Eight months into the pandemic, advisors and their clients are rethinking the way they conduct their financial planning, especially their saving and spending strategies, according to Christine Benz, director of personal finance at Morningstar.
“One of the few upsides to the pandemic is that people are spending less and they have the opportunity to put a plan in place for a higher savings rate,” Benz said in an interview. “Advisors can work with clients on budgeting at this time.”
Options other than cash can be considered for the liquid assets, such as nonretirement brokerage accounts, which can be the simplest holding place for short-term cash needs, or a Roth IRA, which can be an effective multitasking vehicle for younger investors, she said.
In fact, advisors should be rethinking their approach to the entire client relationship, she added. “Advisors often have specialty areas, so they may need to delve into new areas now that they usually did not consider. They may not have weighed in on certain issues with clients in the past.”
For instance, clients may have more flexibility about where they live now that many are working remotely and may continue to do so even after the pandemic passes, Benz said. The current circumstances “may give some clients the opportunity to move to a lower cost area or an area with a better quality of life.
“The pandemic has given people an opportunity to think in bigger terms and re-evaluate their lives. This gives advisors a chance to be life coaches. Advisors who are so inclined are undertaking training in these areas. This is the next real wave for advisors,” she said.
People should also rethink how much they need to keep in liquid, emergency funds. The pandemic has brought this issue into stark detail and advisors should be customizing an emergency fund strategy that depends on the individual client’s circumstances. The lack of short-term financial planning is a pressing issue across income levels,” Benz said.
Advisors also now have the opportunity to delve into their clients’ health care costs. “Health care spending on average has actually declined in recent months and people are seeing the drawbacks to having health care insurance tied to employment,” she said.
For those who can afford it, high deductible plans combined with health savings accounts hold advantages. “Money can be put into a health savings account tax free and withdrawn for health care expenses tax free.” Benz said. “Or a health savings account can be used like a Roth IRA and money can be withdrawn for other expenses by paying the taxes.”
The current retirement landscape is complicated by the low interest rate environment the Federal Reserve has put in place to stimulate the economy. “Yield for bonds was a big part of retirement income in the past. That is over now because yields are so low. The value an advisor can add is that he or she can determine whether to sell some equity assets for the client to live on. There is a lot of education that needs to take place between the advisor and the client,” she said.
“Annuities are also going increase in use in the future,” she added.
Advisors can help early-retiree clients by mapping out a plan for their cash flow during retirement, including maximizing nonportfolio income sources like Social Security and making decisions about pensions, Benz said.