During a coaching session, Matt, a financial professional, shared his concern about a couple who were reckless spenders:
“Barbara, this couple is nearing retirement, and they’re constantly overspending. I’ve been diplomatically educating them for years now. They agree to scale back in our meetings, but then continue to buy, buy, buy. At this rate, they’ll run out of money in retirement way too soon. I’m frustrated. What should I do?”
Although Matt’s approach was tactful and persistent, it wasn’t working. He was inadvertently enabling his clients’ habits and their future financial ruin. Plus, this predicament could have ruined Matt’s relationship with them. Convincing clients to change their spending is a common challenge for many financial professionals. Let’s discuss a better way of addressing it.
Forecasting Errors Keep Clients Hyper-Focused on Achieving Pleasure in the Present Moment
First, What’s a Forecasting Error?
A forecasting error is when someone’s future reality deviates from what they originally expected—sometimes significantly. It can keep people hyper-focused on achieving pleasure in the present moment. The pull of pleasure makes it very difficult to resist immediate temptations, even if it will cause more pain down the road. Matt’s clients were making a forecasting error by living in the moment without considering the future.
You can recognize a forecasting error in two ways. The first way is by paying attention to a client’s reaction after you’ve given them feedback about a concern such as overspending. If they’re dismissive or reluctantly agree, that’s a clear indicator they’re not comprehending the gravity of the problem.
The second way is by observing a client’s ongoing behavior. If the client continues to repeat bad habits after your conversation, they’re in the grip of a forecasting error.
Why Clients Overspend (and How to Help Them)
Second, the Impact It Can Have on Client Relationships
One of the big challenges financial professionals must grapple with is the client’s notion that the issue isn’t their problem. A client who refuses to take responsibility for their behavior now is unlikely to assume responsibility later. Instead, the client is more likely to blame someone else for their self-made calamity. This makes the financial professional the most obvious and convenient villain.
If disaster strikes, the financial professional may face an outraged client. Even worse, the financial professional may experience negative word of mouth from the client, along with unfair blame for the client’s bad behavior.
When Matt realized he was inadvertently enabling his clients’ financial failure and that they might blame him for their overspending, he was especially motivated to try a different approach.
Third, How to Help Clients Overcome Forecasting Errors
If you’re concerned about how a client’s overspending could affect their retirement, try this approach.
Express Your Concern
Rather than immediately confronting a client about their spending habits, which would likely make them defensive, start the conversation by focusing on the trust they have in you, and your responsibility to guide them well.
Lead off with appreciation for your work together so the meeting doesn’t feel overly critical. You might begin this way:
“I really value our work together and the retirement plan we’ve created. As you know, the markets are only one part of your financial success. Financial habits are equally important. You’ve entrusted me to help you invest well and save well.
That’s what I want to talk to you about today. I’m concerned about the effect that your current spending could have on your retirement. At this rate, your retirement savings could run out way too soon. It’s a hurdle we need to address, but together, I think we can overcome it.”
Help Them See How Their Current Spending Could Affect Their Future
In Matt’s situation, he’d already mentioned the couple’s spending problem, but they didn’t recognize the gravity of the situation. Therefore, he needed to help them clearly see how their current spending could affect their future lifestyle in retirement. I suggested that he try this approach:
“I want to make sure we all understand how your current spending could affect your retirement. To do so, let’s explore what you want your future to look and feel like.”
Then ask probing questions to reveal future pleasures they look forward to vs. future pain they want to avoid. For example:
Encourage them to be specific as they describe these visions. Envisioning future consequences in detail helps clients develop an emotional commitment to avoid future pain and gain the pleasure they want in retirement.
Then, explain how their current spending could lead to the future pain they envisioned, and how better spending habits would likely lead to the appealing vision. At this point, make sure you’ve prepared a budget to help them adopt healthier spending habits and get back on track.
Visualization Exercise: Help Clients See the Future Impact of Today’s Overspending
Very few people change habits without continued support and accountability
Make the budget manageable and build on it over time. Crash dieting rarely works. Likewise, overly restrictive budgeting will likely backfire. Ideally, the client will be excited to see their savings improve without feeling too much near-term deprivation. The intention isn’t to have a spartan lifestyle and take away all their fun but rather to find a balance they can live with—and afford—without compromising their retirement vision.
“Won’t Clients Blame the Messenger and Reject Me?”
Addressing a client’s overspending habits can feel risky, but the risk could be greater if a financial professional doesn’t address these habits. Down the road, the client could say: “We hired you to plan our retirement, and now we’re struggling financially. You failed us!”
First, some clients, especially those who don’t live on a budget, can make a forecasting error by overspending and putting their future in jeopardy. Second, even though a client is responsible for their overspending, they’re likely to shift the blame to their financial professional. Third, making the future consequences of overspending more concrete can help clients see the need to change their behavior.
The Visualization Approach Hit Home With Matt’s Clients
Matt’s original, straightforward approach of addressing his client’s overspending wasn’t wrong. It’s an approach I see many financial professionals using. However, it wasn’t enough to overcome the client’s forecasting errors. They needed a vivid emotional picture of their financial risk.
After trying the visualization approach, they got serious about changing their habits. Matt was relieved and much more confident that the clients will keep their spending under control. Now they have a compelling vision—and a practical plan to help achieve it.
I recommend easing yourself into this technique. Begin by selecting a low-risk client who could benefit from better financial habits. Don’t pick your most important client or the worst over-spender. Plan out the conversation we outlined above and give it a try. After you see positive results, try it with more clients.
Not every client will change their ways, but you’ll have the assurance that you’ve done everything possible to help them build better financial habits and support their financial success.
The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds.
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