Recent surveys reveal a startling disconnect: while more than three in four Americans are anxious about their financial futures, only about a third of investors say they have a financial advisor (with rates plummeting to 1%, as expected, among those with no investments at all). For advisors working with the majority of Americans with such concerns, the challenge lies in addressing the often unstated topic of financial limitations. Many clients may hesitate to bring up constraints, while advisors might shy away from these potentially uncomfortable conversations.
However, by mastering the art of addressing financial constraints head-on, advisors can forge stronger relationships, craft more practical and effective plans, and ultimately provide greater value to clients.
"Unless your last name is Gates or Bezos, you’ve got financial constraints," Stephanie McCullough, founder and financial planner at Sofia Financial in Berwyn, Pennsylvania, told us. "Good conversations with clients will obviously bring out information about the constraints they face."
Drawing on insights from leading financial professionals, we'll examine the main limitations clients face, review proven techniques for broaching sensitive topics, and then discuss strategies like reframing limitations as opportunities as you help your clients reduce their financial stressors.
Key Takeaways
- Advisors should start conversations about financial constraints early to set realistic expectations and build trust with clients.
- Use empathetic language and active listening when discussing limitations to make clients feel understood and supported.
- Advisors can frame financial constraints as opportunities for creative problem-solving and prioritization rather than insurmountable obstacles.
- Advisors should regularly revisit and adjust financial plans for changing circ*mstances and evolving client priorities.
Types of Financial Constraints
Financial constraints are specific and objective obstacles, not general and vague problems. Nor are they just about a client's sentiments. Think of them as the difference between not liking long drives and working with someone on how to get from New Orleans to Houston with specific information about speed traps, bad weather conditions, orlong stretches without gas stations.
For example, retirement planning combines four types of financial constraints: liquidity risk, time horizon, taxes, and legal/regulatory constraints. If you recommend that a 35-year-old client contribute$5,000 per year to an individual retirement account, that person is effectively devoting $122,500 over the next 24.5 years to a non-liquid account. With some exceptions, your client will be unable to retrieve those assets without paying a large fee. Thus, just about all financial advice involves dealing with the trade-offs of dealing with client constraints.
Here are the most common kinds of constraints clients face, along with the role advisors have in mitigating them:
Behavioral Biases
In the last decade, financial advisors have become far more attuned to how they can reduce the constraints that don't come about from the kind of job they have or recent changes in the wider economy—but from within. Clients' behavioral and emotional responses to financial decisions are often their most significant constraints.
Advisors must manage clients' expectations, biases, and emotional reactions to market changes, often employing behavioral finance techniques to help clients overcome obstacles they might not know they have. An attunement to this has been part of a wider shift in financial advising. As Nicholas Gertsema, CEO and wealth advisor at Gertsema Wealth Advisors in Saint Joseph, Missouri, told us, "Advisors are changing from an investment-driven industry to an advice-driven profession. I believe that the advisors who will set themselves apart are the ones that are embracing behavioral finance and applying it to their practices."
Behavioral finance is about understanding how financial decisions around investments, payments, risk, and personal debt are greatly influenced by human biases and cognitive limitations in responding to information.
These constraints require financial advisors to be adaptable and empathetic, and many have developed great strategies for dealing with clients who have specific biases. "The two most common behavioral biases are confirmation and recency bias,” said Neil R. Waxman, managing director of Capital Advisors in Shaker Heights, Ohio. “Confirmation bias, in which an investor’s predisposition toward consuming information that only confirms their own bias, creates a circuitous vacuum of information that continues to reinforce and confirm their beliefs in an escalating manner. It’s natural for this to happen and hard to resist."
Waxman said behavioral coaching is "the most influential thing an advisor can do." For this reason, he said, "We describe our firm’s services as financial social work and have always valued and respected the role that human factors play in the financial planning process. ...Providing clients with insights on human and behavioral factors combined with the perspective and vision delivered by a sound financial roadmap has the greatest probability of successful outcomes for the client and the advisor."
Debt Management
High levels of debt, including student loans, credit card balances, and mortgages, are the major hurdle facing most Americans, including those meeting with financial advisors. The burdens of debt are significant beyond its financial effects. Advisors have to sort out strategies to manage and cut their debt while simultaneously planning for savings and investments.
Below are the averages for the different kinds of debts Americans have.
Liquidity and Short-Term Financial Needs
Clients often have short-term financial needs or emergencies that can disrupt long-term finances. Advisors often start by helping clients create emergency funds and liquidity plans to ensure they can handle unexpected expenses without derailing their financial plans.
Liquidity risk management—making sure a client doesn't run out of cash they need—is something financial advisors discuss far more than a few decades ago. Almost every investment involves an asset that is less liquid than cash, so the investor and his advisor have to consider how the investment limits future cash flow.
Investment Knowledge and Risk Tolerance
A lack of investment knowledge and uneven levels of risk tolerance among clients can pose challenges for advisors. However, tackling these issues is a chance to educate clients on solid investment principles and show them how they can align investment strategies with their risk tolerance and financial goals.
Below are what Americans have reported in recent years as the best long-term investments, giving advisors a sense of the information many Americans have vs. the advice most advisors would provide:
Market Volatility and Economic Uncertainty
Market volatility is a significant external constraint on client finances. Economic shifts can quickly upend long-term goals, lead to unpredictable returns, and derail even the best-managed long-term plans. For instance, a sudden market downturn can erode retirement savings, requiring adjustments to spending or even delays to retirement. Volatility will also affect the availability and cost of credit via changes in interest rates and alter asset valuations.
Regulatory and Tax Constraints
Advisors often work with clients to work with regulatory and tax constraints that can limit the investments and strategies available to them.
For example, should clients want to start a business or put money into alternative investments like precious metals or artworks, you'll need to highlight all the legal and regulatory constraints. High-net-worth clients may have special interests in philanthropic organizations or travel, but each of those comes with limitations and opportunity costs.
Time Constraints
All investors need to understand their time-horizon. This isequally true for a client who has a five-year-old daughter and wants to save enough money to put her through a four-year university education andfor a 50-year-old who is behind on retirement savings and wants to stop working before age 70.
| Common Financial Constraints Clients Face | ||
|---|---|---|
| Constraint | Description | Advisor's Role |
| Limited Income | Fixed or irregular income, difficulty saving/investing consistently. | Create budgets, prioritize expenses and debts, and identify income-boosting prospects. Develop investment strategies aligned with cash flow (e.g., dollar-cost averaging). |
| High Debt Levels | Burdened with student loans, credit card debt, or mortgage debt. | Create debt management plans and prioritize high-interest debt payments. Educate clients on refinancing/consolidating debt. |
| Limited Investment Knowledge | Lack of understanding of investment basics, risk tolerance, or asset classes. | Educate on investment fundamentals, explain options, determine risk tolerance. Guide the creation of a diversified portfolio aligned with goals and knowledge level. |
| Time Horizon Constraints | Short-term goals conflict with long-term objectives, or major goals are a relatively short time away. | Help prioritize goals, allocate resources, create timelines for achieving each. Develop strategies to balance short-term needs with long-term growth. |
| Liquidity Needs | Needs for access to cash for unexpected expenses/emergencies. | Help build three-to-six-month emergency fund. Recommend liquid investments that have more liquidity. |
| Tax Implications | Taxes impact investment returns and financial planning. | Understand client's tax situation, recommend tax-efficient strategies (e.g., tax-loss harvesting, tax-advantaged accounts). |
| Emotional Biases | Make irrational decisions based on fear, greed, or other emotions. | Educate clients on behavioral biases and help them develop a disciplined approach. |
Initiating Challenging Conversations with Clients
One of the most crucial skills for financial advisors is the ability to have frank, sometimes uncomfortable conversations with clients about financial constraints. These discussions are essential for creating realistic financial plans and ensuring long-term financial stability. However, broaching these topics requires tact, empathy, and careful preparation.
McCullough said financial advisors might be skittish about approaching tricky topics, but your client likely already knows it's coming. She shared an example of working with one of her clients, a widow living off an inheritance. The client couldn't work for health reasons, but she might live another 20 to 30 years. Given the finite amount of inheritance, her real estate taxes, maintenance, and other costs were eating away too much from her savings. "It became obvious that the cost of continuing to live in her home was unsustainable," McCullough said. "But she loved that house—she had it just the way she liked it after years of effort. It was in the neighborhood where she had friends and support, and it had space for her adult daughter, who often stayed with her for several months at a time."
McCullough's approach to this delicate situation offers valuable insights for any financial advisor (or anyone, frankly, who has to approach a complex topic with someone else):
- Anticipate client reactions but don't let them stop you: McCullough said, "I was nervous to have the conversation, to tell her that she needed to move." This acknowledgment of potential difficulty is crucial in preparing for such discussions. How many of us have put off such conversations for years—or decades—with loved ones? Nevertheless, this is part of the work of the financial advisor.
- Present the facts clearly: The unsustainability of the client's living situation was "obvious," McCullough said, and she let the concrete data lead the conversation, staying on the firmer ground of what was happening, not what the client wished to be the case.
- Be prepared for surprises: "To my astonishment, she was totally fine!" McCullough told us. Clients are often more aware of their financial constraints than advisors expect.
- Emphasize the long-term benefits: A tactic the best financial advisors often use is to help clients imagine themselves in a situation to make specific goals real for them. For McCullough, that meant "emphasizing" to her client "the security her future self would feel."
- Offer ongoing support: Of course, getting on the same page is just the first step. Afterward, it's natural that clients will hope that something has changed, that the constraints have gone away. Simply put, the client will need reassurance. "She would call periodically saying, 'Are you certain this is going to help?'" McCullough said. This highlights not just the importance of continued communication and support but also how meaningful the work of advisors is beyond spreadsheets and portfolio management.
How Do Financial Advisors Manage Their Emotions?
Financial advisors have the knowledge, expertise, and practice to weather market volatility. More experienced advisors have seen economic downturns before and know how to stay patient and which investing strategies to employ. Financial advisors also understand the long-term implications of investing and understand how today's changes are often temporary.
Can a Financial Advisor Drop a Client?
Yes, in some cases, a financial advisor might need to part ways with a client. Generally, this is done in person and then followed-up with an email or letter to clearly state that the relationship is over and to set a date for when to transfer assets.
Why Do Financial Advisors Ask Open-Ended Questions?
Financial advisors do this because this is the best way to get clients to discuss their aspirations and goals. Ultimately, the client's satisfaction matters the most, so an advisor needs to get a clear idea of their values, aspirations, and risk profile. But it's also simply a part of relationship-building. "I find that clients and prospects find it more enjoyable when I'm actively listening, which helps us to build a better connection," said Gregory G. Guenther, a financial planner at Grantvest Financial Group in Matawan, New Jersey.
The Bottom Line
Financial constraints are a reality for nearly all clients, regardless of their wealth level, and financial advisors often have to provide them with that reality check. As a financial advisor, your role is to identify these constraints—which can range from behavioral biases and debt management to market volatility and regulatory limitations—and help clients navigate them effectively. By initiating direct discussions about these constraints early in the relationship, you can set realistic expectations, build trust, and create better financial plans.
The key lies in your approach. Use empathetic language and active listening to make clients feel understood and supported. Frame constraints not as insurmountable obstacles but as opportunities for creative problem-solving. Remember to regularly revisit and adjust financial plans as circ*mstances change. By mastering these skills, you can provide greater value to your clients, helping them achieve financial security and peace of mind despite the constraints we all must face.
