'False timelines' and inadequate information raise risks in times of loss, warns seasoned CFP professional
Whether it’s death, getting fired, or the end of a long relationship, clients faced with personal tragedy often have to make financial decisions even as they process their grief. And according to one seasoned financial planner, too many mistakes happen due to one psychological pitfall.
“I think when people are going through a loss and have to make a financial decision, a lot of the time they make decisions on a false timeline,” says Sara McCullough, CFP professional and owner of WD Development.
Depending on the scale and the nature of it, McCullough says loss may disrupt a client’s life and cause them to reassess their priorities. In many cases, she says re-evaluating those objectives will take time – but people don’t always go through that process.
“If someone received a life insurance policy payout, they could end up with half a million dollars in their bank account,” McCullough says. “They don’t need to invest that right away. But then the bank may call them, and suddenly they feel pressured – that it’s irresponsible to just leave the money there, and they need to do something.”
One risk from acting too quickly: people could make decisions without the right information. McCullough recalls how early in the pandemic, she had a financial transition appointment with someone who had just been laid off and given a severance.
“One of the first things we talked about was his mortgage,” she says. “At the time, people were allowed to defer their mortgage payments, but he didn’t.”
The client’s colleagues insisted he should take the chance to put off his mortgage, but McCullough recommended that they look at his financial situation first. Even before he was laid off, he had enough emergency savings to pay for all his family’s expenses for six months. With the severance package he received, he was covered for 18 months of expenses, including the mortgage.
“I asked about his chances of being re-employed, and he said he already had two interviews. And one of his goals was actually to pay down the mortgage as quickly as possible,” she says. “So there was no reason to defer it.”
At McCullough’s practice, clients usually have enough of a financial cushion that they can afford to process their emotions before finalizing a decision. But in cases where a client only has a weeks-long runway to restructure their spending and finances, she says honesty is the best policy.
“If I had to explain to somebody, ‘You have this much in the bank account. You cannot afford the house. You need to be reemployed. You’ve got to move’ … it’s not good news, but it’s clear news,” she says. “We operate better with clear information, and I’ve seen that again and again.”
By meeting with a CFP, McCullough says, grieving clients can get a more accurate picture of what expenses they’re faced with, how much money they have, and how long it can last. Those projections, she says, will be useful in creating a goals-based spending plan.
When it comes to grief-loaded situations, she believes CFPs shouldn’t stop with a planning-by-numbers exercise. As a Certified Divorce Financial Analyst, McCullough often listens to clients talk through feelings of anger, sadness, and loneliness – all of which can shape their financial priorities going forward. That emotional sense-making, she argues, should be made just as integral to the KYC process as talking about clients’ finances.
“In these situations, we have to recognize that clients have to take time. We have to normalize the fact that grief doesn’t take three days, and their priorities might change,” McCullough says. “I believe CFPs need to give the client permission to pause. Tell them their options, and tell them you’ll revisit them in six, eight, or 12 months … that’s what I want for every client.”
