What Many Advisors Overlook in Boosting Clients’ Financial Security

Clark and Mitchell find that policies and interventions aimed at increasing the financial resilience of lower- and middle-income households can help them better respond to unanticipated income needs. They also seek to determine the factors and characteristics correlated with financial resilience — and to identify if these changed during the COVID-19 pandemic.

In the study, financial resilience is defined “as a household’s ability to withstand acute shocks having an adverse effect on its financial well-being.” While some of the inputs are objective, such as the ability to immediately cover three months of expenses in cash, other inputs are psychological in nature, such as whether respondents perceive their debt to be manageable and whether they are anxious about their finances today and in retirement.

Clark and Mitchell find that respondents’ average resilience scores remained relatively stable across the first two years of the pandemic period, but some variation between groups of respondents was found. The more financially resilient households were older, better educated and earned higher incomes.

Additionally, and not surprisingly, federal stimulus checks improved resilience, as did higher levels of financial literacy. By contrast, the authors explain, those with higher personal discount rates were less resilient.

What It All Means

Clark and Mitchell argue that their results suggest that programs aimed at improving financial resilience and financial literacy can both help households better cope with financial shocks and more successfully respond to unanticipated income needs.

They point out that, although financial resilience stayed relatively stable over the first two years of the pandemic, this may not necessarily continue as stimulus checks are no longer being issued. They conclude the paper by identifying the need for additional research to identify whether and which households continue to be financially resilient.

One key implication that financial advisors can take away from this study is the importance of psychological factors, in addition to objective financial measures, in the financial planning relationship. Helping clients to improve in both domains of financial resilience now may reduce their chances of being financially vulnerable in the future.

Ben Hampton, CFP, is a doctoral student at the University of Georgia.