As Americans continue to grapple with high inflation, a new survey by Hearts & Wallets has found thanearly half of its respondents are very concerned about inflation, and a third of those respondents are holding more than 90% of their investable assets in cash.t
To educate Americans that large cash holdings may be counter-productive to the attainment of a sound financial future, Laura Varas, CEO and founder of Hearts & Wallets, shared a few suggestions.
First, Varas said, advisors need to help clients with high cash allocations articulate the reasons for their cash stashes. As she said, “each reason has a distinct solution: targets for emergency vs. contingency funds, seeing cash balances across account types, insurance, suggestions to ease decision-making and tax concerns.”
Second, advisors should lay out the range of options for investing on different timeframes. Bank, taxable accounts, insurance and investment products can address different liquidity needs, she added. “Educate clients about how such options can function vs. cash. The behavior of keeping very low cash appears to be more common for consumers with advisors. This may be because advisors are able to educate their clients about options that can meet their liquidity needs,” she said.
Third, alternatives offered to clients as substitutes for “cash” must trade off safety, be accessible in understandable combinations, and help address the emotional reasons why clients hold “savings.”
In addition, advisors should build processes to deliver money to clients quickly. “Alternatives to cash must be accessible. Accessibility will increase client confidence and therefore, their assets,” she said.
Finally, advisors should help their clients develop more reasonable definitions of emergency funds, such as cash on hand for an unexpected root canal, vs. contingency funds, for a job loss, or for a tree falling on the roof of the house. “Align investment products accordingly and identify when to use insurance instead,” she said,
Easing concerns about retirement
In addition, the survey said that concern about the U.S. economy, and “making assets last through retirement/outliving money” are both areas that are up four percentage points in one year. To ease clients’ concerns about funding their retirement, Varas said that advisors should promote ways to develop a “well-thought-out plan” for their clients, such as making use of financial planning or offering a product to “take minimum money and invest,” e.g., to provide money for their grandchildren.
“Plans, and particularly written plans, are associated with bigger emergency funds and higher assets-to-income ratios,” Varas added. “Having a plan, and especially a written plan, increases the focus on investments and improves asset allocation.” Older households with more investable assets of $2-million-plus will want a plan that includes tax optimization and estate planning, she said.
Varas also said that advisors should build strong retirement-funding advice and service models for households at all wealth levels that have questions about how to fund their retirement.
Active vs. passive
In the survey, the consumer attitude with the highest level of uncertainty this year is whether active or passive investment strategies are “better during certain market conditions.” “Our research on financial fluency sheds more light on this confusion,” Varas said. “Half of all consumers surveyed did not know the definition of “passive investing.” Of consumers who chose a definition, more of them selected “buy and hold” than “invest in an index.”
“The key here is education – in conversations and through all other communication channels,” Varas said. “Provide points of view on whether active strategies can be ‘better during certain market conditions.’”
Appreciation for professional advice
The survey also revealed a growing appreciation by consumers for professional advice. “This growing receptivity affords advisors and their firms opportunities to clarify their advice and service models,” said Varas. They should strive to continually improve the consistency of service delivery in alignment with their client expectations.
“Value propositions about expertise will resonate with more clients than value propositions about saving time, as only 15% of households outsource and delegate because of ‘many demands on my time,’” Varas said.
In addition, the survey noted that Ameriprise and Edward Jones earned the Hearts & Wallets' designation as Top Performers on customer agreement with “my financial advisor is a partner to me.” To earn a Hearts & Wallets Top Performer designation, Varas explained, firms must receive ratings from their customers distinctively higher than the ratings that customers of other firms gave to those firms, and each firm included must have sufficient sample size.
Top Performer methodology provides useful insights to firm performance on what consumers value, Varas added. “The firms that achieve distinctively higher satisfaction at the national level among their customers than other firms are known for their focus on distinct types of customers,” Varas said. That is true for both Ameriprise and Edward Jones for this particular attribute of “my financial advisor is a partner to me. Both firms seem to be doing a good job of understanding the needs of their customers and working in a collaborative way, she added.
The survey was drawn from the section of the Hearts & Wallets Investor Quantitative™ Database that analyzes consumer attitudes, sentiments, concerns and goals toward saving and investing. The latest survey wave was fielded from August 15 to September 15, 2022, with 5,993 participants.
Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].