An Advisor's Guide to Client Misconceptions

Financial advisors understand money and investing to a degree that surpasses a majority of the population. Because of that, advisors must frequently navigate gaps in their clients’ financial educations. Here are some common client misconceptions and how to handle them.

Misconception #1: The Basics

Vance Barse noted, “When we look at common planning gaps, we really need to start with the basics. Core financial literacy is not even taught in this country. Clients often don’t know what time value of money is, or the value of compound interest, or even the fundamental differences between stocks and bonds — let alone what their broader financial picture is.”

With frequent client misconceptions around even the 101 level of finance, it can be tricky for advisors to bridge the gap and clearly communicate their strategies. Barse counteracts this through a robust onboarding process. “When clients come onboard, we like to start with an understanding of what their foundational financial literacy is, what they are trying to achieve in their planning/investment process, and pair the two so they can understand how what we’re doing for them is unique to their goals,” he said.

Misconception #2: Higher Incomes Mean Fewer Money Woes

According to Charlotte Geletka, “a lot of people think that increasing their earning potential will take away some of their challenges with money. And that’s not the case.” Though a better-paying job can help relieve financial stress, more income doesn’t automatically solve problems and could, in fact, create some.

A new job with a better salary might look comfortable on paper, but it could complicate matters. For example, it could involve transitioning from a work at home situation to an office situation, which means greater expenses for gas and lunch. It could even add a dinner expense if the hours are longer. These expenses could add up quickly and diminish the on-paper value of the promotion.

Lifestyle creep is also very much a thing that many people are vulnerable to once they start earning more money. Earning more money makes people more likely to spend money, and the impulse takes an enormous amount of discipline to counteract.

Misconception #3: Taxes — Pretty Much Everything About Taxes

Simply put, people do not understand taxes. What’s worse is that many people assume they have a handle on it. Geletka noted, “I definitely see knowledge gaps in understanding taxes. Taxes have really gained increasing complexity in the past five years. People don’t understand the changes that came in 2017 and how it impacts their financial situation.”

A critical service financial advisors can provide for clients is helping them wrap their heads around their tax situation, which in all likelihood is very different than the one they imagine they have.

Misconception #4: Being Born With Money Gives You a Better Understanding of Money

Our society tends to assume the amount of money someone has is in line with their financial acumen. Many Americans have priors that are inclined to frame financial success as a direct result of an individual’s efforts. The reality is that the amount of money someone has is largely determined by the amount they grew up with.

What this means is that people with little to no money might, in fact, be far savvier with their money than someone born with an excess of it. A 2019 Georgetown Center on Education and Workforce study found that being born wealthy is the leading cause of having wealth, more so than financial acumen or talent. “To succeed in America, it’s better to be born rich than smart,” Anthony P. Carnevale, director of the CEW and lead author of the report, said on CNBC’s “Make It.”

This means financial advisors might have to walk a tricky tightrope to navigate wealthy clients who think they understand the money they have far more than they do.

How to Deal With Misconceptions From Clients Who Don’t Understand Their Own Gaps

Fortunately, Geletka has some tactics on how advisors can navigate clients who don’t understand their own gaps. “I’m really clear in my initial client meetings, when I outline who we are and how we work. You may hire me for one thing — perhaps investment or deep dive analysis — but I will be very honest and transparent about what red flags that you have in your financial life. And so if you hire me, you have to be willing to understand that I’m a truth teller.”

Establishing boundaries and setting expectations from the jump is critical, and gives you something to refer back to should a client’s pride put them at odds with your much more considered strategy. Overcoming misconceptions and psychological hurdles takes clear communication.

For more news, information, and analysis, visit the Financial Literacy Channel.