Using Predicted Perceived Emergency Fund Adequacy to Segment Prospective Financial Consulting Clients

Abstract This research examines determinants of emergency fund adequacy using a classification tree methodology. A subjective evaluation of emergency fund adequacy was obtained from a survey with 404 respondents in two United States cities. The sample data showed financial behaviors, such as whether a respondent saves regularly, pays credit card bills in full each month, and has a written financial plan, and demographic characteristics such as household size and ethnicity, were major splitters of the classification tree. The findings suggest that a series of questions can be used when working with prospective clients to separate target profile clients from others in practice. © 2006 Academy of Financial Services. All rights reserved. Keywords: Emergency fund adequacy; Classification tree methodology; Financial planning 1. Introduction Financial consultants, be they planners or counselors, face a difficult task when first meeting a prospective client. The consultant must determine if a prospect fits within the advisor's target market (Bruckenstein & Drucker, 2004). The difficulty arises in that the decision must often be made quickly. It is during the first crucial minutes of a meeting with a prospective client that a planner must develop a client profile. How should a financial consultant undertake the evaluation? One way is to begin the process by filling out a detailed client questionnaire. This approach is problematic. First, nearly all prospective clients will be put off by the prospect of sharing detailed personal information with someone they have just met, even if the person is highly recommended through a referral. Second, few clients come to the first client or planner meeting with sufficient documentation to accurately complete a client data gathering questionnaire. Answering questions without sufficient information will undoubtedly lead to wrong answers based on conjectures and pure guesses. In lieu of completing a client questionnaire some financial consultants base the decision to work with a client on their intuition. Factors such as the prospect's age, gender, and physical appearance all combine to create an image of someone that may fit the consultant's target market. Again, this approach to selecting clients can lead to significant errors. As the ownership of wealth becomes more diverse in the United States it is becoming increasingly difficult to segment prospects solely on their outward appearances and social situation. Therefore, if demographic profiling and intuition lead to problematic outcomes is there a better way to screen prospective clients that can be accomplished relatively quickly and effectively? The purpose of this paper is ito offer potential guidelines in answer to this question. The research presented here uses a classification tree to examine the predictors of those who do and those who do not meet the three-month emergency fund rule. The emergency fund rule is hypothesized to be a proxy of financial capacity, which defined as the ability to withstand a financial shock. Financial consultants are particularly interested in a prospective client's financial capacity because without an adequate level of financial wherewithal, an exogenous event can alter the way client assets are managed (Roszkowski, Davey & Grable, 2005). It is anticipated in this paper that no more than a handful of questions can be used by a financial consultant to efficiently separate prospects into a target client group and others into suboptimal groups. If it is possible to screen prospective clients using a series of simple to answer questions that do not probe too deeply into a client's personal and financial life, answers to these questions can give a financial consultant a quick and effective mechanism for deciding if he or she should continue to work with the prospective client. This research examines who is more likely to meet three-month emergency fund adequacy by using a classification tree and a subjective measure of emergency fund adequacy. …