Telling a client how to spend their money might make them a better client for you
by Jill Chadburn on 06·04·2023
As a financial adviser it is your job to get to know your client and this is normally done via factfinding.
Given that you must prove how your recommendations might impact the client’s financial situation, you need to know a lot about a client’s income and expenditure.
A client’s income is very black and white, whereas how you categorise expenditure is a very grey area, as it is all down to people’s perspective.
While essential expenses are every expense related to living, non-essential expenses are usually the expenses that you don’t necessarily need. For example, expenses such as rent, mortgage, debt repayment, mandatory insurance, utilities, groceries, or medication are essential ones that you need to pay for living. However, things such as clothes, shoes, makeup, video games, gym membership, and, yes, even the Netflix subscription, are non-essentials.
So, essential expenses are, well, essential. You must pay for them no matter what because you either need them or are a financial responsibility. As for non-essential ones, they often arise from wants, not needs.
As an outsourced paraplanner I see numerous factfinds from clients from all walks of life, where one client’s essential expenditure is €900 per month, whereas another client has €6,000 per month essential expenditure.
Who is to say exactly what is essential expenditure and what is not?
We all agree that food is classified as an essential expenditure. However, is it essential that you buy branded items like Heinz baked beans, when buying the supermarket brand is cheaper? The latest research from Kantar shows price increases are now set to add an additional €453 to our average annual grocery bill, and some of the sharpest increases are in essentials like butter, eggs, bread, and flour, which are a non-negotiable feature on the shopping list for many of us.
Also, most people would find that having a car and all the running costs and insurance it incurs as essential. But is a BMW X7 valued at around €150,906 essential or would a Skoda Kodiaq valued at around €53,699 which is nearly 2/3rds cheaper, not be sufficient? You may want the flashy, all singing, all dancing BMW but is it essential?
Your chosen lifestyle will also impact on what you classify as essential expenditure. Is it essential to send your children to a private school, have a nanny, send Jane to ballet lessons and Joe to soccer club? Some parents will say yes, while others will review the above as a luxury. Based on the private school fees on average, you can expect to pay around €14,000 p.a. for a pupil at a day only school and up to €27,800 p.a. for boarding school plus private school fees have risen faster than inflation every year for the past 10 years.
Some people are also choosing pets over parenthood. Forbes magazine has stated that in the US ‘Millennials tend to be delaying traditional life milestones like marriage, home-buying and baby making, therefore it is no surprise that millennials are adopting more pets: 35% as compared with 32% of Boomers, according to research firm GfK. Fifty-seven percent of millennial households own a dog versus 51% of all U.S. households.’ (https://www.forbes.com/sites/erinlowry/2016/08/31/why-are-so-many-millennials-opting-for-pets-not-parenthood/?sh=18c85c643963 ).
A pet owner, therefore, may view Pet Insurance and a Vet Health Care Plan as essential expenditure, whereas a non-pet owner would view this frivolous spending.
You will also have people that have ‘bad’ habits, such as drinking, smoking or even gambling, where they will view this as essential expenditure as they could not do without these things. If you were buying four bottles of wine each week and it cost around €12.00 per bottle, that would cost €2,496 per year. The same with smoking if a packet of cigarettes cost approximately €15.50per pack and you smoked 10 cigarettes a day, roughly 3.5 packets a week, that would cost €2,821each year. Also drinking and smoking will have the knock-on effect on applying for life cover, by having the premiums rated, which will then increase their essential expenditure or not even be able to afford the premiums in the first place.
So why suddenly are we interested in someone’s expenditure?
Electricity prices in Ireland remain among the highest in the EU as energy costs increased sharply in almost all member states last year with Irish consumers paying 26% more than the EU average.
International energy crisis continues to impact energy prices with unprecedented increases in wholesale gas in excess of 700% in the last 12 months and over 200% since June 2022 alone. Electric Ireland will increase residential electricity bills by 26.7% and residential gas bills by 37.5% with effect from 1st October 2022.
The increases equate to €37.20 per month on the average residential electricity bill and €42.99 per month on the average residential gas bill, based on the estimated annual bill as defined by the Commission for Regulation of Utilities (CRU).
Inflation in Ireland averaged 4.35% from 1976 until 2022, however the Consumer Price Index (CPI) was 8.2% higher in September 2022 compared with September 2021
With the price of everything going up, where will this money come from to pay for this increase?
Therefore, it is even more important nowadays to understand your clients’ spending habits and what they classify as essential expenditure.
As a financial adviser you can help your client’s re-think their spending habits when you are completing a Cashflow Analysis. There is no reason why you can’t ask your clients for their last 6 months’ bank statements. You can do some cursory analysis of their spending and include your finding in your annual review.
By reviewing their circumstances at each annual review and providing a holistic financial planning strategy to determine if their lifestyle is sustainable now and, in the future, and if not, what can they do to make their lifetime goals achievable.
This type of advice is not directly fee earning but is the sort of ‘added value’ that we suggest, to encourage greater client loyalty.