clients have taken on part-time jobs in retirement. Although 529 savings plans have grown in popularity, their use varies by assets. The least-affluent clients are more likely (57%) to use these savings vehicles than mass-affluent (49%) and high-net-worth clients (39%).

Boosting non-retirement savings
Even when clients’ finances improve, few advisors advocate splurging on big homes or sports cars. Instead, 57% of advisors suggest increasing non-retirement savings and 66% recommend increasing retirement savings. Most also tell clients to hold the line on non-discretionary spending, with 71% recommending clients keep their non-discretionary spending level, or even decrease it.

It may not be what some clients want to hear, but advisors are steadfast in putting financial health first. “I advise clients as honestly as I can, because their financial lives depend on a solid plan,” one planner says.
What if a client’s income decreases? In that case, advisors want clients to remain steady on retirement savings. Only 14% of advisors recommend their clients reduce saving. Regardless of a client‘s age or wealth, advisors take very similar approaches to saving versus spending. Less-affluent clients should keep discretionary spending to 18% of their total budget, planners say, while high-net-worth clients should keep it at 20%.

Advisors recommend the least-affluent clients allocate 30% of their budget toward retirement savings, while mass-affluent and high-net-worth clients should save 29%. Younger clients lag behind in saving for retirement. Those most likely to use retirement accounts are ages 50 to 64 (85%). The least likely are clients ages 25 to 34. Clients who are 50 to 64 are also more likely to invest in a health savings account (74%) than younger clients are (60%).

Commit to educating clients
“Financial illiteracy is a plague that has infected the majority of Americans,” one planner says. Again, younger and less-affluent clients struggle most in this area. Advisors report that, of clients who are not financially literate, 22% are between 25 and 34. That’s compared with 16% who are 50 to 64 years old, and 10% who are 65-plus. Of clients lacking such literacy, 44% are less affluent, compared with 17% who are high net worth.

When it comes to improving their clients’ financial literacy, advisors favor in-person (86%) and phone (60%) meetings. The next most widely used methods are print informational literature (47%), followed by web seminars (41%).

“To help my clients who are not very financially literate navigate today’s complex financial environment, I constantly emphasize good financial habits that they should practice, and how to manage money properly,” one advisor says.

However, despite the challenges, it’s worth it, planners say. “It is an inspiring and fulfilling thing to help people achieve financial security and reach their goals,” one planner says.

The Financial Wellness Report is created by the editors of Financial Planning and is based on a survey of about 300 advisors in April and May 2019. Clients were segmented by age and investable assets: less affluent (less than $250,000), mass affluent ($250,000 to $999,999), HNW ($1 million to $9.9 million) and UHNW ($10 million and more).

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