For decades, financial advice has been defined by numbers but behavioural science has shown that our clients’ relationship with money is more complex than just how much they have.
“Enough” is deeply subjective, shaped by several factors like personal values, mindset, money history and culture to name a few. As a result, we often find people with substantial income or wealth who still feel anxious or dissatisfied with their financial lives, while others with modest means live full and joyful lives.
This raises the question: what determines a client’s money happiness and how can financial advice help clients not only grow wealthier, but also feel more secure, fulfilled and content with their financial lives?
Wellbeing: the most valued state
Before we can answer these questions, we need to understand why wellbeing is one of the most valued and universally desired states among humans. Research shows that people who experience high levels of wellbeing are more resilient, more creative and make better life decisions. They also tend to enjoy better health, stronger relationships and higher productivity. In many cases, they even earn more and build greater wealth compared to those with lower levels of wellbeing.
So, what are the essential ingredients that help us as humans experience wellbeing? Psychologists tell us that humans enjoy wellbeing when they generally feel good about life, function well and regularly experience positive emotions like hope, contentment and love. It’s when their days are filled with purpose, meaningful activities and a sense of personal growth. It is important for us to feel a sense of autonomy and control over our lives if we are to experience wellbeing.
Why is this relevant for advisors?
Our financial wellbeing has been identified as one of the most important determinants of our overall wellbeing. So, when our advice helps clients feel more in control, feel empowered to make better decisions and fund meaningful goals and experiences, we’re delivering value that goes far beyond what investment returns or insurance policies can deliver. We’re helping clients thrive – not just financially, but in life.
To expand the impact of financial advice from improving financial health to enhancing overall wellbeing we need to deepen our understanding of what financial wellbeing truly means, how we measure it and, importantly, what drives it. This understanding is key to designing financial planning strategies and interventions that genuinely support and promote financial wellbeing.
The changing meaning of money
A good starting point is to explore the role a client’s financial health plays in their financial wellbeing as this has historically been the primary focus of financial advice. This is especially relevant as most advisors work primarily with affluent or high-net-worth clients. While research consistently shows a strong link between income or level of wealth, in other words a client’s objective financial health and life satisfaction, it also reveals that this relationship weakens as income increases beyond a certain point. Once basic needs are met, the marginal benefit of money diminishes and a client’s perception of their financial circumstances takes centre stage.
For affluent and high-net-worth clients, wellbeing is shaped less by “how much” they have and more by how they feel about what they have, whether their wealth supports meaningful experiences, provides peace of mind and provides them with the freedom to enjoy life. Consequently, advisors need to shift their focus from measuring success by wealth accumulation to how they influence perceptions, behaviours and their client’s financial confidence.
The future of advice lies in broadening our value proposition.
Defining financial wellbeing
Financial wellbeing is universally defined as the perception a person has of being able to sustain their current standard of living, while at the same time feeling that they are making progress towards a desired future standard of living and having the financial freedom to enjoy life along the way. It consists of four key pillars: first, is the need to feel in control of one’s current financial affairs. This relates to being able to pay the bills at the end of the month, not being overly indebted and being organised.
The second cornerstone is to have peace of mind knowing that if life throws a curve ball at you, you have access to financial resources to finance emergencies. The third cornerstone is to be able to enjoy life – being able to spend on some wants from time to time rather than only having to pay for needs. Lastly, it is to have hope for the future, working towards life goals and feeling secure about one’s financial future.
It is also interesting to note that the meaning of financial wellbeing changes over the course of life. Young adults see financial wellbeing in terms of having freedom to finance life experiences. For people in midlife, it is more about stability – making ends meet and for older adults it is about independence and being able to support loved ones financially.
Shaping financial perception to foster wellbeing
Perception is influenced by several factors, but financial advisors can help clients experience financial wellbeing by ensuring that their financial plan assesses where the client is objectively and subjectively in each of the four cornerstones, develop strategies to improve each of the four cornerstones and regularly measure and give feedback on the progress made in each of the cornerstones. This proves a more holistic approach to financial planning and removes the focus from investment performance and returns as the only measures of financial success.
However, this requires that financial advisors enhance their discovery process to gain a better understanding of the client’s profile including their personality traits, values, goals, money attitude and beliefs. This allows the advisor to gain an understanding of the client’s perception and whether there are behavioural factors that need to be addressed in the planning process. It also helps to ensure that financial strategies recommended are not only suitable from an outcome perspective but also from a behavioural perspective.
Building financial capability for better wellbeing
Another key driver of a client’s financial wellbeing is whether clients feel confident in their own ability to make sound financial decisions. Financial capability directly influences an individual’s money attitude and behaviour. By improving a client’s financial capability, the risk that short-term impulses or poor decisions derail their financial plan can be reduced.
Advisors should therefore place more focus on the financial education of clients and should ensure that the financial plan, feedback and other touchpoints continuously empower the client with financial knowledge, understanding and skills within the context of their personal financial journey. This changes the focus of advice to empowerment which strengthens trust, enhances client engagement and ultimately leads to better financial wellbeing.
Advice that delivers transformative value
The future of advice lies in broadening our value proposition to include the subjective dimensions of financial wellbeing. Instead of measuring success only by returns, we can begin to measure it by the confidence our advice gives clients, the peace of mind they experience, the freedom they have to enjoy life and the hope financial planning provides for their desired future.
Advisors who embrace this shift will not only differentiate themselves but will also deliver the kind of value clients remember long after portfolio returns are forgotten. This is advice that empowers capability, not dependency. Advice that clients value not only for what it earns them, but for how it helps them thrive.
