Telling a client how to spend their money might make them a better client for you

by Jill Chadburn on 20·10·2022

As a financial adviser it is your job to get to know your client and this is normally done via factfinding.

Given that you must prove how your recommendations might impact the client’s financial situation, you need to know a lot about a client’s income and expenditure. 

A client’s income is very black and white, whereas how you categorise expenditure is a very grey area, as it is all down to people’s perspective.

While essential expenses are every expense related to living, non-essential expenses are usually the expenses that you don’t necessarily need. For example, expenses such as rent, mortgage, debt repayment, mandatory insurance, utilities, groceries, or medication are essential ones that you need to pay for living. However, things such as clothes, shoes, makeup, video games, gym membership, and, yes, even the Netflix subscription, are non-essentials.

So, essential expenses are, well, essential. You must pay for them no matter what because you either need them or they are a financial responsibility. As for non-essential ones, they often arise from wants, not needs.

As an outsourced paraplanner I see numerous factfinds from clients from all walks of life, where one client’s essential expenditure is £900 per month, whereas another client has £6,000 per month essential expenditure.

Who is to say exactly what is essential expenditure and what is not?

We all agree that food is classified as an essential expenditure.  However, is it essential that you shop at Waitrose when you are able to get the same groceries at Aldi?  There have been numerous articles written on this cost comparison and one article showed that the difference in price for the same shop was approximately 44%. (https://www.lovemoney.com/news/18071/aldi-vs-tesco-vs-waitrose-which-supermarket-cheapest-best-tasting ).  That is quite a big saving you could be making each week, but some people even after reading the article and seeing the saving will still shop at Waitrose.

Also most people would find that having a car and all the running costs and insurance it incurs as essential. But is a BMW X7 valued at around £79,270 essential or would a Skoda Kodiaq valued at around £30,415 which is over 50% cheaper, not be sufficient?  You may want the flashy, all singing, all dancing BMW but is it essential?

Your chosen lifestyle will also impact on what you classify as essential expenditure.  Is it essential to send your children to a private school, have a nanny, send Jane to ballet lessons and Joe to soccer club? Some parents will say yes, while others will review the above as a luxury. Based on the Independent Schools Council (ISC) Census 2019, private school fees on average, you can expect to pay around £14,000 p.a. for a pupil at a day only school and up to £35,000 p.a. for boarding school plus private school fees have risen faster than inflation every year for the past 10 years.

Some people are also choosing pets over parenthood. Forbes magazine has stated that in the US ‘Millennials tend to be delaying traditional life milestones like marriage, home-buying and baby making, therefore it is no surprise that millennials are adopting more pets: 35% as compared with 32% of Boomers, according to research firm GfK. Fifty-seven percent of millennial households own a dog versus 51% of all U.S. households.’  (https://www.forbes.com/sites/erinlowry/2016/08/31/why-are-so-many-millennials-opting-for-pets-not-parenthood/?sh=18c85c643963 ).

A pet owner, therefore, may view Pet Insurance and a Vet Health Care Plan as essential expenditure, whereas a non-pet owner would view this as frivolous spending.

You will also have people that have ‘bad’ habits, such as drinking, smoking or even gambling, where they will view this as essential expenditure as they could not do without these things. If you were buying four bottles of wine each week and it cost around £7 per bottle, that would cost £1,456 per year.  The same with smoking if a packet of cigarettes cost approximately £10 per pack and you smoked 10 cigarettes a day, roughly 3.5 packets a week, that would cost £1,820 each year. Also drinking and smoking will also have the knock-on effect on applying for life cover, by having the premiums rated, which will then increase their essential expenditure or not even be able to afford the premiums in the first place.

So why suddenly are we interested in someone’s expenditure?

Wholesale energy prices increased rapidly from the second half of 2021 onwards. Many consumers were protected, at least initially, by the energy price cap. It was increased by 12% in October 2021 but rising wholesale prices led to a much larger increase of 54% in April 2022 and Ofgem announced a further planned increase of 80% on 1 October 2022.

Unfortunately, it is not just energy prices that have increased, the Consumer Prices Index (CPI) rose by 10.1% in the 12 months to September 2022

That is quite a hike for most households. So where will this money come from to pay for this increase in our standard of living?

Therefore, it is even more important nowadays to understand your clients’ spending habits and what they classify as essential expenditure.

As a financial adviser you can help your client’s re-think their spending habits when you are completing a Cashflow Analysis.  There is no reason why you can’t ask your clients for their last 6 months’ bank statements.  You can do some cursory analysis of their spending and include your finding in your annual review.

By reviewing their circumstances at each annual review and providing a holistic financial planning strategy to determine if their lifestyle is sustainable now and, in the future, and if not, what can they do to make their lifetime goals achievable. 

This type of advice is not directly fee earning but is the sort of ‘added value’ that we suggest to encourage greater client loyalty.

Further reading:

COBS 9.2 – assessing suitability

COBS 9.4 – suitability reports