Watch out for the financial health paradox

Data point to a gap between consumers’ self-assessments of financial health and their actual behaviour

Watch out for the financial health paradox

Anyone who’s ever worked with a coach knows that one of their most important duties, if not the most important one, is to hold a mirror up to their clients. That means giving candid feedback when they see their client going off-track from their goals, and helping them get back on the path to health.

That doesn’t just apply to fitness coaches; it’s also true for financial advisors, who must provide the right behavioural coaching to steer their clients away from self-sabotaging tendencies. That includes chasing hot investments, selling stocks out of sheer panic, and failing to acknowledge their actual state of financial health.

That’s the kind of cognitive dissonance that US consumers are suffering from, according to a recent report from EY and NextWave Consumer Financial Services. The report warns of four paradoxes that are driving the consumer financial services industry, one of which is the so-called “financial health paradox.”

The paradox arises from the halo effect of a strong economy. The decade since the financial crisis had brought sustained economic growth for the US, including a 10-year bull market that has let the S&P Index post a 14% return on an annualized basis. Average hourly earnings for US workers have also reportedly risen by 16% since 2012, while unemployment is hovering near all-time lows and consumer confidence remains at historic highs.

“Not surprisingly, our NextWave research confirms that the economy’s halo effect extends to consumer sentiment about financial well-being,” the report said. On average, 83% of consumers in the US rated their own financial health as “excellent,” “very good,” or “good.”

Dividing the respondents by asset level, they found that 86% of mass-market investors gave those same self-ratings; among the mass affluent and the high-net-worth segments, the percentages rose to 94% and 98%, respectively. Focusing on different age groups, the report said that 90% of 18- to 24-year-olds gave themselves those favourable self-assessments; similarly high rates were observed among 25- to 34-year-olds (95%), 35- to 49-year olds (90%), 50- to 64-year-olds (99%), and consumers aged 65 and older (97%).

However, “research shows that US consumers are spending more, saving less, borrowing more and not focusing enough on their long-term financial futures,” the report said. It noted that while the suggested minimum household savings rate is 10%, current household savings rates in the US stand at 6%. The debt picture is also bleak, with consumers in 2019 holding US$10.3 trillion in outstanding debt from non-mortgage loans and US$960 billion from outstanding credit card debt — more than twice the credit-card debt levels observed in 2009.

That has redounded to a US$4.3 trillion retirement-savings gap in the US, which is likely contributing to financial stress felt by 60% of US consumers.

“For individuals and families, financial well-being is about more than feeling confident about the economy; it’s about the daily behaviours, actions and decisions that build toward financial stability and security,” the report said.


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