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Financial Planning > College Planning

3 Steps to Reduce Clients’ Stress Levels: Financial Finesse’s Insights

By Liz Davidson

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Most advisors will remember March 9th 2009 as one of the scariest days they’d ever faced in their careers.  No doubt everyone was worried about how their clients would react to the market falling to its lowest point in 13 years; their portfolios just lost tens of thousands of dollars in a day and they were looking to their advisor for answers.

The fact is advisors don’t have just their client’s portfolio to manage; advisors have their client’s emotions to manage as well.  Advisors face the constant risk of clients overreacting to “danger” in the market, making poor decisions in their financial planning, or even firing their advisors because they don’t understand market swings.

Countless studies on the brain’s response to stress, and Financial Finesse’s own findings on the behavior of retirement plan participants, show that intense acute stress (which hits, for example, when there is news of an extreme market drop) temporarily damages our brain’s hippocampus and causes us to experience hampered short-term memory and affects our ability to learn and to concentrate, i.e. our brain screeches to a halt and goes into survival mode.

Possibly even more harmful to our ability to make rational decisions than acute stress is ongoing financial stress.  Our recent research on trends in employees’ financial stress revealed that even with the stock market rebound and more people out of financial hot water, 86% of employees say they have some sort of financial stress.  Where else can you find 86% of people agreeing on something?

It wasn’t just among lower-income or even middle-income Americans where we saw financial stress.  Eighty-one percent of employees in the highest income bracket indicated they had financial stress.  What is a surprise are those that say they have no financial stress actually have major flaws in their financial plans: not saving enough for retirement, having inadequate estate plans, and improperly allocating investments.  Employees’ overconfidence in their financial security showed they were in a state of complacency based on false perceptions that could put them at risk of major financial problems and significant financial stress down the road.

For advisors, this means virtually every client has or will have financial stress while working with them, thus

 

making them ticking time bombs set to go off the next time anything goes wrong in the market.  The only way advisors can truly combat the risk of losing clients to emotional impulse is to help them avoid financial stress and react to market volatility rationally. Here’s how:

Keep Clients Under the Right Amount of Stress.

Some stress is definitely a good thing.  It can keep us away from becoming too complacent, and move us toward reaching our goals.  This kind of stress, called eustress, is every advisor’s motivational tool. Here’s a strategy you can use to help your clients become proactive through the right kind of financial stress:

Step 1: Upfront at your first few meetings, identify their financial vulnerabilities and the consequences these vulnerabilities can have on their portfolio.

In our business as educators, we’ve found even using the word “vulnerability” gets people’s attention and motivates them to take a deeper look.  Our research shows most people end up taking steps to address their vulnerabilities.

Step 2: Send them e-mail reminders to follow through on key financial decisions such as setting up a will or trust, buying insurance, automatically transferring money into their IRAs or other investment accounts.

The number one request we receive from the employees we work with is to “remind” them to take actions we’ve outlined in their personalized financial wellness plans.  We only do this with their permission, but it has been a powerful motivational tool.  Most people want to be held accountable with their finances in order to make the right decisions on an ongoing basis, and reminders are an easy way to do this.  Virtually every client relationship management system allows you the ability to set up automated reminder e-mails to clients based on their situation.

Step 3: Provide ongoing information on the fundamentals of financial planning to help them maintain perspective when the market does drop or things don’t go as planned.

By consistently reminding them of the long-term financial planning fundamentals that have stood the test of time, you can reduce both their tendency to procrastinate doing the right things and their propensity to panic when their portfolio drops or they encounter an unexpected financial emergency.

 

Automate Everything You Can

Automating your clients’ finances pays off in the long run for both the advisor and the client.  By getting your

 

clients to automate investments, and even bill payments, you set them up for success and reduce the chance they will face detrimental financial stress.  You also create a situation where they dollar cost average into the market, which helps to smooth out volatility and reduce the tendency to panic, and you end up with wealthier, more satisfied clients who generate more income for themselves and for you.

Here’s a list of what you should consider automating for clients: 

  1. Bills – Make the more minor everyday decisions as easy as possible for them so they can focus on longer-term goals.
  2. Debt payments – Since debt is the number one cause of stress, setting this up automatically will help reduce their financial stress.
  3. 401k contributions – When clients are contributing to their employers’ plan every month, they are automatically dollar cost averaging.
  4. Emergency fund
  5. IRA contributions
  6. College fund 529 account
  7. Other investment account outside of retirement plan
  8. Auto-rebalance of their investments – This will create less work for you and helps clients keep on track.

When clients are in a state of eustress (as opposed to the unhealthy extremes of complacency or distress) they have the urgency needed to stay focused on meeting their long-term financial planning needs, but aren’t prone to making impulsive short-term decisions.  No advisor can be expected to fully rid their clients of stress, but they can definitely help them manage it.  Taking proactive steps to do this will benefit you and your clients tremendously.

Below are three articles written originally for our Forbes.com blog that you can use as sources for helping clients with investing decisions:

  1. 3 Key Investment Concepts Everyone Needs to Know
  2. The Investing Autopsy
  3. Stop Telling Me to Work Until 70

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