A key factor in helping people manage their money effectively is having a clear idea of their monthly and yearly spending needs and habits. But how much time do you spend getting to grips with your clients’ lifestyle spending?
Do you just ask them to tell you how much they spend? Or do you ask to see their past 12 months’ bank statements, so you can carry out a careful analysis?
Of course, each client is different in terms of personal values, life priorities, financial resources and acumen. You might think a detailed analysis is not necessary for those whose spending is modest compared to their financial resources. Or you might find it too intrusive, too much extra work or of little value to the planning strategy.
But if your current approach to analysing client spending is a light touch, you may want to rethink this.
A client who has a detailed expenditure budget tells you a lot about their financial organisation. A client who knows what they are spending and why, and can control it, is likely to be much easier to work with than someone who does not.
But a client who is disorganised, has no idea where all their money goes and is oblivious to the damage this can do is likely to need a lot more time and effort. The business risk and profitability of these types of clients needs carefully managing and pricing. There are several other reasons to take more interest in what your clients spend:
1. Clients with expensive lifestyles that cannot be sustained from existing resources, and who can’t or no longer wish to work, need to make changes before they run out of money;
2. Clients who need to free up income, to accumulate more savings or repay debt usually suffer from lifestyle creep. This is where spending rises in tandem with growth of income, which can crowd out one’s ability to build enough financial assets. This usually arises when spending is not aligned with a client’s priorities;
3. Helping clients feel more in control of their money and less stressed is highly valued. We cannot control stockmarkets but we can control our spending and how we react to life events;
4. Even people who spend less than their resources can support would benefit, helping them identify the basis for making inheritance tax-exempt gifts out of surplus income;
5. A detailed understanding of lifestyle spending is an integral part of the Capacity For Loss assessment. Agreeing in advance with clients what outgoings they would cut in the event of a market meltdown or a prolonged period of poor returns is a lot easier than having awkward conversations after.
But the main reason is what it tells you about the client. What people spend money on is more revealing about their priorities, money values and financial capability than anything they tell you in a meeting.
If you can help clients align their spending with their most important priorities, they won’t just have better financial outcomes, they’ll have a better life.
Jason Butler is an expert in financial wellbeing @jbthewealthman