How coronavirus may change clients' financial wellness

April 28, 2020 2:39 PM

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Despite the massive economic disruption that has accompanied the response to the coronavirus pandemic, clients aren't quite pressing the panic button. If anything, the outbreak could encourage more retirement savers to think seriously about their long-term financial well-being.

Advisors polled in Financial Planning’s most recent Financial Wellness Report indicated that they are placing a premium on financial education and literacy these days, and that the fallout from the COVID-19 pandemic has helped bring some of those issues into focus.

"I think given the recent outbreak of COVID, clients are a lot more concerned about their savings and the welfare of their families," one advisor says. "The economic uncertainty and rates of unemployment have many people worried."

Here are some of the report's key findings:

It can be an uphill battle. The more than 230 advisors surveyed for the Financial Wellness Report judge that just under 30% of their clients are not financially literate, which can weigh significantly on how advisors provide financial advice and offer education.

"With clients who are financially illiterate I have to tell more stories, allegories and give more easily intelligible explanations of things," one advisor says, observing that it can be difficult to reach a satisfactory "trust level" with those less savvy investors.

"For those with more literacy, the trust level is higher and they are capable of understanding some of the complexities associated with tax strategies, principles of asset allocation and diversification and strategic investment decision-making," the advisor added.

Advisors report that clients have at least a basic understanding of common tax strategies — such as minimizing liability and retirement plan contributions — though that baseline knowledge does not necessarily translate into general financial wellness.

For instance, while advisors say just 8% of their clients were either "not at all" or "not very" knowledgeable about retirement contributions as a tax strategy, they agreed that far more clients are not well-positioned for retirement.

Asked about their clients' overall preparedness for retirement, just short of a third of respondents say their clients are saving enough, and that nearly equal portions are saving enough or saving more than enough.

Of those, the largest single block of investors facing a retirement shortfall were the mass affluent investors — those with a net worth between $250,000 and $999,999 — though significant portions of clients in the surrounding net-worth brackets could also have trouble funding their retirement, according to the survey.

Advisors reported nearly even splits among their clients' respective preparedness in savings for emergency expenses and education, however they identified a major shortfall in savings for health expenses. Advisors reported that just over half of their clients either have no savings for health costs or not enough.

One advisor, who described most of their clients as "pretty well prepared in terms of financial wellness," says that the challenge for the others is a matter of education. "A good example would be what is happening now with all the headlines about the coronavirus," the advisor says. "There is a lot of volatility in the market but it is probably a short-term event and they need to look at where they should be in five to 10 years."

The survey found anecdotal signs that the economic anxiety brought on by the coronavirus is having some positive impact. For instance, one advisor reports, "The virus is finally getting certain clients to live within their means and save more."

And yet, taken together, advisors report that a substantial minority — 40% — of clients aren't putting any of their household income toward investments or savings. "People need to understand that even in financial distress they can still save $5.00 a paycheck so that they are investing something," one advisor says.

Another advisor points to a what could be described as a confidence paradox among investors, observing that "it seems quite infrequent that client's opinion on their financial wellness matches their reality."

In aggregate, however, when advisors were asked how they view their clients' preparedness and how they imagine their clients perceive their own situation, the figures aligned almost precisely, with nearly half of all clients estimated to be "extremely" or "very" prepared to advance their financial wellness.

Many advisors report that their clients' respective levels of financial literacy do not impact the products or planning strategies that they recommend, but some point to healthier relationships with higher levels of literacy.

"It impacts it a great deal," one advisor says. "Many of my clients come in confused and frustrated. I try to explain all aspects of their finances to give them the best options to save. The more literate they are, the better they feel they are putting their money in the right places."