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Your Clients' Financial Well-Being Is More Than Their Finances: Morningstar

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A person’s financial well-being is about more than just finances, according to a new research paper from Morningstar behavioral economist Sarah Newcomb.

The paper – When More Is Less: Rethinking Financial Health – draws on results of a 2016 survey of U.S. adults to create a model of financial health using demographic, psychographic, emotional and behavioral variables.

Traditional definitions of financial wellness focus on the economic aspects of a person’s life. A finance-only definition of well-being assumes that emotional well-being will automatically follow economic stability, according to Newcomb.

However, Morningstar’s research shows otherwise.

“There are the clients who fear not having enough, despite every indication to the contrary,” Newcomb writes. “There are those who are so fearful of making a wrong choice that they refuse to make any, leaving their wealth to slowly erode in cash accounts. Other clients, in contrast, spend too freely, choosing blissful ignorance about the damage done to their bottom line.”

Ignoring the emotional aspects of clients’ financial lives does them a great disservice, according to Newcomb.

Based on these findings, Morningstar developed a simple model of financial health that incorporates both the economic and the emotional aspects of well-being. According to this model, a person who isn’t both economically sound and emotionally well is not financially healthy.

Morningstar shows that financial behavior and emotional well-being are affected by two simple mental factors that advisors can target to better help their clients achieve financial health. According to Newcomb, advisors can use this information to assess how healthy their clients are by adding two simple ideas to onboarding interviews and check-in conversations.

The first factor looks at economic stability and how “time is money.” People who think further into the future tend to save more frequently and build larger savings balances in retirement and nonretirement accounts, according to the paper.

Compared with those with time horizons of less than a year, people with full financial life plans had, on average, 20 times more money saved. Even looking ahead by just a few years increased savings fourfold.

This effect was significant even when controlling for income, age, education and gender. (“In other words, life circumstances matter some, but perspective matters more,” Newcomb says.)

Newcomb says that advisors are in an excellent position to help clients improve their mental time horizon.

“Onboarding interviews offer an ideal opportunity to determine a client’s current mental time horizon, and periodic check-ins provide the platform for moving their vision outward over time,” she writes.

The second factor looks at emotional well-being and how “power is happiness.”

According to the paper, people who feel empowered in their financial lives experienced more joy, peace, satisfaction and pride in their financial lives. This effect also remained significant when controlling for age, income, education and gender.

People who feel empowered had mostly positive experiences with respect to their money, even in the lowest income ranges, according to the paper. Those who felt disempowered were, overall, less happy than their peers, and didn’t reach the positive range until their annual earnings were well above $100,000.

“The lesson here is fascinating: A sense of personal power — not money itself — may be the key to emotional well-being in our financial lives,” Newcomb writes.

Emotional and attitudinal factors present an opportunity for advisors to coach their clients in a “very meaningful way,” according to Newcomb.

“By identifying specific patterns of thought that may sabotage a client’s overall financial health, an advisor can help guide clients into making better financial decisions and increase their satisfaction and peace of mind,” she writes.

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