Measuring Financial Well Being 1. Course Introduction 1.1 Course Start Notes: Welcome to Measuring Financial Well-Being. This course is being offered to meet some of the continuing education requirements for Certified Financial Planners. Click Next to begin the course. 1.2 How to Use This Course Notes: Before you start the course, here are some pointers on navigation: * Use the Back and Next buttons at the bottom of the screen to move through the course. * You can click the Menu button at the top left of the screen to see every page of the course, track your progress, and to navigate to any page. * You can click the Resources button at the top right of the screen to access links and resources related to the course content. * This course contains audio. You can turn the audio on or off at any point using the audio icon below. 1.3 Course Welcome Notes: Today’s course will introduce you to the financial well-being scale developed by the Consumer Financial Protection Bureau (also referred to as the CFPB). You will learn what the financial well-being scale is, what it measures, and perhaps, most importantly, how you can use it on the job. 1.4 Receiving CE Credit Notes: You may be taking this course to receive continuing education (CE) credit. This course is intended to provide one hour of CE toward the requirement for the Certified Financial Planner (CFP) designation. This course is an overview level course relating to the client and planner attitudes, values, biases, and behavioral finance objective in the CFP educational framework for CE credit. 1.5 Course Requirements Notes: This course will run one hour. To complete this course and receive the continuing education credit, you must touch every page and pass a 10 question multiple choice assessment with a score of 70% or better. Click Next to continue. 1.6 Course Outcomes Notes: After completing the course, you will know how to administer the financial well-being questionnaire and interpret the results. You’ll have a useful tool for leading meaningful discussions with clients, a way to build trust and discover your clients’ true priorities, and a means to measure - and to celebrate! - incremental progress. You will also be able to use the questionnaire to measure changes in financial well-being over time in individuals and populations. 2. Defining Financial Well-Being 2.1 What Is Financial Well-Being? Notes: What do you think of when you think of financial well-being? We all have a different answer to this question. As you might suspect, financial well-being is subjective. 2.2 Same Stats, Different Feelings Notes: Let’s look at an example. Both men earn eighty-five thousand dollars a year, have more than 250 dollars in savings and stick to a budget. Despite having similar objective attributes, they feel very differently about their money positions. 2.3 Bureau Definition of Financial Well-being Notes: The CFPB’s definition is intended to be universal, no matter where you are in life, and intuitive. The CFPB defines financial well-being as a state of being wherein you: · Have control over day-to-day, month-to-month finances, · Have the capacity of absorb a financial shock, · Are on track to meet your financial goals, and · Have the financial freedom to make the choices that allow you to enjoy life. The CFPB’s definition is based on the consumer’s perspective, revealed by nearly 60 hours of open-ended interviews. Since the CFPB released the definition, it has been adopted for use by financial educators, employers, foreign countries, and more. 2.4 Objective Measures Notes: While many financial advisors use objective measures to understand a client or group, such as income, net worth, cash flow, budget, balance sheet, debt-to-income ratio, and savings or investable assets, this information can be overwhelming - for the client and for the planner - and doesn’t always give the whole picture. 2.5 Security and Freedom Notes: Another way to look at it is “financial well-being means having a sense of financial security and financial freedom of choice, in the present, and in the future.” Review the graph to see how the four elements work together. This definition probably aligns well with your client’s goals. As a financial planner, you can help your clients achieve a sense of financial security and financial freedom of choice. 2.6 Check Your Understanding Notes: Take a moment to check your understanding on the content covered so far. Answer the following question. 3. The Financial Well-Being Scale 3.1 A Holistic Picture Notes: Financial well-being can affect more than just financial health. Financial stress can affect physical health in many ways. You are in a unique position to have a positive impact on the wellness of the people you serve. Understanding your client’s financial well-being could help you do your job more effectively. When you understand a person’s holistic financial picture, you can better tailor your service to their needs. 3.2 Developing the Scale Notes: Let’s talk about the science behind measuring a person’s financial well-being. Following a rigorous research effort to develop a consumer-driven definition of financial well-being, the CFPB developed and tested a set of questions-a “scale”-to measure financial well-being. The scale is designed to allow practitioners and researchers to accurately and consistently quantify, and therefore observe, something that is not directly observable. 3.3 Scale Purpose Notes: The purpose of the scale is to help practitioners and researchers: * Quantify and compare financial well-being scores across time or across individuals * Study the relationship between financial well-being and other factors We’ll discuss more about how practitioners like you can put the scale to use later on. 3.4 What Is the Financial Well-Being Scale? Notes: The financial well-being scale allows you to work together with your clients to discover solutions and plans of action. It is part of your toolbox and can be a helpful tool in your entry conversation and in monitoring change over time. The financial well-being scale is not a diagnostic and does not identify a topic or action that a person should take to improve financial well-being. It does not take the place of any other financial planning structures or techniques that your practice already uses. However, we find that most people have a clear sense (sometimes brought into focus by the questionnaire) of their most important issue or need. 3.5 Developing the Questionnaire Notes: The financial well-being questionnaire consists of ten questions. The CFPB underwent a multi-step research process to identify the questions for the scale. Click on each step to learn more. Icon 1: A series of cognitive interviews were conducted to ensure people understand the questions and what they are designed to ask. Icon 2: Factor analysis was used to select the questions that best measured the underlying concept of interest. Icon 3: Three rounds of psychometric testing with over 15,000 respondents were performed to select the questions that provided the greatest reliability across adults . 3.6 Public & Free Notes: The ten questions provide an accurate reading of your client’s financial well-being. The financial well-being scale is publicly available, free of cost, and free from copyright. 3.7 Questions Describing A Situation Notes: For these questions, answer, “How well does this statement describe you or your situation?” 1. I could handle a major unexpected expense 2. I am securing my financial future 3. Because of my money situation, I feel like I will never have the things I want in life 4. I can enjoy life because of the way I’m managing my money 5. I am just getting by financially 6. I am concerned that the money I have or will save won’t last Response options are: Completely, very well, somewhat, very little, and not at all. 3.8 Statements That Apply Notes: For these questions, answer, “how often does this statement apply to you?” 1. Giving a gift for a wedding, birthday or other occasion would put a strain on my finances for a month 2. I have money left over at the end of the month 3. I am behind on my finances 4. My finances control my life Response options are: Always, often, sometimes, rarely, or never. 3.9 From Questions to Score Notes: Once the questionnaire is completed, the financial well-being score can be determined. A person’s financial well-being score is generally stable and should not vary much day-to-day; for this reason, it can be used to measure differences in an individual or a group over time. Use the questionnaire to measure changes in financial well-being over time in individuals and populations 3.10 Administering the Questionnaire Notes: Now that you understand the CFPB’s definition of financial well-being and the purpose of the financial well-being scale, let’s discuss how to administer and score the questionnaire. The questionnaire can be administered in two ways. First, the questionnaire can be self-administered. The client takes it independently and returns with their results for more conversation. Second, as the coach, you administer the questionnaire. This is the recommended way to administer the questionnaire. You sit down with your client, read the questions, and record their answers. 3.11 Tips for Administering Notes: Here are a few tips to follow when administering the questionnaire. As the administrator of the test, you should read the questions exactly as written and not steer the client toward an answer or your interpretation of a question. You must ask all the questions. You must score it as directed to get accurate, comparable results. Do not change the wording or avoid words you think are awkward. The questionnaire answers should reflect the client’s own definition and understanding of the questions. 3.12 Preparing for Emotional Reactions Notes: When implementing the questionnaire, it’s important to be prepared for a variety of reactions. Financial topics might trigger an emotional reaction in your client. The questions may bring memories and feelings to the surface. Be prepared for this and keep in mind that the financial planning profession is deeply connected to people working to achieve their important life goals. 3.13 Answering Questions Notes: Your client may also ask about the wording used in the questionnaire. Encourage your client to use their own definitions. For example, if your client wants to know what constitutes a “hard time,” ask them to answer the question using their personal definition of what a “hard time” is. 3.14 Open Source Code Notes: The CFPB’s code is open source, so developers can use the code and the technical report to recreate the scale and scoring calculation. 3.15 Ways to Score Notes: The method for scoring the questionnaire depends on how it was administered. The online version of the questionnaire exists that provides automatic scoring. You can save or print the PDF after taking the online questionnaire, but answers and scores cannot be saved on the CFPB’s site. Click the link on the slide to access the online version. If you choose to use the paper version, you will need to score the questionnaire yourself. Click Next to learn more. 3.16 Scoring the Questionnaire Notes: When scoring the questionnaire, here are a couple of key points to remember. A questionnaire can be scored using the scoring worksheet only if the respondent provided an answer to all questions in the scale. Any responses such as “don’t know” or skipped questions make the use of the look-up table inaccurate. If you choose to manually score your client’s questionnaire, determining their financial well-being score is a two-step process. You will need the scoring worksheet to complete these steps. Click the link to download the worksheet. Click Next to learn more about scoring the questionnaire. 3.17 IRT Analysis Notes: The score used for the financial well-being scale is based on an Item Response Theory (or IRT) analysis, so scoring responses takes more than just addition. Here are three facts about the IRT analysis you may find useful when administering the questionnaire and discussing the questions and results with clients. One, an IRT analysis underlies the scoring model used in standardized tests such as the SAT. Two, the IRT is a statistical method that provides a more precise measure than a simple summary score. And three, the IRT gives us more precise individual estimates because it allows different items in a scale, and people’s responses to these items, to contribute differently to the final score. If you enjoy digging into data, click on the link to see the financial well-being survey data and reports. When you’re ready, click Next to continue to an example of scoring the questionnaire. 3.18 Walk-through: Scoring the Questionnaire Notes: Let’s walk through an example showing how to manually score the Financial Well-Being Questionnaire. On the first page of the scoring worksheet, you’ll see the questionnaire. For Parts 1 and 2, enter into the right-hand column the number from 0 to 4 that correspond to each of the person’s responses, and add them up to find the sum total. This is the “total response value” Then, on the second page, you’ll find the financial well-being score. Find the row that corresponds to the total response value. Then , follow that row across to the column that corresponds to the person’s age and how the questionnaire was administered. This will give you the respondent’s financial well-being score. 3.19 What Does the Score Mean? Notes: The score produced by the questionnaire is only a number. If you present the score to a client, be prepared to follow up with more context so it’s clear what the number means. Review the table to understand what the score suggests. A score of zero to twenty-nine suggests a person is finding it difficult to make ends meet. A score of thirty to thirty-seven suggests a person likely has trouble meeting basic needs. A score of thirty-eight to forty-nine suggests a person is doing better, but still largely struggling to make ends meet. A score of fifty to fifty-seven suggests a person has more stable finances for the most part. A score of fifty-eight to sixty-seven suggests a person has largely secure financial circumstances. A score of sixty-eight or greater suggests almost universal financial security. 3.20 Low Scores Suggest Financial Struggles Notes: The lower the score, the more likely it is that a person is struggling financially. Top factors associated with higher financial well-being include a higher level of liquid savings; lack of a negative experience with a debt or credit product; and money skills and day-to-day management. 3.21 What Does the Score Mean? Notes: Connie is a financial planner who works with clients of various backgrounds. Let’s look at today’s appointments and see how the financial well-being score helps her understand each client. Click the button to get started. 3.22 What Does the Score Mean? Notes: The next appointment of the day is with Carrie. Carrie has a financial well-being score of 32. What do you think Carrie’s score means? 3.23 What Does the Score Mean? Notes: Henry comes in next. His financial well-being score is 80. What do you think Henry’s score means? 3.24 What Does the Score Mean? Notes: Connie’s next appointment is with Shauna, who has a financial well-being score of 54. What do you think Shauna’s score means? 3.25 What Does the Score Mean? Notes: Connie’s last appointment of the day is with Trevor. Trevor’s financial well-being score is 46. What do you think Trevor’s score means? 3.26 Check Your Understanding Notes: Take a moment to check your understanding on the content covered so far. Answer the following question. 4. Using & Implementing the Score 4.1 Using the Score with Clients Notes: You now know how to administer the financial well-being questionnaire, how to calculate the respondent’s score, and how to interpret that score. Now, it’s time to take a deeper look at how you might use the score with your clients. 4.2 A Variety of Ways to Use Notes: There are a variety of ways you might use the financial well-being scale at work. Click on each icon to explore the ways. The first is, Initial Assessment The scale can be used to assess a person’s financial well-being at intake. In addition, reviewing individual questions that make up the scale with a client could also help guide a conversation about their financial situation, both strengths and needs, in terms that resonate with and motivate clients. The second is, Tracking Individual Progress The scale can be used to track changes in an individual’s financial well-being. Tracking changes in the financial well-being score over time will provide you the most quantifiable measure of progress. You might also notice changes in how the client responds to individual items. This may provide additional insights into how individuals are experiencing their financial situations over time. Some changes may highlight an individual’s preference in taking more control over money management or building stronger protections against financial shocks. The third is, Assessing Program Outcomes The financial well-being scale provides a tool to measure the extent to which programs are improving the financial well-being of the individuals that they serve. Also, the scale can be used to measure the effectiveness of your firm’s or practice’s approach. And the fourth way is, Financial Well-Being Survey Research More and more researchers are using the scale, the study, and the data generated by the tool to make connections and draw conclusions about financial well-being in the United States and abroad. 4.3 Example: Using the Scale Notes: Let’s look at a scenario where a financial planner was able to use financial well-being to guide a conversation about her client’s financial situation, both strengths and needs, in terms that will resonate with and motivate her clients. Marta reviewed the investment portfolio for Samuel, her 52-year old client. Her analysis is that Samuel’s investments are not well diversified and overly risky, because about 45% of his portfolio is in his prior employer’s stock. He is making ends meet as a freelancer and plans to glide into retirement over the next 15 years. Samuel’s financial well-being score is 53, which is about average for his age. When Marta and Samuel discuss his answers to the quiz, he explains he worries about risk but is more worried about outliving his retirement savings. Knowing this, Marta adjusts her recommendations and plans to check Samuel’s financial well-being in six months. If his score has improved, he is probably experiencing a greater sense of security. Click Next to continue. 4.4 Remember, It's Subjective Notes: What if your picture of an individual is drastically different from what the financial well-being scale suggests? This is a good indicator that there is a conflict between what the client says about their financial well-being and what numbers actually show Remember, financial well-being is subjective. Your objective financial situation describes only about seventy percent of your financial well-being score. Objective attributes like income, net worth, and balance sheet do not thoroughly capture a person’s entire financial situation. 4.5 Example: It's Subjective Notes: Let’s look at a scenario about how a financial planner was able to use financial well-being to guide a conversation about her client’s financial situation, both strengths and needs, in terms that will resonate with and motivate her clients. Divya is meeting with her newest client, Daniel. He’s just started a business and has limited liquid savings at this time. A financial setback could completely wipe him out. Despite this prognosis, Daniel is very confident about his financial situation and his financial well-being score is well over 60. Divya thinks this is worrisome and would like to set up savings goals for him. What do you think the best action for Divya to take is? If you thought that the best action is to have a conversation, you’re right. Digging a little deeper can help you uncover why the client answered the way they did and can help identify strategies to bring the two views into alignment. Divya decides to speak with him about the disconnect between his actual financial situation and his financial well-being score. She finds out that Daniel’s grandfather has agreed to provide him with financial support while he launches his business. In this situation, the financial well-being scale was able to uncover an unlisted resource that an objective financial picture would not reveal. Click Next to continue. 4.6 What to Do If Views Are Different Notes: If you realize the objective financial situation and the financial well-being score are incongruent for your client, you might take the following steps: Initiate a conversation with client about the different views Identify why the client answered as they did Identify goals or strategies to bring the two views in alignment 4.7 Measuring Change Over Time Notes: The financial well-being score is intended to be fairly stable over time. This is what makes it a good method for measuring change with an individual client or in a client population over time. A change in the range of three to five points may be reasonable for a client to experience after working to improve finances for about six months or more. The score should respond to an actual change in a client’s financial situation, such as setting a savings goal, starting a new habit, getting a higher paying job, or paying off a loan. 4.8 Example: Change Over Time Notes: I’m a CFP and I work as a financial advisor in a small financial planning firm. I primarily work with people who seek financial advising during a life change such as a birth, marriage, or divorce. Recently, I’ve started evaluating clients’ financial well-being scores. Happily, I’ve seen a positive trend! My clients tend to see a 4- to 5-point improvement in their financial well-being scores after a year of working with me. 4.9 Reasons to Measure Change Notes: You might want to measure change over time to: Monitor an individual client’s progress. For example, is the client meeting goals and improving their score? Is there still a disconnect between the financial situation and the financial well-being score? Present a measurable quantitative result of your impact. Overall, are clients increasing their financial well-being score after working with you? Assess connections to client satisfaction by including the questionnaire as part of a broad client satisfaction survey. 4.10 Example: Identifying Relationships Notes: The financial well-being scale can also be used to identify the relationship between financial well-being and other factors. Consider the following example: Karen says, I work as a financial education consultant for a nonprofit. I can’t provide personal financial advice, but I’d like to target my educational program toward what would best serve my clients. I decided to issue a survey that combines the financial well-being questionnaire with additional financial and demographic questions. I found that in my client population, higher financial well-being scores correlate with self-reported ability to save. I’ve decided to focus my next program on how to get started on an emergency fund. 4.11 The Scale is Publicly Available Notes: A few important things to note: * The financial well-being scale was developed to benefit the public * Financial well-being materials from the CFPB are publicly available for use at no cost, so anyone may reproduce, publish, or otherwise use this content without the CFPB’s permission Click Next for a list of resources available to you for implementing the financial well-being scale. 4.12 Resources for Implementing the Questionnaire Notes: * You can download the questionnaire in English and in Spanish, and implement the questionnaire as you wish - perhaps on your website or as part of an intake survey * You may also access the questionnaire directly on the CFPB’s website and score it from there * The CFPB’s code is open source, so developers can use the code and the technical report to recreate the scale and scoring calculation * If you’re interested in data analysis, you can download the survey data for your own use 5. Course Summary 5.1 Resources and Readings Notes: A few important things to note: * The financial well-being scale was developed to benefit the public * Financial well-being materials from the CFPB are publicly available for use at no cost, so anyone may reproduce, publish, or otherwise use this content without the CFPB’s permission Click Next for a list of resources available to you for implementing the financial well-being scale. 5.2 Course Summary Notes: You have finished the course content for Measuring Financial Well-Being. In this course, we defined financial well-being as having financial security and financial freedom to make the choices that allow you to enjoy life. Different people will have different definitions of “financial security and financial freedom of choice” so it can be difficult to measure financial well-being. Using the financial well-being scale can help make the subjective quantifiable and measurable. This may help you, as a CFP, in developing a more rounded understanding of your client’s financial picture and in measuring change in an individual or population over time. You are now able to administer, score, and interpret the financial well-being score! 5.3 Course Outcomes Notes: You will need to take the assessment to complete the course and receive CE credit. You may review the course as many times as you like before starting the assessment. Once you start the assessment, you will not be able to return to the course content. You must complete the assessment in one sitting. You must receive a score of 70% or higher to receive CE credit. You can take the assessment as many times as necessary to achieve 70% or higher. The assessment is 10 questions long and should not take more than 15 minutes to complete. When you are ready to take the assessment, Click Next to begin. 6.12 Complete the Credit Process