Middle-Income Americans Desperately Need Financial Advice: Financial Finesse

Cynthia Meyer, a financial planner at Financial Finesse, tells ThinkAdvisor about profitable ways to serve investors who don't qualify as high-net-worth

(Photo: Thinkstock) (Photo: Thinkstock)

Heated dissention over tax cuts and health care for Americans are center-stage. But backstage, a relevant, worrisome and largely overlooked issue lingers: The average Financial Wellness Score for U.S. employees is a dismayingly low 5.4 on a scale of 1 to 10. Indeed, only about 6% of the overall workforce can be considered financially secure, defined as scoring at least 9 out of 10.

So says Cynthia Meyer, resident financial planner at Financial Finesse, a leading financial education and research company, in an interview with ThinkAdvisor. Driven by money behaviors, financial wellness means maintaining a lifestyle at or below one’s financial needs, keeping an emergency fund and carrying a reasonable level of debt, among other components.

(Related: Public Sector Workers Need More Financial Security: Survey)

In its study, “Optimizing Financial Wellness for a Diverse Workforce,” released in May, Financial Finesse found that only one in five employees of all ethnicities, including earners of $200,000 or above, had emergency savings.

Focusing on disparities among ethnic groups, the study showed that 31% of African-American employees and 25% of Hispanic/Latinos are “struggling” or “suffering” financially. Further, unless educated and coached, these groups are likely to maintain behaviors that keep them in a “cycle of low financial wellness.”

With the U.S. workforce becoming more diverse, these matters are increasingly important to employers. For example, employees who are struggling or suffering financially are costly to companies because of absenteeism, tax issues, wage garnishment and delayed retirement. A 2016 Financial Finesse study of all ethnicities showed that, on average, the annual cost to employers totals $198 per suffering employee and $94 per struggling employee.

Consequently, companies are stepping up: 92% of them plan this year to initiate programs to help employees improve their financial wellness, according to a study by Aon Hewitt.

(Related: 3 Reasons Financial Wellness Might Sting)

The recent Financial Finesse diversity survey found that only 18% of black and 20% of Hispanic employees think they’re on track for retirement, though some individuals in this population aren’t aware they’re in fact moving ahead to reach their goal.

In our interview, Meyer, a former Merrill Lynch advisor who holds the CFA, CFP and ChFc designations, discussed profitable ways in which advisors can serve less-than-high net worth investors. (Financial Finesse planners give up their brokerage licenses.)

Based in El Segundo, California, the company aims to build a financially healthy society by providing companies with coaches that help educate employees about financial options and how to become better savers and investors, among other services. For those with investment accounts, the firm offers second opinions on their FAs’ proposed strategies.

ThinkAdvisor spoke with Meyer by phone one recent afternoon shortly before she hopped on a Financial Finesse call-in help line dubbed “Ask a Financial Planner a Question.” Here are highlights of our conversation:

THINKADVISOR: Why is your recent study important to financial advisors?

CYNTHIA MEYER: The financial services industry is becoming much more client-focused. If you’re an advisor competing against technology — robo-advisors or online discount platforms, for example — then your role becomes much more. It’s not just delivering alpha; it’s being a facilitator of the client’s financial security. That’s more than just investing.

But in relation to their own businesses, why should it matter to an advisor that African-Americans and Hispanic employees are struggling or suffering financially?

If they have a diverse client population, it applies to their own personal practices. Even higher income earners will have gaps in their financial wellness. One in five is still going to have issues of living beyond their means. I’m sure there are plenty of advisors who may have the millionaire client who’s spending too much every month.

Many FAs are competing for $1 million households. But there are obviously many other folks who don’t fit that demographic. How can they profitably serve people who have a lower level of investable assets?

Align with unbiased financial wellness partners. Offer holistic financial planning. Leverage technology but add human advice. Offer multigenerational planning. Form teams.

Just what does financial wellness entail?

A state of financial well-being that includes maintaining a manageable level of financial stress, a lifestyle that’s at or below financial needs, a strong financial foundation including emergency savings and basic insurance, a will or estate plan and low or not-high credit-card debt or other debt.

How do U.S. employees of all ethnicities score on financial wellness?

It’s so depressing. Our 2016 data show that only 6% of employees were in the “Secure” category. Our “Diverse Workforce” survey found that the overall average was 5.4. There’s a lot of room for improvement.

Why are the levels so low?

Financial wellness is about people’s behavior. Small daily activities lead to strong, robust financial wellness — being relatively restrained in spending, making sure you’ve automated your savings so that you have a set amount going to important goals. Risk management is a big component. So is making sure you put some money away for high-deductible health care plans.

Did your recent study include high earning African-American and Hispanic employees in the survey too?

Yes. We looked at employees in each demographic group. We found that only one in four African-Americans had an emergency fund to cover unexpected expenses. Even with employees who have very high incomes — $200,000 and above [of all ethnicities] — we still find that almost one in five have no emergency fund. They don’t have a cash cushion. So a big negative financial event can send the whole cart tipping over.

The study pointed out that most in the minority groups of African-American and Hispanic have no investment account. Why is that?

Folks in the struggling and suffering categories need to build an emergency fund first before they’re going to have that nice brokerage-account nest egg to invest. We found that people in those two groups were more likely to pull out loans for hardship withdrawals from their 401(k) plans or take out cash when they move from one job to another.

Do they distrust financial advisors? Is that also a reason for not having an investment account?

In general, there’s research showing that trust in financial services plummeted during the [financial crisis], and the industry as a whole has a way to go to achieve the previous level of trust.

But isn’t lower income among blacks and Latinos a major part of why people in these groups are struggling or suffering financially?

Certainly income and age are factors. We found that both groups of employees consistently lagged across the income spectrum — that is, they started off in the lower income brackets and finished lower in the highest income brackets. So, even for those employees who had an income of $200,000 and above, there’s still this big divide.

Your study pointed out that companies need to adjust their financial wellness programs to take into account the changing diverse workforce. Are they doing anything?

The Fortune 1000 companies that we work with see a diverse workforce culture as a major goal and something that strengthens their economic hand. Many large companies are looking to enhance their best practices around how they market and deliver workplace financial wellness programs to help employees. They’re saying they need to add these as an employee benefit because people need a person to talk to [about their finances].

The survey also showed that blacks and Hispanics are loaded with debt. Can part of that be blamed on banks wooing people to open accounts and buy on credit? If so, they pile on more and more debt.

Certainly credit card debt is a big issue for people of any age and income level. A lot of that happens when you’re young: People get in trouble and over time, can’t dig out. Also, folks in the lower income category may be underbanked or unbanked [have no checking accounts]. They may have had some bad credit. People get in trouble with student loans; some don’t understand the implications of taking them. Right now, 11% of student loans are in one-year default. That’s really high.

How well do these groups know how to manage the money they earn?

We found a higher percentage of African-American and Hispanic employees in “the cycle of lower financial wellness,” which you can see in non-minority groups too. For instance, if your parents didn’t have resources to contribute to your college education, you paid for it through student loans. So you start off with higher loan and credit card debt, and maybe not as much knowledge of how to manage your money. Then that slides into delayed or no homeownership. It’s a kind of slippery slope.

The study found that African-American investors on average save less for retirement and tend to be less consistent when choosing investments. But a Prudential survey of 2016 shows that 52% of that ethnic group reported being well prepared to make wise financial choices. Those two findings don’t seem to jibe.

There may be a gap between perception and reality: If you think you’re well prepared but in fact you haven’t taken a risk tolerance test, which means you don’t have a target asset allocation, and you’re not rebalancing your portfolio at least once a year, maybe you’re not as well prepared as you think.

Your study said it was surprising that a large number of employees failed to prepare a basic estate plan.  Was that so surprising?

Having enough life insurance and a basic will are things that employees can often get taken care of at work through employee assistance programs. [But] many aren’t aware [they can do that].

Is it reasonable to suppose that African-Americans and Hispanic employees are low in financial wellness because they don’t have access to financial education in schools and their communities?

Yes. In New Jersey, for example, in order to graduate students in public schools are required to have only one semester of a finance-based course — and a lot of schools let them take it online. I don’t think that’s enough. Financial literacy should be incorporated into math classes and health classes. We should be teaching kids about that [throughout all their school] years.

What can be done to reduce the high level of distress and disappointment with financial services brought by the financial crisis?

Any information that advisors can offer incorporating financial wellness issues into their practice is going to help them build relationships with prospective clients and current clients.

What else can advisors learn from your study?

Try to power down the jargon. Make sure people understand and are completely maximizing the benefits at their disposal [at work]. A lot of financial power can come out of that when used correctly.

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