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Risk & Behavior

Why Is Financial Empowerment Important?

How advisors can help clients manage both their emotional well-being and economic stability.

Although most current definitions of financial health only focus on economic stability, every advisor knows that ignoring a client’s emotional well-being is a recipe for disaster. This is why it’s important to adopt a new definition of financial health—one that balances both a client’s economic stability and emotional well-being.

Even clients with enough assets to withstand any reasonable economic shock can be anxious about their finances, which can cause behavioral problems and overall dissatisfaction with their finances. On the other end of the spectrum, every advisor has clients who aren’t at a good place economically, but still spend carelessly, ignoring the ramifications on their financial plan. For a person to be truly financially healthy, they must find a balance between economic stability and emotional well-being.

In our last post, we discussed the first part of this equation. Advisors can help a person improve their economic stability by extending their mental time horizon—helping clients get accustomed to thinking about the long-term consequences and benefits of their financial decisions. For the next step, advisors can again turn to behaviorally focused techniques to help their clients improve their emotional well-being.

The importance of financial empowerment

When we looked at the specific patterns of thought that can impact a person’s emotional well-being, we stumbled on the importance of financial empowerment. We found that people who feel empowered in their financial lives experience more joy, peace, satisfaction, and pride concerning their finances. The impact that financial empowerment had on a person’s emotional well-being remained significant even when we controlled for age, income, education, and gender.

The graph below compares people who feel empowered by their finances with people who don’t, with the y-axis being a measure of their overall emotional experiences. It shows that people who feel empowered had mostly positive experiences with their finances, even in the lowest income ranges. Those who felt disempowered were less happy than their peers and didn’t reach the positive range until their annual earnings were well above $100,000. The lesson here is fascinating: A sense of personal power—not money itself—may be the key to emotional well-being in our financial lives.

How to promote financial empowerment

Our study didn’t measure how much control a person actually had in their financial lives, but how much they believed they had. This suggests that it’s the feeling of power, not necessarily the exercise of it, which was linked to emotional well-being. Improving a person’s feeling of empowerment is more about helping them understand how much control they already have in their financial lives.

There are a couple of ways advisors can help clients get there:

  • Involve clients in financial decisions: Some clients would rather not be involved in the intricacies of their financial plans, but their sense of financial empowerment may depend on their involvement. They need to know that, with your help and coaching, they can make good decisions and reach their goals.

  • Help clients keep score: If you have a client who is particularly fearful or reluctant to make decisions, you’re probably dealing with a disempowered individual. They may be struggling to make amends with their past mistakes. To help clients overcome this inner battle, emphasize how their new decisions are positively impacting their finances. Even if all they’ve done is contribute to a 401(k) or walk into your office, they’ve chosen to do something for the better.

Achieving both sides of financial health

Being financially healthy is not just about having enough money to cover your expenses—it’s also about feeling emotionally at ease with your finances. It’s that peace of mind that every client aspires to have after working with an advisor.

To help clients get to this state of mind, advisors must help clients align both their economic stability and emotional well-being. Advisors can use this framework to help guide their clients toward a stronger state of financial health.

Read our latest research paper, “When More Is Less: Rethinking Financial Health,” to learn more about our new definition of financial health.
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