A new study from DataPoints says that how people behave with regard to financial management can tip off advisors as to which kind of client (or potential client) they're dealing with.
The behavior of people with high wealth potential ("an indicator of one's propensity to build and maintain wealth over time"), said DataPoints in the study, not only differs from how those with low wealth potential behave, but can be a tipoff to other factors about those people's behavior toward money—behavior that can help financial services firms to better select and focus on clients likely to develop or maintain wealth.
The study, "Financial Behaviors & Wealth Potential: Demonstrating the Value of Predictive Assessments for Financial Services," lays out a number of ways to tell whether clients have high or low potential to develop wealth, even if they are not currently well off.
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In addition, the study reported that some factors can indicate whether a given pool of potential clients is likely to work with advisors or to be satisfied with their services.
Financial services firms, the study said, can use that predictive behavior to help develop not just their current but also next generation of clients.
The data assessed for the study came from 40 years' worth of information on "financially successful, self-made Americans that served as the basis for books such as The Millionaire Next Door."
Based on that information, DataPoints "examined the Wealth Potential of a sample of nearly 500 mass-market, mass-affluent, and high-net-worth respondents" to come up with its findings.
Here's a look at five areas of financial management behaviors that DataPoints says are predictive of wealth potential (or its lack).
1. Tracking spending on budget categories.
More than 60 percent of DataPoints' sample indicated that they know how much their household spends each year on food, clothing, and shelter.
However, high-potential respondents were considerably more knowledgeable, at 82 percent, about how much they or their household spends each year on major budget items.
Sixty-five percent of medium-potential respondents, and just 41 percent of low-potential respondents, said they had a handle on those budget categories.
2. Tracking expenses and receipts.
Keeping track of how much and where one spends money isn't necessarily a popular pastime, but both high- and medium-potential respondents indicated that they have easily tracked personal expenses and receipts compared to the low-potential group.
Nearly three times as many high-potential respondents—87 percent—indicated it was easy or very easy for them to track expenses, compared with just over a third of low-potential respondents.
DataPoints indicates that companies offering automated technologies for financial services should see this as indicating that there are key differences in how effective and potentially impactful their products could be for those that have struggled in the past to manage expenses and budgets.
Understanding those differences can provide for better-targeted product development and marketing that are based on client behaviors.
3. Time spent on financial planning.
Author Thomas J. Stanley of The Millionaire Next Door fame found that one key behavior of self-made, affluent individuals was that they spent significantly more time on financial planning than those who were not so successful at accumulating wealth.
Respondents asked by DataPoint about time spent on financial planning bore out those findings with similar results: high-potential respondents either make time for financial planning, through a disciplined approach to time management, or feel that whatever time they do have is being used effectively.
4. Attitude toward savings.
DataPoint's report pointed out a fundamental principle of personal financial management: Monthly expenses should be covered by monthly income and any positive difference should be saved for the future.
Although the results among high-potential respondents were lower than expected, DataPoint found that 85 percent of high-potential respondents indicated rarely or never taking money out of savings to pay monthly bills.
That was considerably better than medium-potential (59 percent) and low-potential (32 percent) respondents.
Being able to predict this action, the report said, could help advisors coach clients to stick to budgeting and saving goals.
5. Investing behavior during downturn of market.
High-potential respondents aren't freaked out by a downturn in the market, as evidenced by what they said they did during the September 2015 downturn.
More than 70 percent of the sample took no action, and 5 percent took money out of the market—while 24 percent actually put money in.
Broken down by level of potential, 31 percent of the high-potential group invested during the downturn, while 26 percent of the medium-potential group did so.
Among the low-potentials, just 10 percent invested in the downturn.
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