Even when clients are focused on their personal goals and have an appropriate investment strategy, they often seem to lose their investment discipline in challenging markets. Maybe the advisor didn’t properly identify the clients’ risk tolerance. Maybe their perceptions of market risk changed or maybe their personal circumstances changed and they never communicated this to their advisor. But, another dimension that may be at play is an investment strategy that fits the clients’ goals, but is at odds with their money values.
Americans, in particular, rarely think about (and almost never talk about) the idea that money means different things to everyone. Feelings about money are shaped by parents, grandparents, personal experiences and the media. Spending and savings habits reflect those money values. People with different money values will consider big purchases differently, prioritize goals differently and endure financial risks differently.
Before advisors begin to determine financial priorities and investment goals, it’s wise to explore what money means to a client. This may seem a simple exercise, but, most people rarely think about how they view money, the role money plays in their lives and how major life decisions are affected by these views.
What does money mean to clients? What excites them about their money? What uses of their money are most satisfying? What financial worries do they have? Does wealth cause them to be involved or isolated? While a money values discussion can be quite complex and explore many different value nuances, most clients’ answers to these questions are likely to lead them to favor one of four broad money values.
1. Security. Some clients have been exposed to real financial struggles. Either they experienced them personally or heard stories from their family history. They understand the challenge of having to count pennies to pay for a meal, meet a utility bill or make a loan payment. Whatever the experience might have been, these clients fear not having enough money. For them, extra wealth in the bank is security for an unexpected emergency. No matter how much wealth they accumulate, they’ll always fear that it won’t be enough to support them and their families for the rest of their life. When thinking about money, they’re likely to ask, “What if something happens?”
If a client’s primary money value is security, she probably thinks mostly about risks to her wealth. An advisor will want to help insure against many of the financial risks in the client’s life. When it comes to a client’s investment portfolio, an advisor will want to carefully consider the client’s comfort with market risks and any specific risks in her life. When discussing investments with a financial advisor, the client may have a tendency to prefer choices that preserve capital or produce steady income. This may be appropriate if her wealth is extensive enough to meet all her goals. Otherwise, the advisor may need to work carefully with the client to understand and embrace enough risk to allow her wealth to grow and support her lifestyle goals for many years to come.
The risk with clients who have security as a core money value is that they may be persuaded to follow an investment strategy that includes more market risk than fits their values. When markets become difficult, their need for security can lead them to abandon the investment strategy at the worst time.
2. Self-sufficiency and independence. From their first lemonade stand to their first after-school job, earning their own money made them feel independent. After living in their first apartment, they couldn’t imagine ever living at home or in a dorm again. These clients love the feeling of providing for themselves and making money decisions that no one else can question. For them, money means independence and self-sufficiency. As their wealth has grown, they may ask themselves questions like, “When will I accumulate enough to be able to walk away from my job any day I choose?” or “When will I have full access to my funds, so I can make my life’s financial decisions?”
Clients whose primary money value is independence may analyze their wealth regularly and often want to look at evaluations of where their wealth might be in five or 10 years. They don’t usually fear losses, nor do they cherish their wealth as a prize. Rather, clients who think of money as a means to self-sufficiency view their wealth as the source of an enjoyable life. When considering their investment portfolio, advisors can comfortably recommend the necessary risk exposure to help clients reach their long-term goals. Since many investors with this money value expect to add to their wealth, advisors generally have an easy time helping these clients embrace a disciplined strategy and commit to that strategy, regardless of short-term market movements.
The one challenge advisors may find with these clients is that they’re sometimes tempted to redefine their wealth goals every time they close in on their current goal. They’re content with reaching the goal, but their independent approach can naturally lead them to new ideas.
3. Success. Some clients still share stories of when they led their high school team to win the regional championship. They thrive on the feeling of pride that accompanies success. Now their financial success defines their personal success. As they accumulate more wealth, they view it as a reflection of their accomplishments in life. When thinking about money, they often say, “When I accumulate X, that will be real success.”
These clients may have no problem imagining goals, but they need to appreciate achieving them too. When considering their investment portfolios, these clients may have a tendency to judge short-term performance ahead of the long-term strategy. Financial advisors need to help them stay disciplined in their approach. For these clients, sometimes a very moderate risk exposure will achieve their goals, but may not meet their need for success. In strong markets, a client who values success can become frustrated with a steady approach.
Those who view money as their primary measure of success can also sometimes lose track of other ways their lives have value, focusing solely on their wealth accumulation. Advisors may need to help these clients measure their successes along the way and recognize the other successes in their lives as well.
4. Opportunity. These clients talk glowingly about their first paycheck, their first trip abroad or their first ticket to a concert at Carnegie Hall. For them, wealth presents unlimited opportunities. Their goal may be to broaden their life with travel, unique experiences or even the newest gadget. Wealth allows them and their families to live beyond the basics and consider many possibilities. When they think about money, these clients may say: “If I lose it all, I will lose opportunities, but I won’t lose my day-to-day life.”
Clients whose primary money value is opportunity will consider many different wealth prospects. They may have an easy time identifying goals, but they may need help to prioritize a few to build a sustainable investment strategy. These clients are likely to be comfortable with some risk and volatility in their investment portfolio, as they see their wealth as the source of future potential. They also may be comfortable with more speculative investments that have long time frames or uncertain pay off streams, but high returns if successful. Clients who value opportunity are usually sanguine about short-term market cycles, and once well-directed, they can stay true to a disciplined investment strategy.
Sharing Money Values
Though the idea of money values is very simple, many clients have difficulty discussing financial values with their advisors. These descriptions may help advisors identify the characteristics of common money values and find words to start the discussions more naturally.
Couples also need to share their money values with each other. Couples with different money values can get along financially for long stretches of time, until important financial questions arise. If a couple has never identified and shared their money values, they can easily get frustrated at each other’s financial habits, viewing their spouse as stingy, extravagant or, perhaps, irresponsible or overly cautious.
Couples often discover their differing money values when making a significant purchase, such as a car, as this common scenario illustrates:
A couple shared with their advisor the story of their most recent new car purchase. The wife explained that they agreed they needed a new car, and the husband volunteered to make the purchase. She was very happy that he offered to do this without her, as she didn’t enjoy the car-buying process. He arrived home very happy with his purchase. The car was a compact sedan, as they had discussed, but at this point in the story, her tone changed. She reported that the car was loaded with premium features and technology, and she couldn’t believe that he had been talked into buying all these upgrades.
The husband shook his head, as he had already heard this complaint a number of times. So, the advisor asked him about the purchase. He said he was surprised by his wife’s reaction to the car, because he believed he had purchased the car they had agreed on. At this point, the advisor asked him to talk about the cars his family had owned when he was growing up. The husband described new mid- and full-sized cars that his family bought or leased every few years. They had very similar features to what he had purchased. Based on his experiences, he had cautiously bought a smaller car than he was used to.
When the advisor asked the wife about the cars her family had owned, she described them as comfortable, but not feature-rich. Her family bought and drove them for years until they broke down. She expected a modest car, like those she had grown up with.
This young couple brought very different experiences and money values to the car purchase. It’s useful to help couples first consider their money values separately and then share with each other what they’ve learned. They frequently discover the reasons behind their spending and saving differences in ways that help them better relate to and accept each other’s habits going forward. As in this story, it’s very common for couples to have different views of money, which they might not discover for a long time. Often, years can slip by before a husband and wife realize they value money differently, especially when the family is materially successful.
It’s important to help couples identify their separate money values, because that can be critical to identifying financial goals. It’s usually difficult for couples to agree on shared long-term financial goals when they don’t understand each other’s money values. One spouse may be focusing on security in the couple’s old age, while the other is thinking about opportunities to travel and experience new cultures. Often, just to move forward, one partner agrees to long-term goals that might be at odds with his actual values. Over time, this disconnect makes it very difficult for the couple to stay focused on the long-term goals, as they weren’t fully shared from the beginning.
Most advisors have participated in discussions in which a couple initially seems to share such different financial goals. When hearing these descriptions, it can be very useful to step back and identify money values. When advisors understand more fully how both people value wealth, they can more successfully help couples begin to build attainable and shared goals.
Setting Investment Strategies
Computer models and experienced professionals can both analyze a set of facts about a client and recommend an investment strategy that has a high probability of meeting the stated goal. These strategies usually require long time horizons and, most importantly, disciplined adherence. Altering course when market conditions change may devastate the most well-considered portfolio. Yet, advisors report that one of their most common challenges is helping clients stick to their investment plan.
When investment strategies are out of step with money values, financial facts make little difference. There will always be a danger that the client will feel uncomfortable with the strategy. Clients need strategies that fit their circumstances and their values. Too few advisors consider money values as an input in suggesting appropriate investment strategies.
Advisors who add money value discussions to their client introductions will know more about their clients right from the start. These advisors and their clients can share a meaningful goal discussion starting from a common base. Some traditional goals take on different priorities when money values are clearly understood. For example, funding a lifestyle for the rest of a client’s life has a very different meaning to a client who values security over independence. Building a legacy has a different meaning for a client who values success over opportunity. Using money values, advisors can enhance goal discussions, as well as considerations of risk tolerance and risk perceptions, before recommending appropriate investment strategies. In this way, an advisor who puts a priority on determining client money values is likely to have greater investment success and deeper committed relationships with his clients.