Tips to Help Clients Build Financial Security

Key Takeaways

• You and your clients are probably feeling the pressure of inflation and the anxiety of a potential recession—and now can be a good time to discuss financial security.
• Financial security can mean different things to different people, but in general having an emergency fund is a good place to start, and slowly building toward other financial products like banking products, life insurance, retirement savings.
• Helping a client develop a plan and follow through on their goals is a strategy to get them to a place where they feel financially secure. Often the most important reason for someone to hire a financial professional is for encouragement to take action and bring structure to their financial life. 

What does financial security mean to you? For some, it means having a robust retirement portfolio. For others, it means finding a high paying job or simply building an emergency fund.  As a financial professional, you’re uniquely positioned to bring structure to your client’s financial life by helping them set goals and develop plans for retirement; you’re setting them up for financial security—whatever that means to them.

Explaining financial security to clients

As previously discussed, financial security can mean different things to different clients, and the current financial climate could be a good opportunity for starting a conversation. You and your clients are probably feeling the pressure of inflation and the anxiety of a potential recession—it’s evident for most after going to the grocery store or filling up the tank with gas.

In July 2022, Nationwide conducted an online poll of 1,150 U.S. families with children under age 18 to ask about their current perceptions and attitudes toward their finances. We found that increasing worries about inflation and recession are having negative effects on their financial outlooks, but many families are aware of the challenges and are ready to make moves to put themselves in a better financial position. Additionally, only around half of U.S. families told us they feel like they’re on track to meet their financial goals (48%). About the same number (51%) feel secure about their financial future.

This is where you come in! Since many Americans lack financial security and need help with retirement planning, working with a financial professional can be the first step many take to get control of their financial futures.

How to help clients achieve financial security

Using the “financial house” metaphor is a great way to engage clients on the idea of building their financial security. A solid foundation starts with an emergency fund and can be built upon with various financial tools. Here’s one common way to help your clients build their financial house:

Foundational Floors

Level 1: Emergency Savings: a strong foundation should typically start with an emergency fund. This is meant to cover a few months to a year’s worth of expenses for a household. According to a survey by Bankrate, many Americans can’t cover an unexpected bill of $1,000¹

Level 2: Banking products and property/casualty insurance: these are critical life management tools. A day-to-day checking account and liquid savings, plus protection for the home and auto, are important elements of any sound financial plan. A checking account facilitates payments of ordinary monthly expenses, and a liquid savings account allows people to save for emergencies but still retain quick access to the funds in case of need. Auto and home insurance can help protect those savings if the client’s car or home are damaged.

Level 3: Life insurance and LTC coverage: these products provide protection for a client and his or her loved ones in the event of death or medical incapacity.

Upper floors

Level 4: Employer sponsored plans: for most individuals, their employer-sponsored 401(k) account or other retirement plan is their first exposure to investing. In many cases, retirement plan advisors would recommend maximizing contributions to a person’s retirement plan (especially if the employer matches contributions) as an initial move in retirement and financial planning.

Level 5: IRAs/annuities: IRAs and annuities can be an easy way for investors to begin saving or to augment an employer-sponsored retirement plan. These personal accounts are generally held for retirement, and they can provide clients with control over the investments as well as tax-deferred growth in many cases. Keep in mind that there may be penalties for early withdrawals from these types of accounts.

Level 6: Mutual funds, stocks, and bonds: as you move higher through the financial house, you come to mutual funds and individual securities. Not all investors are interested in purchasing stocks or bonds directly. This type of investment can carry more risk and is generally used by more experienced investors. However, mutual funds may help diversify the risk of holding individual securities.

Level 7: Alternative investments: at the top of the house, knowledgeable and advanced investors may want to include alternative investments (generally defined as investments other than stocks, bonds, or cash) such as real estate, commodities, hedge funds or private equity to potentially balance risk.

Although you can follow this as a rough guideline, your clients may need to build their house in a way that makes sense for them—not all floors will be appropriate for all clients. To keep up with the metaphor, each client’s house will have its own distinct floor plan, built accordingly for their personal needs.

Start building financial security early 

There’s no better time to make a financial plan than today. For younger clients especially, you can promote the value of saving early, although it’s never too late to start saving! As you probably know, the earlier your clients begin to save, the more time they have to potentially build a secure financial future by allowing compound interest to help accelerate their financial growth.

The passage of the SECURE Act 2.0 can be also be a conversation starter for clients who are hesitant to tie up money in retirement accounts with early withdrawal penalties. The SECURE Act 2.0 allows penalty-free access to retirement plan funds for certain emergency expenses emergency situations, aiming to remove a common barrier for retirement savings plans among low- and middle-income workers. Many families struggle with the either/or choice of saving for possible short-term emergency spending needs or saving for their long-term financial future. This provision would allow savers to do both simultaneously. Plus, the potential ability to access retirement savings without penalty would help many people avoid digging themselves into a financial hole when an unplanned expense comes up.

Develop a financial plan and identify goals

Your clients’ financial goals can vary based on where they live, what their family structure looks like, what health concerns they have, and many other potential factors. It’s important to ask the right questions to move the conversation forward.

Questions you could ask include the following:

• What is important to you?
• How prepared do you feel about future events or priorities?
• Do you feel like your investment professional has been there to help you weather the storm?
• What changes have you made to your investment portfolio recently?

These questions and others like it can help you dig deeper into the topic. The aim is to learn as much as possible about a client’s investment situation. From there, you can help them set realistic goals based on their starting point. For younger clients, this could mean planning to save for an emergency fund or paying down certain debts. For more established clients, you could be discussing investing or tax strategies.

Think long-term when becoming financially secure

When you think of the major expenses a person will pay for in their lifetime, many people will think of cars, homes, vacations, or educational programs. As a financial professional, you know that retirement income planning is just as big of an expense, if not bigger, and should be planned for as such.

Although retirement planning is likely just one piece of your clients’ overall financial plan, it may also be the piece of the financial puzzle that they’re “hands off” with. Clients may believe they have already adequately addressed their retirement planning through contributions to an employer provided retirement plan. Your biggest challenge may be to convince them that they need additional help.

It may not come as a surprise that research shows that people who invest in a retirement program and have a life insurance plan feel more secure financially.² You can help your clients achieve their financial goals. As with many of the things in life that are good for us (eating healthier, exercising, quitting a bad habit, going back to school, etc.), the hardest part in achieving our goals is often taking the very first step. This is equally true with our own long- and short-term financial planning. Often the most important reason for someone to hire a financial professional is to encourage the person to take action and bring structure to his or her financial life.