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Financial stability can be ambiguous, and a person’s economic condition can change at any given point, sometimes without notice, leaving one feeling caught off guard and immensely vulnerable.
Predicting which direction a person's financial needs will move can be a difficult task. A change in market conditions can leave one’s portfolio registering bigger losses and smaller gains. Higher inflationary pressures can cause a decline in the purchasing power of one’s savings, leaving one having to pay more for the same basket of goods and services.
Planning for the future and successfully helping clients navigate tumultuous economic events is one of the most important roles any financial advisor can have. However, preparing for a client’s unexpected job loss can cause bigger calamity for clients, while advisors need to equip themselves with the task of helping to navigate their clients through this stressful time.
Knowing when or how a client might find themselves on the receiving end of a pink slip seems impossible. Nonetheless, this is when it’s important to backtrack and consider what possible strategy you may have in place that will help you guide your clients through their unemployment.
Review current savings and emergency funds
Being sympathetic can help your clients feel assured that you can assist and guide them through the process following the announcement of them losing their jobs. However, more than this, it’s important to immediately begin reviewing your client's current savings and emergency fund situation.
An important part of planning for unexpected expenses is to ensure that all your clients have a good amount of money stockpiled in an emergency fund. The traditional rule of thumb is to make sure that clients have at least six months of their income saved up. This will give them enough financial leverage, and ensure they have enough saved to help carry them through the next several months.
As an advisor, your role is to ensure that clients understand the importance of saving enough of their earnings each month for unexpected expenses. Even long before ever needing to use their emergency savings, it’s a good idea to ensure that you and your client routinely consider how much they are saving each month, and where they can make improvements.
Prioritize financial adjustments
Though not all clients will share a similar level of financial safety following unemployment, you and your clients must prioritize making more effective budget decisions. Having a more hands-on approach will ensure that you can review all current expenses, and better estimate their near-term needs.
Start by working through possible budget options. This will allow you and your client to estimate whether their emergency savings will be enough to cover their expenses and how long will this last them. Don’t forget to factor in possible unemployment benefits or insurance payouts to help bolster savings accounts.
Something you need to communicate with your clients is the possibility of budgetary constraints they may experience. In some instances, clients will need to make do with less money each month or perhaps make more severe financial cutbacks as a way to help them remain buoyant until conditions improve again.
By effectively communicating the importance of prioritizing having a budget, and making financial changes may help your clients better understand the severity of their condition, but more than this, ensure they are aware of the financial changes they need to make.
Assess the near and long-term plan
With two of the most important steps accounted for, you can start to consider the near and long-term outlook for your client. During this phase, it’s important to begin talking about any next possible steps they can take to help them overcome this challenging period, and what they consider should their next steps be.
For instance, you might want to assess whether your client is in a position to start looking for new employment opportunities following the recent layoff. While some individuals may be quicker to jump to the next thing, others often require a bit of emotional support throughout the process.
Next, clients will need to be aware of near-term financial changes that might impact their long-term planning. For instance, a client who may have been saving up for a big international trip at the end of the year might need to put these plans aside for the time being.
Similar as with investors and traders using applicable data to better understand the financial direction of a given asset, your role as advisor will be to review your client’s financial position to clearly determine the best course of action and to minimize potential near-term risks. This investigation will allow you and your client to understand how their lifestyle and spending habits will need to be adjusted to meet their financial obligations.
While there may be multiple moving parts to take into account, consider what any near-term challenges might be for your clients, and whether you can find any possible solutions that meet their needs without having to make major compromises.
Having a plan will give your clients more clarity about the road going forward, but on top of this, you will have a clear vision of what they expect from you and how you can adjust your approach to meet their needs.
Apply for unemployment benefits
Next, start working with your client to see whether they are eligible for any unemployment benefits. In some instances, clients may be eligible for state-sponsored benefits or may receive a payout from their employer. Depending on the situation, it’s important to consider all possible options.
Employer-sponsored benefits
- Extended benefits: This provides additional financial support for employees covering the weeks or months before standard government benefits kick in.
- Unemployment claims support: Employers may provide additional support for employees such as expediting their unemployment claims. This may help an employee receive benefits faster.
- Supplemental financial assistance: Depending on how long an employee has been with a certain company, an employer might provide a higher weekly pay for retrenched employees compared to state-sponsored benefits.
State-sponsored benefits
Most states have an allocated state-sponsored unemployment benefits program. These programs can vary from state to state, and the payout amount received will depend on several factors, including:
- Eligibility criteria: Each state has set up guidelines for eligibility which need to be met before a person can receive any benefits. In this case, many states do not allow residents to obtain unemployment benefits as part of their retirement plan.
- Earnings calculations: The amount a person will receive will depend on the state’s earnings calculations. This usually takes into account things such as length of period worked, and weekly earnings.
- Active jobseekers: In some states, residents are required to be active jobseekers, and report back to a state representative to receive unemployment benefits.
As an advisor, ensure that you review all possible options that your client has available, and what the eligibility requirements may be to qualify for state-sponsored benefits. Seeking to leverage unemployment benefits should form part of your near-term planning, and contributions should be calculated as part of the financial planning.
Determine client risk tolerance
Part of the long-term planning process includes determining your client’s current risk tolerance. In this case, whereby your client may be more susceptible to higher levels of risk, due to broader financial uncertainty, adjusting portfolio exposure and investments is crucial to forward-looking growth.
To determine your client’s risk tolerance, you will need to consider the following:
Near-term objective: For many, this would include having enough financial leverage to ensure their financial well-being while actively seeking new employment. Additionally, ask about any possible financial stressors. This may include things such as paying off their mortgage, a loan, or covering medical bills.
Investment objective: Is your client seeking investment vehicles that they can use to supplement their income? Should this be the case, how do current investment strategies align with forward-looking goals?
Risk capacity: Does your client have enough capacity to carry the current risk of being unemployed? For instance, do they have enough financial security from their emergency savings to help meet their financial needs?
Risk-return: Changing portfolio objectives could mean that clients might need to take on lower-risk investment vehicles, which might deliver lower returns in the near term. Consider whether your client is comfortable with this trade-off, and what other possible options there may be.
Behavioral bias: Something to keep in mind is that clients may have different levels of investment confidence. Consider how losing their job or being without a full-time income can affect their investment confidence and how comfortable they might be exposing their portfolio to various levels of risk.
Emphasize diversification
During your initial conversation with your client, highlight the importance of having a broad diversification strategy that will help them absorb the loss of their full-time income. However, by this point, you should have developed an approach that ensures your client’s portfolio is not weighted towards a single investment vehicle.
As Vanguard explains, diversification ensures that an individual portfolio can leverage the concept of correlation. What this would mean is that having investment vehicles that move in the same direction all of the time can create a low correlation. Having a portfolio with low correlation can impact both near and long-term returns and the pace of investment growth.
Consider to balance your client’s portfolio to provide them with a medium to high correlation, but simultaneously taking into account their level of risk tolerance. Having an analytical approach is important during this process because you can review portfolio asset allocation, while taking into account data within investors relations to align portfolio correlation with near and long-term returns.
For instances where clients have a very low-risk tolerance, consider adjusting investments to provide them with near-term returns instead, while focusing on building long-term financial stability.
Diversification can be hard to accomplish, especially once a client has lost their main source of income. Nonetheless, these activities should provide you and your client with a clear pathway to better understanding how to adjust current investment to address further looking needs.
Provide appropriate support
Knowing that a client may be having a hard time coping with the stress of being unemployed can be a difficult thing for advisors. During this time, you must seek to provide your clients with the necessary support they need as they begin to adjust to the change that they may be experiencing.
Here are some practical things you can do to help support your client more effectively:
- Schedule routine calls or meetings: Try to reach out to your clients every several weeks to ensure that they are coping with the change.
- Provide guidance: Provide more real-world advice on how a client can make the necessary changes to adjust to living on a smaller paycheck.
- Offer job search assistance: Should you have the capacity, and feel comfortable to support your clients in a more personal way, try to offer them job search assistance.
- Direct support: Get the hard work out of the way first, and communicate with your client that you are there to support them throughout the process.
Remember that though you may be a service provider, you remain a human first. Should you find that your client is having a hard time coping with being unemployed, ensure that they seek out support from others or guidance from other career professionals.
Concluding Thoughts
Taking into account that life can change at any given moment leaves a feeling of uncertainty. However, knowing that you can provide your client with the necessary support and guidance throughout this phase of their life will ensure that they make decisions that will help support their financial well-being and provide them with a sufficient safety net.
Understanding how your clients will react in such a situation will provide you with the necessary insight to develop a strategy that will deliver more appropriate results. By assessing their tolerance, you will have a clear vision going forward, helping put your client on the right path, despite having to live through the loss of employment.