Goals-Based Investing

How the simple act of goal setting can prevent financial distress

By AMP Capital

When a client walks in to meet an adviser, they may look happy and healthy, but chances are they’re suffering from bad financial stress.

New AMP research, released in the report ‘Financial wellness in the Australian workplace’, found some 2.86 million Australians are feeling financially stressed in 2016.

That’s 24 per cent of all Australian employees – across all industries, income levels and job roles.
Financial stress is also increasing. Australians’ confidence in their finances fell in the last two years from 54 per cent in 2014 to 48 per cent in 2016.

For advisers, the findings suggest that a quarter of clients could be in a financially stressed state. That may not only be causing them pain but threatens to derail their prospects of a healthy financial future.

It’s vital, therefore, that advisers develop a deep understanding of the symptoms and triggers of financial stress and who is at risk.

But the good news is that research has also shed light on a client’s path back to financial wellness through something advisers are experts at: financial goal setting.

The two elements of financial wellness

Financial wellness is made up of two key factors: ‘cognitive’, or how a client thinks about their financial position; and ‘emotional’, how a client’s financial situation makes them feel.

The cognitive element includes how a client perceives their current financial situation relative to their expectations; their perception of future finances against aspirations; and the context of lifestyle that an individual lives (including social, environmental and personal).

The emotional response includes a client’s feeling of worry or foreboding about finances, the anxiety caused by finances, and even an insatiable feeling of guilt around finances.

Ultimately, your clients’ financial wellness will fall across a spectrum ranging from a negative destructive mindset known as financially stressed, to a positive mindset known as financially secure.
It’s important for advisers to evaluate, not just what a client is expressing verbally about their financial wellness, but also the signs of emotional distress in response to their financial situation.

At-risk clients

When patients visit a medical practitioner, they’re evaluating symptoms in the construct of groupings: certain groups, such as smokers or the elderly, are at higher-risk of some illnesses.

The same applies to financial wellness. Some groups at a greater risk of financial stress.

Triggers of financial stress are not the same for everyone. But five key triggers dominate our findings:

  • bad debt
  • home loan
  • retirement
  • supporting the family and
  • budgeting.

Other major triggers include life events such as starting a new job and moving house.

But there are three demographics that have the highest incidence of financial stress.

  1. The first are contractors, including freelance workers. That isn’t surprising given the lack of clarity around earnings which makes planning and goal-setting extremely difficult.
  2. Single parents also face significant financial stress given they lack the ability to defray financial costs and concerns with a partner, and must also deal with the additional costs of children.
  3. Females are also more likely to suffer financial stress, with 30 per cent suffering stress, against 19 per cent for males.

Your client’s industry can also increase financial stress, with stress highest in the accommodation and food services industry (35 per cent), followed by health care and social services (32 per cent).

Big earners, but growing stress

There is obviously a correlation between income and financial stress.

Low-income earners are more likely to suffer financial stress, but interestingly, our research has found that the number high income-earners – those earning $150,000 or more – who are suffering financial stress has doubled from 8 percent in 2014 to 16 per cent in 2016.

That finding suggests that advisers can’t assume that because their clients are earning high incomes that they are not under financial stress.

With the emergence of fractured economic growth after the mining boom, advisers also need to be aware of the impact of geographic location on financial wellness.

Some areas are experiencing more stress than others. Employees in Brisbane are the most financially stressed (30 per cent), while Tasmania has the lowest levels of financial stress in Australia. In Melbourne, financial stress has fallen dramatically from 32 per cent in 2014, to 19 per cent in 2016.

The one thing in common

There is one thing common to Australians suffering financial stress: they are less likely to set goals.

Of those suffering financial stress just 37 per cent have ‘many clear goals’ or ‘a couple of goals’. By contrast, 60 per cent of financially secure Australians have goals.

What’s more, of the financially stressed, some 27 per cent haven’t even thought about goals. (Not only don’t they have goals, but the financially stressed don’t have a plan to achieve those financial goals. Just 8 per cent have a defined plan.)

Retirement and super

With a lack of goals and planning creating major uncertainty for the future, it’s not surprising that superannuation and retirement are a major source of financial stress.

The financially stressed are less likely to set themselves financial goals, but our research found also that, when they do, the goals are focussed on debt, and less on retirement or investments.

Among financially stressed employees, confidence that they will have a comfortable retirement is very low, and that confidence falls as time goes by, especially half way through their career.

Financially stressed clients are also much less likely to be knowledgeable about superannuation; they’re less likely to understand fees, charges and superannuation statements.

Indeed, just 17 per cent of financially stressed Australians have even worked out how much they need to save for retirement, against 43 per cent of the financially secure.

Goals: a step towards prevention

Our research might be considered doom and gloom. It’s not good news that a quarter of your clients might be suffering from poor financial wellness, is it?

An adviser naturally wants to help their clients achieve financial security including a great retirement.
But our research also illustrates that advisers have a powerful opportunity to prevent financial stress by focusing at-risk clients on appropriate goal-setting, and then creating a plan to meet those goals.

Goals (or lack of) are a sign and symptom of financial distress, but also a key part of the cure.

That goal setting can help shift from a myopic focus on debt, to a more holistic and long-term financial picture, including the need to build for retirement.

That, ultimately, will lead to great outcomes and enhanced financial wellness.

  • Goals-Based Investing
  • Income
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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