Financial advisors need to dig deeper and get explicit numbers on a client’s financial health if clients are to cut down on spending and put more away into savings, a webinar has been told.
Stephanie Holmes-Winton, CEO and founder of Halifax-based CacheFlo, said many advisors are too dependent on the U.S.-based Financial Health Network, which produces surveys on implementing solutions to improve people’s financial health.
But Holmes-Winton said while the the U.S. information looks at spending, borrowing, saving and planning, it’s more a survey style that measures a person’s confidence, rather than fashioned precisely for an individual client.
Instead, she said it’s more important to have an objective tool to help people know how much they can spend, by providing information on things like the number of bank accounts they need to open, the required cash flow to fund goals, debt structure recommendations and how impactful the plan is on the client through a cash-flow plan.
“There’s a lot of work to do in measuring financial health but there’s a lot of opportunity to support our clients’ financial health,” said Holmes-Winton. It’s easy for clients to slip back into old habits, so they need to separate high-risk and low-risk expenses, look at savings and spending habits as well as assets, debts and incomes. In addition, to measure financial health accurately, clients should ideally have a credit score, in addition to their attitudes and demographic data.
Changing financial behaviour
She said countless surveys and studies have shown that there’s very little change in financial behaviour even if financial advisors try to improve a client’s financial health. “Changing financial behaviour requires linking efforts to literacy or education and that’s very difficult to do if all you have is information. You could teach a client 24 hours of financial education and if they didn’t use it within 18 months they would lose all of it.”
What people really need are set patterns and formulas – the way students are taught in school – if advisors hope to teach their clients financial literacy that works, she said.
CacheFlo examined a group of households and compared their financial profile in its software against the scoring done by the Financial Health Network in the States.
The result was that there were clients who were in debt $900-$1,000 a month who rated themselves as excellent in saving and spending management. Others had credit card debt equal to as much as their entire annual income, only to rate themselves as excellent in borrowing. On the other side, they saw people who had $600,000-$1 million in assets who rated themselves as poor in planning.
That’s when CacheFlo added its own objective financial measurements. “You need to have a way for clients to act on the financial advice you provide otherwise there’s a good chance it won’t go anywhere.” CacheFlo released a financial capability app last year that Holmes-Winton said can help clients free up $1,000 - $2,000 a month.
