with Stephanie Holmes–Winton
Stephanie Holmes-Winton is a former Advisor, Financial Services Educator, Entrepreneur, and Writer who helped start the cash flow management movement in financial services. In her books Spent: Your Money Mindset is the Key to Your Financial Freedom and Defusing the Debt Bomb Revealing Hidden Wealth she educates advisors and clients how to focus on their cash flow so they can meet other financial goals, like investing for retirement. Her advice is very accessible and pragmatic. She was kind enough to answer a few questions for Exempt Edge regarding her innovative work:
Q. As an experienced former Advisor, why have you come to focus on cash flow management for advisors with their clients (especially since this is not perceived as an issue for high net worth clients)?
A. What I had discovered when I was an advisor and managed my own practice, was that lots of clients were making great money, but most had no idea where it was going. It was not uncommon for high income or high net worth clients to have to raid their investment accounts or borrow to deal with ‘unexpected’ bills on a regular basis.
What started as a focus on cash flow management for my own clients quickly showed itself as an area of educational need for the industry. So in 2011, I sold my practice and set out to be the leader in training for cash flow management for financial services. After all, it matters little what you earn, or how well an investment performs if you cannot maximize how far those dollars go. It’s not what you earn, it’s what you keep.
I discovered along the way that not only was this a necessary part of the financial planning and the advice process, but it was also highly profitable in symbiotic sort of way. Not only does an advisor on average double the value of a client relationship by focusing on cash flow, the client builds significantly more wealth, they can feel the effect of the cash flow plan in as little as ten to fourteen days and we see measurable impact on net worth in just two months.
Q. You advise in your book that clients should make investing and saving plans a ‘bill.’ Can you elaborate on why this is important for client’s success with retirement planning?
A. I found it fascinating when I really thought about the fact that people literally prioritize their hydro or gas company above their future selves. Most would always pay the bill, unless there were extreme circumstances. And if we decide not to pay our bills, we would not expect the lights to stay on. Yet this is exactly what we, and our clients, do with our financial futures. We act as if saving for the future is an optional thing to do, and then get discouraged when we get there and we get what we have paid for.
As advisors, we sometimes think our job is to help a client make the best return, but not only do we not have the ability to control investment outcomes, the returns are only part of the point. Clients need us to reframe things, like treating savings and investing like a bill. They need us to use language, analogies and examples to help them see the reality of their financial behaviour, and not just worry about fees.
Shame, fear, and opportunity cost calculations tend to be the way that popular media, the industry, and even advisors try to show their client the cost of not saving. But behavioural research says that shaming and logic are more likely to prevent the desired result. Reframing, treating investing like a bill, or explaining that their current behaviour actually appears to treat the heating company as if they are more important than the client’s future self. This will actually help clients make better decisions without making them feel bad, guilty, or pressured.
Q. You caution in your book that all discretionary spending is not equal, and give a great example using lattes of how clients need to prioritize what they value. Do you want to elaborate on this theory with our readers?
A. If you were to ask your client: “If I could reproduce every item whose purchase contributed to your current credit card balance would you re-purchase every single item at the same price you paid?” Almost everyone would say: “No!” It is not that we buy what we do because it is so important to us; it is because we spend electronically, and that we tend to not feel our spending as much. What happens is that everything has slowly become a priority no matter your client’s income, and when everything is a priority, nothing is a priority and unconscious spending will eat your client’s net worth. Also, as a financial professional, it is not your place to ask your clients to replace their judgement on spending priorities with yours. I share the example of my five dollar lattes and I ask crowds of advisors, by show of hands, if that expense is ridiculous. Most of the room (even the ones with a latte in front of them) will raise their hands and groan in disapproval.
If you told me the only way I was going to retire in thirty years is to give up lattes, I feel judged, threatened and sad all in the same moment. That is not how we want to make a client feel. Having an alternative way to show a client their limit, what is in their means. This way they can naturally reprioritize the way they spend on the things that actually matter to them, rather than spend unconsciously on every shiny object that comes in to their view. It is amazing what happens when you give someone a way to manage what we often consider discretionary items in a way that they can easily chose what is most important to them, and they can predict the consequences of their choices in the moment of spending.
Q. Most advisors are aware of the financial literacy task force that has been spearheaded by government called the Financial Consumer Agency of Canada (FCAC). Do you think this will help financial services clients? In your opinion, what should they be doing to create real change in Canada?
A. Well I am not sure I can effectively predict whether they are helpful or not, but awareness is always better than no awareness. My area of concern would be the fact that the report assembled identified many things, but most of the places where actual guidance or ideas for change were noted related to investment suitability and transparency. What showed up as an issue, debt and spending, was not really addressed with any practical solutions. In my opinion they need to deal with the financial behaviour of Canadians, including how we borrow and spend, in a way that takes in to account we are human beings and not logical calculators with a heartbeat.
I cannot predict when and if that will ever happen and I cannot influence it either. So we did not wait for anyone to pick us, to say this is your job. We decided to lead meaningful change in the area of cash flow management in Canada (and now in the US as well). We will not leave this industry the way we found it.
Q. It has been well stated in the media that a “retirement crisis” is looming as the boomer generation gets closer to retirement with little saved and record amounts of debt. Do you think Advisors can assist with this problem?
A. I think advisors are likely the only ones who can actually help with this problem. You cannot make a policy to change this, no new mortgage or credit card regulation will deal with what really needs to happen here. People need advice on their whole net worth creation strategy. This cannot neglect that their spending and debt not only impact their wealth accumulation years, but their wealth depletion years as well. When we examined the evidence, what we found is that industry generally did not have the tools, knowledge, or skills needed, to make fixing this issue a normal and profitable part of their practice.
So yes, Advisors are the answer. I often share this quote from Margret Mead when I finish a presentation: “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, that is the only thing that ever has,” to help take home the message that advisors are already the ones sitting across from their clients on a regular basis, they can have far more impact than any task force, finance minister, bank, or lending institution.
Q. Does the ‘financial literacy’ problem in Canada stem from poor cash flow and debt management? Why do you think smart clients have trouble getting the ‘little things’ right?
A. I think it stems from the fact that most of what we expect people to be ‘literate’ about is rather new in comparison to other things. The markets, currency, investment funds; these things are not 10,000 years old. Credit cards were not even available to the general public until 1958 with American Express. That means the baby boomers are the first generation to grow into adulthood with these financial products. The generation that raised the boomers told them debt was bad, but they did not teach them how to use credit. In this day and age, clients need to learn how to use credit wisely, not to just avoid it.
Add to that the nature of the impact of electronic spending and we have a bunch of people who do exactly what they have been set up to do. The evidence shows us that Canadians as a whole do not have any other predictable behaviour. Marketers know how we make decisions better than we do. Prices are forever rising. We have bills now that we must pay that did not even exist fifty years ago. The financial literacy issue is certainly drastically magnified by a lack of knowledge of how to manage our own financial behaviour. Add to that an industry that is not really compensated to help people with cash flow and you can see, we have got exactly what we should have based on the evidence.
I think all smart human beings have trouble overriding impulse and instincts that were made to keep us from getting eaten or starving to death. But in our modern world, they are set off by the wrong things. I think the more we can understand why we do what we do with money, and the more practical methods and tools people can use to set themselves up for success, with a professional by their side, the better. Being smart does not protect us from being human. The little things are constant and eventually wear us down, and these days we are so bombarded with messages and data that we are already worn down even more. The little things get fixed by establishing reinforce-able habits to support what we actually want. Tight budgets, lectures, and stricter lending criteria address none of the real issues.
Q. What would you recommend advisors and industry do to help their clients with debt and cash flow management? Where can they go to learn more?
A. The first thing Advisors need to do is accept that it is not their fault that clients unconsciously overspend or rack up debt, but it will, without a doubt, become their problem. You see with nearly 60% of Canadians retiring in debt, and given that 56% of the debt in this country is held by households with incomes over $100,000 (who are seen as being educated and answering financially literacy questions accurately) actually correlates to a greater likelihood of household debt….most advisor’s ideal client must be carrying at least some form of debt. So the first thing is to stop telling yourself that your clients are the exception to the rule, that it is everyone else who needs to care about this issue. Not only is that not true, but it leaves your practice very vulnerable to advisors who will deal with it.