The overall market for providing financial advice to middle-class America might be shrinking, given the latest Census Bureau report about income in America. But the need for financial planning and financial advisors might be greater than ever before.
Consider: The Census Bureau this week announced that in 2011, median household income declined, the poverty rate was not statistically different from the previous year and the percentage of people without health insurance coverage decreased.
Real median household income in the United States in 2011 was $50,054, a 1.5% decline from the 2010 median and the second consecutive annual drop, the Census Bureau said in its release. Meanwhile, income for the wealthiest 5% -- who make at least $186,000 -- rose 5.3%.
The nation's official poverty rate in 2011 was 15.0%, with 46.2 million people in poverty. After three consecutive years of increases, neither the poverty rate nor the number of people in poverty were statistically different from the 2010 estimates, the Census Bureau said.
The number of people without health insurance coverage declined from 50.0 million in 2010 to 48.6 million in 2011, as did the percentage without coverage - from 16.3% in 2010 to 15.7% in 2011.
These findings are contained in the report Income, Poverty, and Health Insurance Coverage in the United States: 2011.
So what did financial advisors say in reaction to the report? In general, times like these call for a spending plan, a financial plan, and a financial advisor. These are also times that will require advisors to go outside of their comfort zone and help clients improve their human capital.
The need to help workers improve their human capital
Kent Smetters, a professor at the Wharton School at the University of Pennsylvania, noted that most of the losses in income are occurring in the less educated part of the workforce. “They face a double whammy of higher unemployment and under-employment,” he said. “Financial advisors, therefore, would be wise to look at the acquisition of additional human capital along with standard investment advice, including discussions about more education and training. Investment advice helps allocate what you already got whereas human capital advice says how to get more and, in many cases, stop failing behind.”
Learn to live on less
Another hard lesson that the latest report about income teaches us is that Americans have to learn on less, they have to learn to live below their means, especially if income remains stagnant or falls. “We have found that income perception is much more impactful on financial satisfaction than actual income,” said Mary Bell, the director of National Association of Counties and a Ph.D. student in financial planning at Kansas State University. “Given the times we live in, we must learn to live on less, but it doesn’t have to impact our overall financial satisfaction.”
To be sure, the middle class is being hit the hardest. “This is also the group that tends to be overleveraged; therefore, if we would simply live within our means and learn to be satisfied with what we have vs. what we don't have and still want, “ said Bell, who has worked on financial-planning issues for middle-class and military families for years.
Bell also said times like these call for some basic financial planning. “We are in a time where we must live what we've preached: save for a rainy day,” she said. “These times emphasize the importance of having and maintaining an emergency fund. And it's never too late to start. Even $10 a month is more than we had last month. It's also a great time to teach financial concepts because people are much more willing to hear a solution when they have a problem. If there is a silver lining in this economy, it's that people want to fix their financial problems. This provides an opportunity for lessons in financial education. Just-in-time education is when the student is most ready to hear and learn. “
A spending plan is a must
Marty Kurtz, the president of The Planning Center, Inc. and the current chair of the Financial Planning Association, says the findings of the Census Bureau report highlights the need for Americans to have a spending plan. “Unfortunate numbers,” said Kurtz, who, for the record, founded in 2007 First Step Cash Management, a cash flow system to help clients and advisers. “One hates to see the average income families are living on go down, but this recession has been a bad one.”
Unfortunately, employment and income rises are lagging indicators and may take some time to rebound, he said. “What is does say is that it is more important than ever for families to have a spending plan that makes sense,” said Kurtz. “One that helps them separate out their money so they can pay for the essentials, and not fall behind because of misallocating resources. It is hard enough to get by the way it is.”
For his part, Kurtz said advisors whether they are giving advice or selling products need to help clients understand the needs they are covering and “make sure that any expense (advisors) layer in is an expense the family can deal with in the long run. “These are the times for collaboration with clients,” Kurtz said. “Need only is not enough. We need to make sure the y can pay their bills also.”
Time to work with a financial advisor
Middle-income Americans might – in the wake of falling income – feel the need to hire a financial advisor.
“The implications for financial planning and its need are profound,” said Lisa A.K. Kirchenbauer, CFP, RLP, president of Omega Wealth Management. “How will people ever be able to retire unless they get some help planning, creatively, for the future? Otherwise, I think the prospects for retirement are diminishing. “
So, what can planners help people who have less to work with do?
Like Kurtz and Bell, Kirchenbauer said the need for cash management is greater than ever before. Planners can also help with strategic insurance planning, such as health, life, disability, as well as long-term care, which she said becomes even more important if the nest egg will be smaller. In addition, planners could help Americans make smart decisions about their investment portfolios, decisions that will protect “what they do have from things they can’t control like the fiscal cliff, tax rate changes, and the like.”
Plus, planners can provide gentle, but persistent coaching to get (Americans) to save more to help meet their goals, and make better financial decisions overall, be it tax planning, education funding or real estate, and perhaps – as Smetters suggested – move into a career that they can sustain beyond the traditional retirement age.
More planning, less investment management
Kirchenbauer also noted that advisors who have focused their practice primarily on investment management might have to switch gears a bit given the current economic climate. “It’s time to bone up on financial planning and start providing your clients with these services since without more focus on planning issues like those listed above, it may be hard to find new investment dollars,” she said. “In addition, if you only focus your practice on investment management, you are in the part of the business/industry that you can control the least thanks to all of the geopolitical issues that continue to impact the capital markets.”
Middle class benefits from planning
Others agreed that the Census Bureau report serves to remind the advice-giving profession that Americans might need an advisor now more than ever.
“Our ongoing research into the financial behaviors, attitudes and intentions of middle-class consumers has consistently indicated that people have a better financial outlook when they have a relationship with a financial planner,” said Scott Spiker, CEO of First Command.
For instance, he said the First Command Financial Behaviors Index reveals that 53% of middle-class military families (senior NCOs and commissioned officers in pay grades E-6 and above with household incomes of at least $50,000) with a financial planner feel extremely or very financially secure month to month.
That compares, Spiker said, to 44% of survey respondents who do not have a financial planner, resulting in a nine percentage-point gap between the two groups. What’s more, he said the gap is even bigger among the general population of middle-class consumers (again, with household incomes of at least $50,000). “We find that 39% of respondents with a financial planner feel extremely or very financially secure month to month vs. just 26% of those without a planner for a 13-percentage point gap.
Why do middle-class Americans who work with a financial planner have a better financial outlook? One reason, said Spiker, may be that they are more likely than other Americans to take control of their finances by actively monitoring credit scores, investments, their asset allocation, taxes and tax changes, loan rates, and savings rates.
“Middle-class consumers who put their trust in financial advisors are not passive delegators, but active participants in managing their finances,” said Spiker. “Do-it-yourselfers may not be investing as much time monitoring their finances as those people who choose to delegate some or all planning responsibilities to a professional.”
And then there those who see the latest Census Bureau report as yet one more example of the changes occurring in the world at large. “It is an unprecedented change in the human condition,” Said Richard C. Salmen, CFP, CFA, EA, a senior vice president and senior advisor with GTrust Financial Partners. “For the first time – literally – substantial and rapidly growing numbers of people have choices. For the first time, they will have to manage themselves. And society is totally unprepared for it.”
For his part, Salmen said people’s lives are more “financialized” than at any point in history and their need to effectively deal with the money in their lives is increasing each year. “What effective financial planning does is bring systems and process to dealing with the money in their lives that they did not have before engaging in the process,” he said. “Yes, you can do that on your own but most people do not.”
They don’t plan and it’s to their long-term detriment. “I like to use smoking as an example,” he said. “Even though millions of people who smoke know there are long-term health risks associated with the habit they do not see those risks as real for 30 years or more until the first heart attack or the lung cancer shows up. Unfortunately, most of the pain from not doing effective financial planning is of the long-term chronic variety like the challenges of smoking and people do not get the near-term wake up call to action they need.”
The fall in household income, he said, is just another example of a “money” issue that people have to deal with as they live their financial lives.
Others agree. “I think this report highlights the need for people to plan holistically and start planning early and have a worst-case plan,” said Stephen Chen, one of the founders of NewRetirement.com. “Hopefully people will find the time to step back from the day-to-day pressures to feed their family and think about their long-term plan.”
By the way, we came across several articles about the Census Bureau report that are worth reading. Here’s a sampling of them: Is Income Inequality Rising, and Are a Lot of Feathers Heavy?; Household Income Sinks to '95 Level; and Census: Middle class shrinks to an all-time low.