How Advisers Can Bring Focus to Client Conversations

By Sarah Newcomb, Director of Behavioural Science, Morningstar

Advisers are commonly taught the Financial Life Cycle model that describes a path from zero to intergenerational wealth by way of several consecutive stages: Accumulation, Decumulation, and Legacy. This may well be the path that some follow, but for most of us, our financial lives go through many different stages–or modes–as we experience setbacks, shocks, windfalls, and major expenses. While the Life Cycle model is useful, it may be even more useful to think about the journey in a more flexible way.

What Are Financial Life Modes?

The Financial Life Modes model defines seven distinct modes that one’s finances can be in at any given time. Each mode is characterised by the behaviour of one’s net worth over time.

Moving Through the Modes

A person may start or end life in any one of the seven modes, and there is no guarantee that one will move through them in the sequence listed above. Many people will spend their entire lives in Chaos or Survival mode. Some are fortunate enough to start out in Legacy mode but even they could devolve into Chaos if they do not master the skills necessary to maintain Stability or generate Growth.

To this point, each mode also corresponds to specific areas of focus and skills to master in order to advance to a higher mode. These focus areas can help advisers coach clients on specific areas of thought and behaviour that can help them gain financial mastery. The effect on net worth is a natural byproduct of mastering these habits of mind and behavior, as well as managing the inevitable shocks and setbacks that we all face.

The usefulness of the Financial Life Modes comes in several forms. First, most people will know which mode they are in even if they are not financially savvy. Are they just trying to keep their head above water? Survival. Are they comfortable but not saving enough? Stability. Getting a client to identify which mode they most identify with can help you to quickly zero in on the skills and goals that will advance them to the higher modes. A person in Chaos doesn’t need investment advice; they need credit counseling. A person in Stability mode who strives for accelerated growth too quickly risks losing their assets because of short-term thinking.

Another way to use these concepts with clients is to ask them about their financial journey from childhood to present day. What mode were they in when they were kids? What modes have they been through since? What were the major events or decisions that led to these changes? What skills and habits have they already mastered in their current mode, and which would they like to work on?

As George Box said, “All models are wrong, but some are useful.” Some are more useful than others. The Life Modes model is flexible in that it can describe any number of paths through wealth, poverty, and in between. It can also serve as a powerful conversation aid to help you understand your clients’ strengths, weaknesses, skills, and knowledge gaps, and quickly determine which ones are most relevant to focus on in the short, medium, and long term.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

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