Financial Wellness Definition Must Consider Emotion

An analytical approach to financial wellness is helpful for some retirement plan participants, but “it’s often emotion that puts retirement money in motion.”

The effort of building wealth for retirement is inherently analytical, involving complex asset-allocation decisions and choices about financial products and strategies, but financial advisers must also consider the psychological and emotional components of retirement planning in order to be successful.

John Diehl, senior vice president of strategic markets for Hartford Funds, spends a lot of time digging into the minds of long-term retirement investors—how they make decisions and what motivates both good and bad actions from a retirement readiness perspective. The firm just put out a paper on the subject, finding significant financial-emotional distress exists among workers at all age levels.  

“One trend I have always found in this field is that our industry tends to approach questions of retirement planning and building wealth from a very analytical perspective,” Diehl tells PLANADVISER. “The more time you spending in this industry, the more you come to realize the analytics are necessary and useful, but they are far from the only side of retirement planning. Our research friends are constantly reminding us, it’s the emotion that puts money in motion, not analytics.”

Diehl urges advisers to consider their own experiences of sitting down, one-on-one, with clients engaged in the retirement planning process. “Nine times out of 10, it’s not the intricacies of portfolio allocations or share classes that they want to discuss,” he says. “They want to talk about how hard it has been to take care of their aging parents while also paying for their kids’ college and their own retirement. They want to talk about how concerned they are about having mortgage debt heading into retirement.”

This is why Diehl urges advisers to consider not just their financial skill sets but also how they can help clients process the psychological side of retirement planning. Critically, this does not mean sitting down and having a squishy, impractical conversation with clients about vague emotional topics. It means being able to describe how expenses will likely change in the future and how one can take action today to ease financial shocks.

“It’s about considering what life will actually be like in retirement and then planning accordingly,” he says. “It’s looking at things like the clients’ housing. Can their current accommodations work for them into their 70s? What about their 80s, or 90s? What will it be like to try to sell the house? Is it a good source of future income? If not, what are other options? How does the client feel about nursing homes, or in-home care?”

NEXT: Practical advice for advisers 

For a financial adviser looking to implementing best practices, Diehl suggests a good place to start is “familiarizing yourself with the resources in your own community, from nursing homes to hospitals to housing options. What is retirement going to be like in the region or regions you serve?”

“This can all be part of your expertise,” Diehl notes. “You aren’t going to be giving housing advice, necessarily, but being plugged into the community resources helps you to help clients envision retirement realistically and plan accordingly.”

Questions to get clients thinking about early may include, what’s the plan for leaving your home? Can you see yourself in a retirement community? Living with a child? “All of these are emotional as well as financial considerations,” Diehl says. “As the adviser, your question is, ‘How might I begin to model this information into a financial plan?’”

The Hartford Funds survey and other research shows only a small percentage of people, even among those proactively saving for retirement, have initiated conversations with advisers about specific life events that are likely to trigger financial hardship. “It’s way below 20%, for example, who have considered long-term care insurance or who have a plan in place to deal with an unexpected early retirement,” Diehl says. “These are not easy decisions, but that’s way too low.”

He concludes by noting this type of thinking will not just be beneficial for clients’ gross retirement savings—it will also promote healthier advisory businesses and a more stable client base.

“Something else we have found in our research is that many advisers are concerned about the fact that the children of their clients know nothing about the value they have delivered for the parents over the years,” he says. “Starting these conversations in a family setting, bringing in the kids and the spouse now and again, is a great way to start building that bridge.”

Especially given the ongoing efforts by the Department of Labor (DOL) to strengthen fiduciary advice rules and stamp out conflicts of interest, “this will be a powerful way to build natural brand loyalty and to cross-sell without having to worry about conflicts of interest.”