The worst of the financial crisis may be a thing of the past but its after effects are still being felt by many families across America, families for whom issues like struggling to pay off their debts and not having enough savings were not a problem in the past.
For Michael Barr, a University of Michigan Law School professor who previously served as U.S. Assistant Treasury Secretary for Financial Institutions in the Obama Administration, that means it’s almost imperative for financial advisors to become more attuned to the problems of lower and middle-income America.
“In the wake of the financial crisis, many are facing the challenge of stabilizing their income and many middle class families are finding it difficult to balance their monthly expenses,” Barr says. “After the financial crisis, the problem of income and expense volatility has increased, savings cushions are narrower and many families who were financially secure before are now living paycheck to paycheck.”
This stress can lead people to make the wrong kinds of financial decisions that can have grave repercussions for their future. Low-income households have always had to contend with a lack of cash, Barr says, and have always had to “juggle” their debts, paying the minimum amount required to avoid the bill collectors and to keep their households afloat. But now, as more Americans find themselves in a bind, “there’s a risk that more people are going to make the kinds of mistakes that would put them in dire financial straits,” Barr says.
That includes taking on expensive loans to pay off other debts, and getting into a “debt trap” from which it’s nearly impossible to escape.
“There is an urgent need for advisors to know about the problems that so many Americans are facing today and many moderate income families would benefit from having a trusted advisor who could help them with very basic financial planning, budgeting and savings techniques,” Barr says. “Investment advisors can do a lot to help moderate income families develop the financial wherewithal they need to have greater financial stability.”
That’s particularly true, in Barr’s opinion, because the financial services industry is still heavily skewed in favor of those in higher income brackets, and many existing consumer financial products and services do not take into account the conditions of moderate and low-income households.
Some progress has been made since the financial crisis – “we have the new Consumer Financial Protection Bureau that’s focused on looking out for interests of American families and setting up clear rules of the road that makes it easier for families to interact with the financial services industry,” he says.
Since the crisis, there is also an effort by the financial services industry to create more affordable investment products and services. However, there’s still a need to improve their range and accessibility, Barr says, as well as a need to expand the range of cheaper, longer-term credit products.
Advisors can also help low- and middle-income Americans counter some of the behavioral tendencies that result from financial duress. These include the problem of decisional conflict, Barr says, which is when people are faced with such a range of competing options that they don’t know which option to choose. Another problem is myopia, people focusing on the short term to such an extent that it impairs their financial health in the long term, and finally, inertia, or the tendency to do nothing at all.
Barr was the recipient of a grant from the Washington Center for Equitable Growth to identify the behavioral barriers among low and moderate-income households to reducing debt. He’s hoping his work will help the financial services industry become more sensitive to human behavior, which would help improve the financial stability of low- and moderate-income families while benefiting the entire nation.