Financial Wellness. For those of us who work with 401(k) sponsors and participants every day, the delivery of wellness resources through the workplace has become “table stakes” in the advisory world. I think that’s great.
For all the technical details we try to get right—investment selection and monitoring, performance reporting, expense management, routine administrative operations, regulatory compliance, and more—the most satisfying part of this job is the human part, the opportunities for empathetic interaction with investors who can benefit from our guidance. There’s no arguing with the fundamental utility of financial wellness for our plan participant clients.
But I can’t shake this sense that, as it’s used in industry media and marketing, the term itself hasn’t been clearly defined. This post is an effort to bring some clarity, rigor, and actionable meaning to financial wellness.
I see the concept occupying a two-dimensional space.*
On the first dimension, we find an investor’s objective financial reality: income, assets, liabilities, savings rate, burn rate, tax rate, and debt rate. These are (some of) the “financial vital signs” we assess for our clients using Elements. Here, efforts to enhance wellness revolve around making concrete progress to improve investors’ quantitative conditions. Save a little more. Reduce your effective tax rate by a bit. Acquire quality assets. Pay down debt. And so on.
Each of those can make important contributions to a household’s present circumstances and future prospects. Each can help investors get a little closer to their financial and personal goals on multiple time horizons (e.g., acquiring an investment property next year, sending a child to college in six years, and retiring comfortably in 20 years).
But these objective measures can only do so much for an investor without the second dimension of financial wellness: a subjective, psychological, often deeply emotional sense of how an investor feels about how she’s doing.
In the two-dimensional space depicted to the right, one can develop a rough typology of investors. Of course this kind of broad-brush categorization ignores the uniqueness of an investor’s specific relationship with his financial circumstances, but I think it’s broadly instructive as we think through what firms like Interlake can and should do for our clients.
Naturally the quadrant we’d all love to occupy is the upper-right, where we’re both objectively and subjectively financially healthy: “Good and Happy.” We’re doing well, we know it, and we’re committed to sticking with the behaviors and attitudes that got us here.
But one can easily imagine someone who’s doing objectively well but doesn’t feel that way. Do you know anyone who might fit in this corner: “Good but Anxious”? Here we have someone who can’t quite shake his sense of not having enough. Or someone who fears market volatility so much that she can’t sleep well at night even with impressive account values and a prudent mix of long-term investments. Or someone who has arrived early in retirement with plenty of assets but fears running out of money and thus can’t bring himself to spend what he’s accumulated.
Then we move into negative territory on the Y axis, where we find investors with sub-optimal financial vital signs: fewer assets, more debt, lower savings rates, poorly designed or implemented investment programs, etc. Here, too, we can identify people with positive and negative affects toward their objective realities.
In the lower-left corner, we find those who could be doing better and know it: “Bad and Gloomy.” In terms of overall human wellness, this is the worst of both worlds, as the stress, anxiety, disappointment, and even fear that characterize this space on our wellness chart can have profoundly negative personal and physiological effects.
In the lower-right, we find our friends and neighbors who aren’t doing especially well by conventional measures but either don’t realize it or don’t mind enough to let themselves feel bad about their financial vitals. Let's call their condition "Bad but Content." Maybe they have enough innate optimism about the long run to discount the present in favor of anticipating a healthier financial future. I suspect many find themselves in this corner largely because they aren’t sufficiently aware of their financial realities to develop negative emotional responses in the first place.
Let’s assume there’s something to this rough typology. Equipped with this perspective, what should practitioners in our field—fiduciary-minded advisors working with living, breathing clients—do to help investors of each type? I think it’s fair to assume that occupants of each quadrant will benefit from different tools, ideas, and incentives.
Like our categories themselves, these prescriptive ideas are decidedly broad-brushed. But I think we’re onto something important here…
Good and Happy. These success stories don’t need any major changes of habit or perspective. Here, advisors might offer ideas for refinement, little tweaks to investment programs or tax management designed to leverage investors’ existing inclinations to make good situations better on the margins. After all, even small improvements can add up over time. I think Elements would be especially useful in this category as the Elements Scorecard and the system’s Quarterly Progress Reports would clarify and reward (in a psychological sense) an investor’s sustained well-being. The goal here is to move these clients straight north on our chart.
Good but Anxious. For those who are doing fine but don’t feel that way, advisors might want to offer access to financial planning illustrations that show the positive long-term outcomes likely awiating these investors, clarifying that they’re on a fundamentally solid path. Equipped with that understanding, these investors should sleep well at night. The educational obligations (and opportunities!) of our job loom large for this category. We need to help anxious-but-financially-healthy retirees feel free to spend in the best years of retirement, when they still have the ability and desire to do the things they love most in life. We should encourage and enable hardcore risk-avoiders to embrace some short-term volatility, knowing that risk-return numbers for equities look much more comforting on 15- or 30-year time horizons than they do day-to-day.
Bad and Gloomy. These negative-affect types likely require especially empathetic, tactful approaches. Here, one might want to show how even small improvements in financial behavior can produce impressive results over time, freeing these investors to embrace incrementalism rather than feeling paralyzed by the (real and perceived) scale of their challenges. In the 401(k) world, drawing attention to the enormous benefits of tax-deferred compounding might help get them started. Clarifying the “free money” of employer matching might also help incentivize better behavior. On the technology side, a well-designed budgeting app might spark some interest in getting a grip on household finances, empowering and encouraging positive changes in established habits.
Bad but Content. This category seems likely to present acute challenges to advisors. Though the absence of stress and anxiety might be physiologically helpful, it also generates fewer prompts to improve one’s objective financial wellness. If we’re trying to shepherd as many people as we can into the upper-right quadrant of our two-by-two table, we need to help these investors move up the y-axis without creating the kind of stress, fear, or shame that would push them to the left on the x-axis. I suspect this type would benefit from upbeat ideas about what compound returns can do over long periods; about the possibility of complementing Social Security with additional guaranteed income via commission-free annuities; about the massive benefits of saving now rather than waiting; and about the many tools people now have at their disposal to take and reinforce positive financial action in their lives.
What about the transitional process as an investor moves across our two-dimensional space? After all, these are dynamic characteristics, very much subject to change for each individual investor. Our goal should be to help investors both do better and feel better about how they're doing. In terms of our geography, we want to help investors move northeast. Now that's financial wellness.
Money is both quantitative and qualitative, objective and subjective. It’s past, present, and future. It’s…complicated!
When we consider the imperative of delivering financial wellness services, resources, ideas, and benefits to diverse populations of plan participants, we’d be well-served to recognize that those participants often fall into one of the four categories described in this post. One-size-fits-all content, tools, and approaches simply won’t get the job done in our financial wellness offerings. We can’t assume that all plan participants approach financial matters the same way, let alone the same way we do.
I hope these ideas help advance our industry’s thinking about how to improve both the objective and subjective dimensions of financial wellness for our clients. Those two dimensions are tied together in a profound way and we’d do well to remember that every time we interact with our clients.
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*If we wanted to deepen (complicate!) this typology a bit more, we could add a third dimension of financial knowledge or sophistication. Let’s save that discussion for another time.