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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.
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