Have you had clients who love to spend more than they like to save? No matter how well they earn, they find they are unable to save even 5-10% of it. Jayant Vidwans, of Vidwans Financial Advisors, says that such compulsive spenders are difficult to manage. “As advisors we cannot actually change their behaviour. We can only warn them of the consequences of excessive spending. More often than not this has little or no impact on such clients,” he says.
Though it might seem difficult to change the spending behaviour of such clients here are a few tips to inculcate savings habits in them.
Show them how far this saving pattern will take them.
The first step in dealing with such clients is to show them in absolute terms how long their savings will last. Highlighting major future expenses and asking them how they will manage in such situations are other techniques advisors can use.
“I ideally show them that with their current spending pattern, they will be in deep financial trouble by the time they reach near retirement age. Though this will not change their spending pattern, it will at least shake them up. While few clients might brush off this warning, a few will start thinking about their spending style,” says Suresh Sadagopan of Ladder7 Financial Advisories.
Invest in funds with a lock-in period
One of the tried and tested ways to inculcate savings habit among such clients is to make them invest in funds with a lock-in period. “I usually suggest these clients to go for funds with at least three years of lock-in period. This ensures that they do not dig into their investments to spend frivolously,” says Jayant.
Any savings instrument, which has a longer lock-in period preferably with a tax benefit, is a preferred bet for advisors to deal with spendthrift clients.
Show them their problem areas
If a client shows he or she is willing to change, the best way to get their investments on track is to help them identify problem areas. Suresh Sadagopan says, “We should make them identify where they spend the maximum. Then we sit down with the clients and ask them which areas where they should reduce their expenditure and to what extent. We can’t expect miracles in the first sitting, but gradually their spending will reduce,” he says.
“Advisors however need to remember that these parameters change from person to person. The best we can do is to show them their problem areas and give them suggestions on how to overcome these,” he adds.