Financial planning isn’t only about crunching numbers and making projections, as a book released by the Certified Financial Planner Board of Standards seeks to illuminate the importance of psychology to the profession.
CFP Board released in April “The Psychology of Financial Planning,” which explores what Joseph Maugeri, managing director of corporate relations, describes as identifying and responding to attitudes, behaviors and situations that impact financial decision making, the client planner relationship and the client’s financial well-being.
“It’s broader than behavioral finance, which has been around for decades,” Maugeri said.
It is a mix of client communication, counseling, and learning concepts and applying tools, he added.
Generally, the process for training new advisors has stayed consistent, with the requirements tending to veer toward exams, generating clients and assets, and working with clients, according to Maugeri.
“So, the problem with that model is that when the advisor takes all of that knowledge and skills that they’ve learned, and their initial training, and now goes out to deal with real human beings, they confront reality,” he said. “They find out that not all clients have the same beliefs about money, risks, caring for their loved ones, and how to make good financial decisions.”
Working with emotional clients requires skills advisors hone “over years and decades,” according to Maugeri. “[B]ut we think it could be taught, and we think it’s a critical skill and that it will improve client outcomes.”
As explained in the book, Maugeri says advisors must learn their clients’ money beliefs, or “scripts,” by exploring how money was defined for them growing up and seeing if their views align with those of their spouses.
Advisors must also learn empathy, according to Maugeri. “[M]any times, advisors just revert to long-term returns to the market. They’ll pull out a chart and show the S&P 500,” he said. “But there’s emotional issues there when clients see their money drop in value, and advisors need to reframe how they see events that invariably happen over a client’s lifetime and put them into the right perspective.”
Desires and Hopes for the Future
And it’s not just the CFP Board espousing the use of psychology in financial planning.
Advisors working with clients on retirement plans will have to tap their psychology skills to deliver optimal solutions, according to Commonwealth Financial Network.
For starters, advisors need to clearly define the client’s goals, taking into account their attitudes toward retirement as well as their “desires and hopes for the future,” Commonwealth states in a guide for advisors.
Taking into account this information, advisors should take stock of their clients’ assets and liabilities, including assets held elsewhere, according to the report. Advisors should also ask more questions to understand the scope of potential healthcare expenses, taking into account that clients typically underestimate such costs, Commonwealth says.
Practical Uses of Psychology in Advisory Relationships
Using psychology is one way to build trust, according to Bill Seyfarth, vice president and relationship manager at Keebeck Wealth Management.
“If the client doesn’t trust you, it’s very hard to get some certain financial planning initiatives across the table, and get them to buy into a certain solution,” he said.
Chicago-based Keebeck fosters that trust through a continuous flow of information to clients, facilitated by proprietary software that allows 24/7 communication, according to Seyfarth.
“It’s just creating avenues where they feel comfortable that their advisor’s always watching the markets, always has their best interests in mind,” he said.
Asking questions about a client’s family, career and background helps advisors discover and appreciate a client’s beliefs about money, according to Patrick Swift, vice president of wealth planning at Blue Bell, Pennsylvania-based Amplius Wealth Advisors.
That knowledge will help advisors “coach them” out of “preconceived notions or biases” that they may have developed over the past 20 to 40 years “around investing or how their taxes should be paid,” Swift said.
Using psychology can be the difference maker between financial plans, according to Mike Leverty, founder of Hudson, Wisconsin-based Leverty Financial Group.
“What we see is oftentimes two financial plans could look very similar on paper, but yet every situation is unique, and really digging into the decisions behind the plan, versus just the math on it,” is key to success, Leverty said.