How advisors can bust their clients’ money myths

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When it comes to the art of money management, cultivating the right mindset is just as important as crunching the numbers. That’s why, advisors say, it’s so crucial to help clients see the disconnect between their perceptions and actual financial circumstances.

“A client with a six-figure salary who has saved up a lot of money and has no debt can still live with heavy feelings of guilt and shame and behave as if they live in a state of financial scarcity,” says certified financial planner Cindy Marques, co-founder and chief executive officer of Money MakeCents Inc. in Toronto.

“A lot of this stems from how they grew up and their experiences with money around family and friends.”

If someone spends years in poverty but then becomes affluent later in life, they may still deeply believe that they don’t deserve to spend their money or live in fear that they will end up in poverty again, she adds.

The opposite is also true, says Ms. Marques, who also works as a financial education specialist for Open Access Ltd. She has observed clients with limited financial potential spending their money without guilt or restrictions – often to keep up appearances.

“Social media exacerbates that as it’s easy to curate an image of your lifestyle that doesn’t necessarily represent reality,” she says.

“Having conversations that get to the root of why clients engage in certain money behaviours is an important step to holistic planning.”

The key is to avoid passing judgment despite your own beliefs as an advisor, she says.

Melissa Harrell, financial planner with McRae Wealth Management in Winnipeg, often advises her clients to read up on behavioural finance to learn how their money patterns can help them achieve their goals.

“A great book I’ve given to clients is The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel,” she says.

“Our roles extend far beyond just transactionally investing clients’ money to reach a return. It’s about understanding their goals, what keeps them up at night, and how we can create a path to move forward.”

As with any psychology, we cannot prescribe a set list of instructions to follow until we know what and how the clients think, she adds.

“The conversation about biases, myths, and money habits is an ongoing one,” she says.

Some common financial myths

One of the most common financial myths Ms. Harrell comes across is that renting a home is a waste of money. She cautions clients against applying a blanket rule to every scenario as renting can be a great decision in many circumstances.

Ms. Harrell points out the multiple factors at play – housing options in clients’ geographical region, property and land transfer taxes, condo maintenance fees, how long they plan to be in the property, the amount of their down payment, and when they’ll start paying off capital versus interest on the mortgage.

Another common myth Ms. Harrell debunks with clients is that all debt is bad debt. Instead, she encourages them to see debt as a tool to reach a goal with one caveat – being clear on the distinction between consumer debt versus debt associated with an asset or investment.

“Attaching a borrowing cost to a disposable asset or experience could lead to bad behaviours and mismanagement of your finances,” she says.

“But if you want to purchase a rental property to generate income and the property will grow in value over time, you need to forecast out the revenue, deduct the borrowing costs, and consider the growth rate of the real estate.”

As long as there is a net profit, the debt is not “bad” – it’s simply a business decision, she says.

Some clients mistakenly believe that unless they have an abundant amount to save or invest, it’s simply not worth even starting. The truth is everyone needs to start somewhere, and it’s always in their best interest not to delay, says Carmela Lombardi, financial advisor at FaithLife Financial in Newmarket, Ont.

“Not only does this establish good money habits, it also allows the magic of compounding to begin,” Ms. Lombardi says. “Interest grows on interest, even on seemingly small sums, and the result is exponential.”

The takeaway is time is money’s best friend, so starting early is key, she adds.

Another misconception is that keeping money in a savings account is enough to keep it safe. While this can be true for clients who want to stay away from volatility, it’s important to remember there are many types of risk, including inflation in today’s market, Ms. Lombardi says.

Clients who play it safe by accepting a lower rate of return are eroding their future purchasing power.

“If you’re earning 1 per cent in a savings account, but inflation is sitting at 6 per cent, your ability to purchase goods is compromised as your savings don’t go as far,” she says. “So, while it’s prudent to protect a portion of savings for short-term needs, it’s vital to establish a diversified portfolio that balances risk versus reward.”

Age, time horizon and purpose of investment are important considerations in shaping a strong financial plan and this is where working with a financial professional can really help, she says.

When working with clients, Ms. Marques makes a point of breaking down her advice into small bite-sized action items to relieve any feelings of overwhelm.

“It makes it easier to explain the reasoning and concepts behind each of these small steps, and therefore, make the full picture come across in a much more meaningful way,” she says.

“If the client understands why you’re giving the advice, and how it will allow them to achieve their goals, they are much more likely to execute the plan successfully.”

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