Client Psychology E-Book
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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
A Client-Centered approach to Financial Planning Practice built by Research for Practitioners The second in the CFP Board Center for Financial Planning Series, Client Psychology explores the biases, behaviors, and perceptions that impact client decision-making and overall financial well-being. This book, written for practitioners, researchers, and educators, outlines the theory behind many of these areas while also explicitly stating how these related areas directly impact financial planning practice. Additionally, some chapters build an argument based solely upon theory while others will have exclusively practical applications. * Defines an entirely new area of focus within financial planning practice and research: Client Psychology * Serves as the essential reference for financial planners on client psychology * Builds upon and expands the body of knowledge for financial planning * Provides insight regarding the factors that impact client financial decision-making from a multidisciplinary approach If you're a CFP¯® professional, researcher, financial advisor, or student pursuing a career in financial planning or financial services, this book deserves a prominent spot on your professional bookshelf.
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Veröffentlichungsjahr: 2018
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Client Psychology
CHARLES R. CHAFFIN, EdD EDITOR
Cover image: © urfinguss/iStockphoto
Cover design: Kelly Cooper
Copyright © 2018 by Certified Financial Planner Board of Standards, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-1-119-43626-3 (Hardcover)
ISBN 978-1-119-44090-1 (ePDF)
ISBN 978-1-119-44091-8 (ePub)
ISBN 978-1-119-44089-5 (oBook)
Contents
Acknowledgments
Preface
About the Contributors
Chapter 1 Client Psychology
References
Chapter 2 Behavioral Finance
What Is Behavioral Finance?
Applications of Behavioral Finance in Understanding and Changing Clients’ Behavior
Summary
References
Chapter 3 Understanding Client Behavior: Rational or Irrational?
Bounded Rationality
Sunk Cost Fallacy
Flat Rate Bias
Summary
References
Chapter 4 Heuristics and Biases
System 1 and System 2
Heuristics
Representativeness
Availability
Anchoring and Adjustment
Bias Reduction
References
Notes
Chapter 5 Decision-Making under Risk
Expected Utility Theory
Violations of Expected Utility Theory
Prospect Theory
Effects in Prospect Theory
Implications for Research and Practice
References
Chapter 6 The Role of Mental Accounting in Household Spending and Investing Decisions
Mental Accounting as Categorization
Methods for Categorizing Funds
Budgeting
Implications for Investing
Concluding Remarks and Future Research
References
Notes
Chapter 7 Intentional Choice Architecture
Are You an Intentional Choice Architect?
Principle 1: Humans Have Limitations
Principle 2: Humans Use Reference Points to Make Decisions
The Choice Architect’s Opportunity
The Case for Intentional Choice Architecture: Retirement Savings
Plan Participation, Deferral Rates, and Default Investment Options
From Awareness to Action
References
Chapter 8 Cognition, Distraction, and the Financial Planning Client
Influences on the Frame of Mind
Emotion, Stress, and Touch
Choice and Cognitive Overload
Visual Portrayal of Data
Losses and Gains
Cognitive Resource Depletion
Implications for Financial Planning Professionals
References
Chapter 9 Personality and Financial Behavior
Models of Personality
The Relationship between Personality and Financial Behavior
Openness to Experience
Conscientiousness
Extroversion
Agreeableness
Neuroticism
Connecting Personality to Financial Behavior through Theory
Personality Measurement
Implications for Research and Practice
Future Direction
References
Chapter 10 Risk Literacy
Berlin Numeracy Test
Risk Literacy and Financial Planning
Conclusion
References
Appendix
Berlin Numeracy Test for General Population
Berlin Numeracy Test for Educated Population
Notes
Chapter 11 Automated Decision Aids: Understanding Disuse and Designing for Trust, with Implications for Financial Planning
Mechanical versus Holistic Judgment
Conclusion
References
Chapter 12 Self-Determination Theory and Self-Efficacy in Financial Planning
Self-Determination Theory
Self-Efficacy
References
Chapter 13 Marriage and Family Therapy, Financial Therapy, and Client Psychology
Marriage and Family Therapy
Family Systems Theory
Financial Therapy
Building Alliances with Families and Couples
Referrals and Collaborations
Conclusion
References
Chapter 14 Client Diversity: Understanding and Leveraging Difference to Enhance Financial Planning Practice
Understanding the Concept of Diversity
The Business Value of Diversity
Leveraging Client Diversity
Practice Perspectives
Conclusion
References
Chapter 15 Client Psychology: The Older Client
Introduction
Age-Related Changes in Brain Structure and Function
Aging and Economic Decision-Making
Concerning Signs
Supporting Older Clients
Research Challenges
Final Thoughts
References
Chapter 16 Financial Psychology
Financial Psychology
Financial Psychology for Financial Planners
Motivational Interviewing Techniques
Conclusion
References
Chapter 17 Money Disorders and Other Problematic Financial Behaviors
Literature on Money Disorders and Related Financial Behaviors
Addressing Money Disorders and Related Financial Behaviors
Case Studies
Overspending and Compulsive Buying Disorder
Financial Denial or Avoidance
Financial Enabling and Dependency
References
Chapter 18 Situation Awareness in Financial Planning: Research and Application
Perception
Comprehension
Prediction
Future Directions
References
Chapter 19 Final Remarks
References
Index
EULA
List of Tables
Chapter 5
TABLE 5.1
TABLE 5.2
Chapter 9
TABLE 9.1
Chapter 15
TABLE 15.1
List of Illustrations
Chapter 1
FIGURE 1.1 The Academic Disciplines of Client Psychology
Chapter 5
FIGURE 5.1 Measurement of Loss Aversion from the 2012 HRS
Chapter 8
FIGURE 8.1 Cognitive Processing: Systems 1 and 2
Chapter 18
FIGURE 18.1 Situation Awareness Model in Financial Planning Based upon 1995 Model
Guide
Cover
Table of Contents
Preface
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Acknowledgments
A work of this magnitude could not happen without the commitment and dedication of an esteemed group of contributors. Each of these 23 researchers and scholar-practitioners brought a different perspective to the same subject, the human client. They are all leaders in their respective fields and I was fortunate to have the privilege to collaborate with each of them over the course of 2017 to write this book. There is something truly fascinating about diverse lenses examining the same topic—challenging assumptions and providing innovative ideas, all with a common purpose in mind. I am grateful to each of them for their trust and commitment to this new idea.
Thank you to Sheck Cho and all of my friends at John Wiley & Sons for their continued partnership throughout this yearlong endeavor. Wiley continues to be a great partner to the CFP Board Center for Financial Planning and I hope this book is representative of that impactful partnership.
I would like to thank the board of directors at CFP Board for their unwavering commitment to this project. Thank you as well to members of the Executive Leadership Team at CFP Board for their support of this work.
Thank you to Kevin Keller, CEO of CFP Board, and Marilyn Mohrman-Gillis, Executive Director of the CFP Board Center for Financial Planning for their commitment to the Academic Home for the Center for Financial Planning. This work started in 2011 with a vision—a platform where members of academe from multiple disciplines as well as practitioners from across financial planning could present, publish, consume, and discuss research that impacts our academic discipline—our profession—in new and profound ways. It is truly satisfying to see that vision come to fruition.
Thank you to all of those individuals and organizations who support the CFP Board Center for Financial Planning, particularly TD Ameritrade Institutional for their support as Lead Founding Sponsor and Northwestern Mutual as Founding Sponsor. We are grateful to all of the firms, CFP® professionals, and friends from across business models and professions who have joined us on this journey to build the Academic Home for the profession of personal financial planning.
In the end, I take responsibility for this work—a work that I hope will help serve as a catalyst for expanding the financial planning body of knowledge to include the biases, behaviors, and perceptions of the individuals who entrust this profession with their life’s work: the client. The objective of this book is not to be the last word in client psychology, but the first word. I hope that the text found within these pages will fuel both new lines of inquiry and innovative approaches to financial planning practice, making our profession more impactful, relevant, and most important, client-centered.
Charles R. Chaffin, EdDEditor
Preface
Financial planning is, at face value, a quantitative endeavor. There is a host of numbers that exist within a financial plan, representing a client’s savings, debt, investments, retirement, insurance, and other numeric values associated with his or her financial well-being. In the proposed changes to the CFP® Board Standards of Professional Conduct, the CFP Board defines financial planning as “. . . a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances” (Proposed CFP Board Standards of Professional Conduct, 2017). Inherent within that definition are both the steps of the financial planning process as well as the content areas, essentially the necessary competencies of a CFP® professional, to provide competent and ethical financial planning.
The role of the financial planner is challenging and with it comes a high level of responsibility. Beyond the numbers, clients entrust not only their goals and dreams to their CFP® professional, but also the accumulation of their life’s work. Years, and in some cases decades, of long hours in the office and careful investing culminate into a specific set of numbers on a spreadsheet. Clients bring into the financial-planning process their vision for the future as well as their vision for those closest to them. Conversely, clients also bring concerns regarding the current and future well-being of their loved ones. The financial planner is sometimes the first to hear the good news and is also the first phone call or text message when bad news arises, both of which require frank conversation, careful planning, action, and sometimes, thoughtful inaction. Therefore, financial planning is, at its core, a human endeavor.
So what about these clients? How do we help them discover (and then communicate) their hopes and dreams? What about the goals for their spouses, partners, or families? How do the interactions with those around them affect their decisions and financial well-being? How do relationships and communication with their advisors impact the financial-planning process? What do we know about individual behaviors such as spending, debt, planning, and saving relative to a variety of client profiles and contexts? How does stress impact the dialogue between the client and planner . . . what can the planner do to mitigate this stress? How do the cognitive load and attention resources of the client during the development and presentation of a financial plan impact the client’s relationship with the planner? How does technology impact a client’s willingness to communicate more freely with their financial planner? What about the sociological issues that are inherently part of the relationship between client and planner? Beyond these questions, there are hundreds more that financial planners encounter each and every day, many of which have a direct impact on planner efficacy and client success.
Behavioral finance helps answer some of these questions. It brings elements of cognitive and behavioral psychology to both economics and finance to examine why investors make irrational financial decisions. These irrational decisions in many cases stem from heuristics, or mental shortcuts, that involve only one aspect of a complex program or phenomenon, leading to errors in judgment, or biases. In behavioral finance, the focus is on the individual and not the market. Essentially, and at the risk of oversimplifying, the tidiness of modern portfolio theory becomes rather messy with the arrival of the human and all of his thoughts and actions. Behavioral finance helps explain some of that messiness with an underlying premise that the individuals making the decisions are complex and not always well-informed. All of these ideas are relevant to financial planning. Practitioners need to know about concepts such as choice architecture, anchoring, and availability bias, all of which have an impact in the daily life of serving clients and are helpful in explaining some of these irrational decisions.
But are these decisions actually irrational? From the outside looking in, it may appear so, but it is also possible that these decisions can be explained by a host of other factors. Many psychologists, including preeminent scholars such as Skinner and Freud, saw many of the actions of the individual based predominantly on environmental factors and those within the psyche of the individual. Skinner saw the environment as solely determining the actions of the individual. Essentially, the individual does not make any decisions on her or his own—the environment does it for them. Freud saw the unconscious—the automated and visceral elements of the self and thought processes—as a key determinant of behavior and decision-making. Although Freud and Skinner saw many elements of psychology quite differently (and there are many aspects of their work that have been both confirmed and refuted in recent years), their work identifies multiple factors that impact human behavior and decision-making. Therefore, what is an irrational decision to one may be the best decision, given the circumstance, to another. So perhaps irrational is in the eye of the beholder.
The body of literature from behavioral finance is critical to our current and future work in serving clients (as well as important parts of this book), but perhaps we should think more broadly. We need to further investigate stress, cognition, interpersonal relationships, communication, identity, and other basic elements, all within the framework of financial planning. We need to invite researchers from fields such as clinical and cognitive psychology, sociology, education, and others to better understand the rationale behind client perceptions, behaviors, and decision-making and then specifically outline the implications of this work (the “So what?”) in an effort to help practitioners and CFP® professionals do their work better.
In medicine, evidence-based practice is where medical professionals use relevant data to make healthcare decisions for individual patients. Clinical practice, patient values, and the best available research and data are all integrated to formulate a healthcare plan. Perhaps most importantly, individual characteristics and preferences—so essentially what works best for each patient physically, psychologically, emotionally, and spiritually—are primary drivers in determining treatment. It is not, therefore, merely a matter of one-size-fits-all nor a sole focus on the action of the physician, but rather, a personalized approach to medicine based upon the patient’s health status, research, and desired outcomes: a patient-centered approach.
Similarly, in education, the classroom approach for decades was teacher-centric, where the actions and knowledge of the teacher were considered the primary drivers in determining the success of an educational offering or program of study. If the instructor performed his or her actions well, then the assumption was that the students must be successful. But then, a few decades ago, educational psychologists identified key attributes associated with cognition and learner development to help better understand the student learner. These advances placed the focus of teaching pedagogy (essentially, the practice of teaching) on what works for the learner, not the teacher. We now almost universally define success in education as not what the teacher knows or does, but rather, by whether the student learned a concept or not: a student-centered approach.
Perhaps we are at a similar juncture in financial planning, where the profession has begun to realize that the knowledge and actions of the planner are critical, but useless if the client is unsuccessful. No financial planner says, “My client failed to reach her lifetime goals, but not to worry, I myself was competent throughout the financial planning process.” We as a profession can follow medicine and education and develop deeper insights into our practice and focus more closely on the individual. Ultimately, taking this evidence-based approach to financial planning, specifically the characteristics of the client, would yield new findings that could help prepare future generations with the competencies and skills that directly relate to the human element of this profession. The basic fundamentals of investments, taxation, insurance, estate planning, communication, and so on would still and likely always be vital, but these content areas and competencies can be developed and refined solely with the client in mind: a client-centered approach.
Against that backdrop, I present Client Psychology. This book brings together the expected research areas such as financial planning, behavioral finance, communication, and financial therapy. Just as importantly, client psychology invites new fields (or those new to financial planning) such as sociology, cognitive psychology, education, social work, and others. This interdisciplinary approach, bringing diverse fields, methodologies, and researchers together to focus on the financial planning client, can lead to new knowledge that has a significant impact on our profession. As we all know, all of this new knowledge has limited relevance if we cannot answer the “So what?” question. We hope to do so here.
There is an added dimension to this work given the influence of technology in financial planning. As the use and access of artificial intelligence and technology expand, there are a multitude of opportunities and threats to the profession as it strives to be relevant to the population it serves (and perhaps is hoping to serve). The profession has the opportunity to be creative in delivering competent and ethical financial planning through a combination of in-person and electronic delivery, all based upon client needs and preferences. In order to fully serve each client and maximize market potential, the profession needs to have a full awareness of the tendencies and perceptions of the user. In addition, at the tap of a smartphone or tablet, clients now have access to increasing amounts of data, whether their own accounts or financial advice from others, potentially altering the complexion of (and potentially the need for) the client-planner relationship. Taking an evidence-based approach to financial planning, we can use much of the body of literature found within client psychology and then utilize or build technology that fits the needs of our current and future clients. As we all know, learning as much as possible about clients will make our profession more relevant to clients.
Client Psychology is not the final and definitive word in financial planning. Rather, it is a commencement to an approach that brings together many fields of study that can have some impact on the financial planning client, always with their best interests in mind. Our attempt is to provide a new theoretical underpinning through a body of literature from across the academy. Each chapter represents a formal introduction of these new concept areas to a broad audience of practitioners and scholars. As you read each chapter, my hope is that you will be drawn to the argument as to why each of these diverse topics is important to our field. Some chapters draw explicit connections to financial planning and others ask the reader to infer where specific concepts fit into daily practice. I hope that scholars from within and beyond financial planning will be challenged to think about new lines of inquiry within this framework that help us as a profession become more client-centered. To summarize this book and at the risk of giving away the plot, it is a new theoretical framework with contributions from a variety of academic disciplines to enable financial planning to become more client-centered.
So let us begin. I hope that you find Client Psychology both challenging and illuminating, but perhaps more importantly, I hope that you finish the book with more questions than when you started. We all still have so much to learn.
Charles R. Chaffin, EdDEditor
REFERENCES
Code of Ethics and Standards of Conduct
. (2017). Retrieved from
https://www.cfp.net/docs/default-source/for-cfp-pros—professional-standards-enforcement/2017-proposed-standards/final-standards-for-public-comment.pdf?sfvrsn=2.
About the Contributors
Charles R. Chaffin, EdD, is Director of Academic Initiatives, CFP Board Center for Financial Planning, leading academic initiatives such as the Academic Research Colloquium; executive editor of the academic journal Financial Planning Review; editor of the CFP Board book series; and the program lead for the Columbia University–CFP Board Teaching Program. For seven years prior to that appointment, Chaffin provided guidance and oversight to the over 300 CFP Board Registered Programs across the United States. He holds a graduate degree from the University of Michigan and a doctorate from the University of Illinois.
Kristy Archuleta, PhD, is an associate professor and program director of the personal financial planning program at Kansas State University and a licensed marriage and family therapist. She has been quoted in media outlets such as the New York Times, Glamour, Parade, and NPR Marketplace. She is the editor of the Journal of Financial Therapy and has coedited two books related to assessment and financial therapy.
Sarah Asebedo, PhD, CFP®, is an assistant professor at Texas Tech University. With extensive financial planning experience, her goal is to connect research and financial planning practice. She is spearheading research focused on personality, positive psychology, and financial behavior, and how mediation and principled negotiation techniques can be employed to resolve money arguments. Asebedo’s work has been recognized with the 2016 Montgomery-Warschauer Award (FPA/JFP), 2014 and 2017 Best Applied Research Award (FPA/JFP), 2017 Top 40 Under 40 Award (Investment News), 2017 AARP Public Policy Institute Financial Services and the Older Consumer Award (ACCI), and 2017 Robert O. Hermann Outstanding Dissertation Award (ACCI). Asebedo currently serves as President of the Financial Therapy Association. She earned her PhD from Kansas State University.
Sonya Britt-Lutter, PhD, CFP®, is an associate professor of personal financial planning at Kansas State University. She holds degrees from Kansas State University and Texas Tech University. Her research has been featured in news outlets such as the New York Times, the Wall Street Journal, Kiplinger’s, and Yahoo! Finance. Dr. Britt-Lutter recently wrote a love and money curriculum and a forthcoming book for couples.
Swarn Chatterjee, PhD, is an associate professor of financial planning at the University of Georgia. He has published more than 40 peer-reviewed papers and teaches classes in wealth management and behavioral economics. His research interests include studying performance evaluation across different stages of the financial planning process and identification of factors that improve financial decision-making among millennials and the elderly.
Jonathan Fox, PhD, is the Ruth Whipp Sherwin Professor of Human Development and Family Studies at Iowa State University, where he teaches courses in financial counseling and planning. His research in financial socialization appears in journals such as the Journal of Financial Therapy and the Journal of Consumer Affairs. He received his PhD in Consumer Economics from the University of Maryland.
Joseph Goetz, PhD, is an associate professor of financial planning at the University of Georgia. He is an award-winning professor, practitioner, and researcher in the area of financial planning and wealth management. His primary professional objectives are to assist individuals and families in reaching their financial life goals, and to support the development of future financial planners who will participate in the positive transformation of the financial planning profession.
John Grable, PhD, CFP®, holds an Athletic Association Endowed Professorship at the University of Georgia. Dr. Grable served as the founding editor for the Journal of Personal Finance and the founding coeditor of the Journal of Financial Therapy. His research interests include financial risk-tolerance assessment, evidence-based financial planning, and behavioral financial planning. He is Director of the Financial Planning Performance Laboratory at the University of Georgia and a coeditor of Financial Planning Review.
Stuart J. Heckman, PhD, CFP®, is an assistant professor of personal financial planning at Kansas State University. He earned his BS in Personal Financial Planning from Kansas State University and his MS and PhD in Family Resource Management from The Ohio State University. His research focuses on professional financial planning and on risky financial decisions among young adults.
Edward Horwitz, PhD, CFP®, ChFC, CLU, FBS®, is the Mutual of Omaha Endowed Executive Director in Risk Management at Creighton University’s Heider College of Business and an associate professor of practice in behavioral finance. He also serves as Director for Creighton’s Financial Planning and Financial Psychology programs. Prior to academia, his career in the insurance industry spanned over 25 years.
Zhuo Jin is scheduled to complete her master’s degree in 2018, in Organizational Management from George Washington University and earned her bachelor’s degree in Psychology in 2014 from the University of Nebraska, Lincoln. Zhuo’s primary research interests are in consumer and donating behaviors, technology, social media–inspired creativity and lifestyle branding, and social media celebrity. She plans to pursue a doctoral degree in either Marketing or Human Computer Interaction in the fall of 2018.
Bradley T. Klontz, PsyD, CFP®, is an associate professor of practice in financial psychology at Creighton University Heider College of Business and a managing principal at Your Mental Wealth Advisors™. Dr. Klontz is coeditor/author of five books on the psychology of money, including Financial Therapy (Springer, 2015), Mind Over Money (Broadway Business, 2009), and Facilitating Financial Health (NUCO, 2016).
Jodi Letkiewicz, PhD, is an assistant professor at York University in Toronto, Ontario. She teaches, researches, and publishes in the areas of consumer finance, financial planning, and financial well-being. She received an MS and PhD in Family Resource Management at The Ohio State University.
Michael J. Liersch, PhD, is a behavioral scientist and financial planning executive. He holds a PhD in Cognitive Psychology from University of California, San Diego and an AB from Harvard in Economics. He has spent time in both academia and business. As an academic, Dr. Liersch was a postdoctoral fellow at University of California, San Diego Rady School of Business and a visiting professor at New York University Stern School of Business. In business, he held positions as head of behavioral finance in the Americas at Barclays Wealth, head of behavioral finance and goals-based consulting at Merrill Lynch, and most recently, head of financial planning at JPMorgan Chase.
HanNa Lim, PhD, is an assistant professor of personal financial planning at Kansas State University. Her research focuses on households’ financial decision-making and college students’ financial wellness. She earned her BA and MA in Consumer Science from Seoul National University, and her PhD in Family Resource Management from The Ohio State University.
Meghaan R. Lurtz is a financial psychology specialist at Kaleido Creative Studio, an assistant adjunct professor of finance at the University of Maryland University College, and a PhD student at Kansas State University. She graduated from the University of Kansas with a bachelor’s degree in Philosophy, Psychology, and Spanish. Her master’s degree was in Industrial Organizational Psychology.
Jason McCarley, PhD, is a professor in the School of Psychological Sciences at Oregon State University. He holds a BA in Psychology from Purdue University and a PhD in Experimental Psychology from the University of Louisville, and has held positions at the Naval Postgraduate School, the University of Illinois, and Flinders University of South Australia. He conducts research in engineering psychology, with interest in models of attention, decision-making, and human–automation interaction. His work has appeared in outlets including Human Factors and Journal of Experimental Psychology: Applied, and he is coauthor of the book Applied Attention Theory (Wickens & McCarley, 2008).
Nils Olsen, PhD, is an assistant professor of organizational sciences at George Washington University and conducts research within the following domains: (a) individual decision-making (e.g., medical, financial, legal); (b) strategic decision-making (e.g., Olympic Games); and (c) procedural justice (e.g., physician-patient, lawyer-client); and has publications appearing in the Journal of Personality and Social Psychology, Academic Emergency Medicine, and Handbook of the London 2012 Olympic and Paralympic Games. Before joining the faculty at GWU, Professor Olsen worked as a researcher at the Developmental Psychology Laboratory of the National Institute of Mental Health and worked collaboratively with the American Bar Foundation. Professor Olsen holds a BS in Psychology from the University of Wisconsin, an MA from the University of Iowa, and PhD from the University of North Carolina at Chapel Hill.
Vanessa Gail Perry, MBA, PhD, is professor of marketing, strategic management and public policy at the George Washington University School of Business. Her research is focused on consumers in financial and housing markets, public policy, and marketplace discrimination, and has been widely published in scholarly and industry-oriented outlets. Professor Perry has served as senior advisor to the secretary of the U.S. Department of Housing and Urban Development, as an expert appointee at the U.S. Consumer Financial Protection Bureau, and as a consultant to numerous public and private sector clients. Before joining the faculty at GWU, Professor Perry was a senior economist at Freddie Mac. Professor Perry holds a BA in Philosophy from American University, an MBA from Washington University in St. Louis, and a PhD from the University of North Carolina at Chapel Hill.
Quinetta Roberson, PhD, is the Fred J. Springer Endowed Chair in Business Leadership in the School of Business at Villanova University. Prior to her current position, she was an associate professor of human resource studies at Cornell University. Professor Roberson has over 15 years of experience teaching courses and workshops globally on leadership, talent management, and diversity. She has published over 20 scholarly journal articles and book chapters and edited Handbook of Diversity in the Workplace, published by Oxford Press in 2013. Her research interests center on developing organizational capability and enhancing effectiveness through the strategic management of people, particularly diverse work teams. Dr. Roberson’s research and work with organizations is informed by her background in finance, having worked as a financial analyst and small business development consultant prior to obtaining her PhD in Organizational Behavior from the University of Maryland. She also holds a BS in Finance and Accounting from the University of Delaware and an MBA in Finance and Strategic Planning from the University of Pittsburgh.
Deanna L. Sharpe, PhD, CFP®, CRPC®, CRPS®, is an associate professor in the Personal Financial Planning department at the University of Missouri. Her teaching and research focus on factors affecting later-life economic well-being. She has provided leadership for the American Council on Consumer Interests, the Association of Financial Counseling and Planning Education, and the Certified Financial Planner Board of Standards Education Task Force.
Abigail Sussman, PhD, is an associate professor of marketing at the University of Chicago Booth School of Business. Sussman’s prior experience includes work at Goldman Sachs in its equity research division. She earned a bachelor’s degree from Brown University in Cognitive Science and Economics, and a joint PhD from the psychology department and the Woodrow Wilson School of Public and International Affairs at Princeton University.
Faith Zabek is a PhD candidate in School Psychology at Georgia State University. She is currently completing her doctoral internship at the APA-accredited Hawaii Psychology Internship Consortium, where she has contributed to research investigating the impact of experiential financial therapy on savings behaviors.
C. Yiwei Zhang, PhD, is a postdoctoral fellow at the University of Chicago Booth School of Business. Prior to joining the University of Chicago, Zhang worked as an economist in the Office of Research at the Consumer Financial Protection Bureau. She earned bachelor’s degrees in Economics and in Mathematics from the Massachusetts Institute of Technology and earned her PhD from the University of Pennsylvania, Wharton School’s program in Applied Economics.
CHAPTER 1Client Psychology
Charles R. Chaffin, EdD
CFP Board Center for Financial Planning
Jonathan J. Fox, PhD
Iowa State University
Ben (59) and Colleen (49) Orr are not entirely uncommon clients in the practice of financial planning. While they are entrenched in a successful family business and rewarding careers, they are typical clients with a host of financial challenges, somewhat undefined long- and short-term goals, and a family with complex interpersonal dynamics.
This is the second marriage for both. Ben has three children with his first wife, Nina (58). Nina retained 33% ownership of the private cleaning supplies corporation that she and Ben started 25 years ago and she remains actively involved in company management. Ben and Colleen almost never discuss Nina’s continued involvement in the business and family. Of Ben and Nina’s three children, Mary Jo (34) and Ernest (32) are principals in the family business and both are married and have children of their own. Their 29-year-old son, Jacob, resides in a local community serving adults with developmental disabilities.
Colleen’s first spouse was killed in an automobile accident soon after their second anniversary. With modest life insurance benefits, she completed graduate school and now loves her work as a professor of math education at the state university. She currently has no plans or intentions for retirement. She and Ben married 15 years ago, and have two children, John (14) and Joan (10).
Ben and Colleen are committed to planning for Jacob’s needs for the rest of his life. Ben would like to retire in 7 years and wants to transfer ownership of the company to his adult children Mary Jo and Ernest, but he doesn’t know what Nina wants to do with her interest in the company. Ben has no clear plans for what he may do in retirement. He just knows the work of the company is all-consuming and he needs a change. Ben and Colleen are committed to setting aside some funds in a separate account to help support John and Joan when they attend college and believe they have adequate resources to do so.
Another looming concern for Ben and Colleen is Ben’s 81-year-old father, Jack. Ben lost his mother to cancer 10 years ago. Since that time, Jack has lived alone in a town about an hour’s drive from Ben and Colleen. Ben visits when he can, but makes a point to call and talk with his father at least once a week. Jack is in relatively good health and enjoys several volunteer activities and golfing with friends. Lately, though, Ben has noticed that his father has become more forgetful and he is not sure if what he is seeing is a normal part of aging or the early signs of dementia or Alzheimer’s. Ben worries that his father might forget to pay his bills or become vulnerable to fraud. He knows Jack meets with a financial advisor a few times a year. Ben wonders if he should give his father’s financial advisor a call, to share his concerns and see what she has noticed during client appointments with his dad. Under most objective measures, Ben and Colleen are financially healthy. Not including the value of the cleaning supplies company, their net worth is approximately $2,600,000. This is comprised of approximately $3,000,000 in assets and $400,000 in debt, in the form of a home mortgage and a personal loan taken to grow the business. A recent independent valuation of the business came in just under $9,000,000. The bulk of their financial assets are in conservative, income-driven investments within qualified retirement plans. Ben has never been a fan of financial risk and equity investing. He still talks about the few equity funds he held, and quickly sold, in 2008. He is more comfortable with direct control over his company assets and has never been open to others controlling his money. Most of the retirement assets are Ben’s with Colleen designated as the beneficiary. Colleen considers herself more of a risk taker when it comes to investing and her retirement assets (approximately $110,000) are mostly invested in small cap index funds within her university’s 403(b) plan.
Colleen believes Ben spends too much on travel, company and family celebrations, and charity. She is the primary manager of the family budget and tries to keep their spending on track but has been frustrated lately that their annual rate of saving is almost zero, excluding retirement contributions through the company and the university. They own a four-bedroom home in a neighborhood of homes valued between $250,000 and $300,000. Their mortgage balance is approximately $175,000.
Ben and Colleen believe they have adequate protection against the risk of financial loss, but it has been at least 5 years since they have given insurance coverage significant thought. Both are so busy that the thought of evaluating life, home, automobile, health, disability, umbrella liability, and long-term care options seems overwhelming, yet it is something they know they need to do. Colleen has life insurance through the university with benefits of 2.5 times her $88,000 annual salary. She is not sure who her beneficiaries are for the policy. Ben has a $3,000,000 term life policy connected to the family business, with Nina as the primary beneficiary and their three adult children as secondary beneficiaries. They are covered under a group health plan connected to Colleen’s university and have homeowner and automobile policies but don’t remember the last time they reviewed coverage and costs. Ben and Colleen each drive older, reliable vehicles with no automobile loans. They have a $1,000,000 umbrella liability policy but no disability or long-term care insurance.
Ben and Colleen have simple wills and healthcare power of attorney documents that were drafted 13 years ago, just after the birth of John. In their 15 years of marriage, Ben and Colleen have never committed to working with a financial planner. Ben is hesitant to turn everything over to one person or company. He likes bouncing ideas off his many financial advisors (accountant, attorney, retirement investment advisor, and insurance agent), but prefers to make his own decisions in the end. Colleen is growing increasingly frustrated with the lack of coordination between the finances of the business and their household. She has been suggesting that they use the services of a Certified Financial Planner™ (CFP) for years. They have visited with a few planners for initial consultations, but never made the commitment. Ben and Colleen’s situation is complex: There are not only difficult decisions to make, but the number of decisions is overwhelming.
As you move through the methods of inquiry in this book, keep a case family like the Orrs in mind. Keep asking yourself, “What really guides Ben and Colleen’s decisions? How have these decisions been shaped by both mathematical calculations as well as gut-level intuition? When is it mostly about money, and when is it family relations that matter most? How do clients’ understanding of risk impact the decisions they make? How do the dynamics of marriage and communication patterns impact the formulation of life plans and goals? How do personalities, upbringing, and personal identities influence spending and saving patterns and retirement investment choices? How often and in what ways do clients like Ben and Colleen communicate with one another about their goals and vision for the future, and to what extent should that communication matter to you as their counselor and advisor?
Ben and Colleen are in mid-life, but Ben is a decade older than Colleen. How might the aging process affect their decision-making capacities now and in years to come? Will the age difference matter more or less in later life? At what point might each be at risk of cognitive decline and loss of financial capacity? Since Ben is older, what should Colleen understand about age-related changes in cognition? What makes them, and clients like them, more or less willing to trust your advice?
These are the types of questions this book is attempting to address. By working more systemically and holistically beyond the tenets of optimal resource allocation theory and behavioral finance, we find new approaches to the deeply human questions defining the financial lives of Ben and Colleen. All of these questions require an in-depth analysis of multiple academic disciplines to help better serve Ben, Colleen, and their family that goes beyond the traditional content areas associated with financial planning, such as estate planning, taxation, and investments. This leads us to client psychology.
FIGURE 1.1 The Academic Disciplines of Client Psychology
For the purpose of this book, client psychology is defined as the biases, behaviors, and perceptions that impact client decision-making and financial well-being. By anyone’s standards, that is a broad umbrella. However, holistically serving a financial planning client requires a broad approach, taking multiple academic disciplines, research methodologies, and traditions from various programs of study and professions. Biases are our inclinations for or against a certain object or person. Client biases may relate to interpersonal matters and could be based upon one’s past experiences. Behaviors are our responses to a given situation and stimulus, which, in a client context, are more likely to be observable. Perceptions are recognitions of the lived experiences of the individual, the lenses by which they look at the environment around them. Essentially, it is not just what the client does, it is also her perceptions: perceptions of her spouse and family; her motivations; and of herself that impact almost all aspects of her as a client. The first three words of this working definition purposely represent a broad approach to understanding the attitudes and behaviors of the client. Implicit within this broad umbrella are a variety of research methodologies needed to answer many of the questions about our clients, including any combination of quantitative, qualitative, theoretical, experimental, or historical approaches.
Behavioral finance is an important component of our working definition of client psychology and certainly this book. It is a product of cognitive and behavioral psychology within the context of economics and finance to examine why humans, in this case the individual client, make what would appear to be irrational financial decisions when compared to a pure economic or optimization model. Heuristics, or mental shortcuts, are a big cause of these irrational decisions and lead to inherent biases on the part of the individual, particularly when the problem is complex and motivation to think slowly and deliberately is low.
Chapters of this book focus on the foundational elements of behavioral finance, heuristics and biases, prospect theory, mental accounting, choice architecture, and personality and financial behavior. The approach within client psychology is not only to present a theoretical framework for each of these content areas, but also outline the implications of this theory specifically for the field of financial planning and the financial-planning client.
Education is also critical in the field of financial planning, exploring topics such as self-determination theory and self-efficacy, both of which have roots in cognitive psychology but have evolved further in the more practitioner-based profession of education. Self-determination theory focuses on the motivation of the individual with a specific focus on innate psychological needs (Ryan & Deci, 2000). Bandura (1994) defines self-efficacy as “people’s beliefs about their capabilities to produce designated levels of performance that exercise influence over events that affect their lives” (p. 1). Self-efficacy is a focus on the individual’s perception of their own ability to perform a certain task within a specific task setting. A financial planner should have a keen understanding of self-determination theory, as knowing the intrinsic motivation of the client can be a powerful tool in helping keep client behaviors on track and consistent with the client’s long-term financial goals. Self-efficacy and client financial literacy are intertwined. If individuals feel that they have knowledge and aptitude with regard to their own financial decision-making and overall well-being, they are more likely to both seek out a financial planner and stay the course as life challenges intervene.
Financial therapy is a key component to client psychology; as with other aspects of client psychology, it focuses on client behaviors, but from the perspective of the influences of personal relationships. Grounded in the practice and theory of couples and family counseling, financial therapy draws from the relational life of the client. While financial professionals have long acknowledged that advising is a relationship business, the focus has been mainly on the relationship between planner and client. The body of knowledge within the financial therapy discipline continues to grow and has been an integral part of financial planning practice. The inter-relational elements of client decision-making and financial well-being have a powerful impact on the client, with equally powerful implications for advisors working with clients dealing with complex family relationships.
Cognitive psychology focuses on mental processes such as attention, memory, and creativity, and has provided the theoretical underpinning for educational psychology and behavioral finance. The amount of cognitive load that a client, or planner for that matter, uses during the presentation of a financial plan or articulation of goals may have a significant impact on the success of a given client–planner interaction. Similarly, cognitive psychology has a deep impact on the motivations of the individual, which is useful in defining why clients make decisions that enable their long-term financial well-being, or even why they seek a financial planner in the first place. Obviously, behavioral finance topics such as heuristics and biases, anchoring, and mental accounting are greatly influenced by work in cognitive psychology.
Clinical psychology is defined by the American Psychological Association as the “psychological specialty that provides continuing and comprehensive mental and behavioral health care for individuals and families; consultation to agencies and communities; training, education and supervision; and research-based practice” (American Psychological Association, 2017). Within this book, we explore financial psychology, which blends aspects of broader elements of psychology with behavioral finance.
The human sciences add an ecological perspective to the field of financial planning. At the individual level, human sciences includes the biological, psychological, and cultural aspects of life. It is by definition an interdisciplinary approach, incorporating sociology, biochemistry, neurosciences, psychology, and other disciplines to better understand the context of human development and family health. A human sciences perspective brings together an understanding of the individual (what is going on in the clients’ minds), their near environments (relationships with family and friends), the financial marketplace, and the wider cultural and political environments.
The traditional building blocks of financial planning are also key components of this book. The core aspects of financial planning, including investments, taxation, retirement planning, insurance, and communication, are integral parts of client decision-making and overall financial health. Client psychology and financial planning are joined at the hip from both theory and application perspectives. For our purposes, the context for client psychology is financial planning. What differentiates client psychology is that the focus is purely on the client and all of her, his, or their biases, behaviors, and perceptions, whereas the focus of much of the body of knowledge and practical applications of financial planning are planner-centered.
As outlined in the introduction to this book, our journey to becoming a client-centered profession is along the same path of other professions, whether the evidence-based practice of medicine or the evolution of education from teaching to learning. Our objective is to evaluate our actions, efforts, competency, and ultimately our success as a profession on the outcomes of the client.
Through technology, clients have access to all of their account information on their phones or tablets. Access to this information, as well as advice via multiple means, is readily available whether at two in the afternoon or during a sleepless night. To compensate for the ever-increasing availability and effectiveness of financial technology, the planner has to exploit the uniquely human elements of the financial planning process. Dealing with uniquely human factors like emotions and empathy becomes particularly important in ensuring that the CFP® professional continues to be relevant to the population. Technology, already providing basic quantitative client account information and low-level advice, will require the CFP® professional to perform higher-order cognitive thinking, working expertly in what is often referred to as the “soft-skills” of financial planning. Ironically, these soft-skills are difficult to develop and one’s effectiveness in the practice of client psychology is not easy to measure.
In reference to our working definition of client psychology, the information contained in this book is designed for the purpose of helping clients meet their goals of financial success. It is designed to enable planners to focus more on the well-being of their clients. This is an important distinction, as it is not designed to trick clients or discover vulnerabilities of a client in order to take advantage. The contents of this book are designed with the fiduciary in mind, learning as much as possible about the client in context in order to better serve an ever-diversifying clientele.
Practitioners reading this book have the opportunity to infer from a variety of different disciplines how uniquely human factors impact client financial success. We hope that practitioners will consider how areas such as marriage, family therapy, and cognition can potentially impact new advisor-training programs, mentorship, and even the methods by which we prepare the next generation of CFP® professionals. Saying that financial planning is an art is no longer good enough. The stakes are too high. We are talking about the life’s work of our clients. We as a profession must challenge assumptions, question best practices, and learn more about the dynamics that exist within the minds of our clients and the widely varied contexts influencing family financial decision-making.
Just as with practitioners, researchers in financial planning need to accept the challenge of working with unobservable outcomes. Little in consumer psychology comes down to a specific number or set threshold value. There are few accepted rules of thumb to quantitatively assess personal financial well-being. With financial health and well-being as the outcomes of interest, measurement becomes the researcher’s first concern. To start filling this gap, the Consumer Financial Protection Bureau (CFPB) recently developed a financial well-being scale linking an individual’s financial situation, skills, and knowledge to their sense of financial security and freedom of choice.
The Consumer Financial Protection Bureau Financial Well-Being Scale (2017) contains items similar to previous studies of financial stress or strain. Scale items such as “I have money left over at the end of the month” and “My finances control my life” have long been used in the study of finances in a family or social context. However, for the first time, a scale based on multiple waves of testing, including the use of item response theory, has been shown to be a reliable measure of unobservable financial health and well-being. The work of the CFPB on the scale sets an example and standard for researchers interested in questions related to client psychology. What a client may be thinking will never be directly observable, nor will it be easily quantifiable, and researchers in the field of financial planning will have to become comfortable with studies involving unobservable variables with complex measurement models.
Related to the measurement issue is selection of the unit of analysis in research. With a client-centered approach, the unit of analysis should be obvious. The outcomes and research questions center on the client’s personal financial health. For example, assessing a client’s level of self-efficacy in a study of the use of financial planners brings the focus to personal motivation as opposed to a study where the complexity of a client’s portfolio is considered the driving factor in using a planner. Certainly both questions are of interest to financial planners, and perhaps the best study is one presenting competing hypotheses between personal and portfolio considerations. The point here is that with a client-centered approach, research questions focus on the person, and the personal, as the units of analysis.
Long-practicing financial planners know that it’s never just about the money. While retirement account balances, savings rates, and rates of return are easily observed, such values are only meaningful in context. Moreover, the questions stemming from a typical case like the one introduced in the start of this chapter cannot be answered in dollars and rates of return. How a family communicates about money is a descriptive study that likely involves little quantitative analysis. How financial decisions are made depends on similarly unobservable factors such as personality, communication strategy, cognitive ability, and self-efficacy. Moreover, the outcomes that matter most to clients are equally unobservable. A safe and secure life for a child with special needs or the successful transition from a long business career into retirement are examples of outcomes with deep meaning for client and planner alike. Research that identifies the best interventions to build family financial well-being is in great demand. Moreover, studies linking a personal sense of increased security and freedom of choice (financial well-being) to the higher-order needs of life (the real things clients care about besides money) can make the most meaningful contributions to the field of financial planning.
REFERENCES
American Psychological Association. (2017).
Clinical psychology
. Retrieved from
http://www.apa.org/ed/graduate/specialize/clinical.aspx.
Bandura, A. (1994). Self-efficacy. In V. S. Ramachaudran (Ed.),
Encyclopedia of human behavior
(Vol. 4, pp. 71–81). New York: Academic Press. (Reprinted in H. Friedman [Ed.],
Encyclopedia of mental health
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Consumer Financial Protection Bureau. (2017).
Financial well-being scale
. Retrieved from
http://files.consumerfinance.gov/f/201512_cfpb_financial-well-being-user-guide-scale.pdf.
Ryan, R. M., & Deci, E. L. (2000). Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being.
American Psychologist, 55
(1), 68–78.
CHAPTER 2Behavioral Finance
Swarn Chatterjee, PhD, and Joseph Goetz, PhD
University of Georgia
Knowledge of behavioral finance can be useful to financial planners and counselors trying to understand their clients’ financial goals, objectives, and behavior patterns (Chatterjee & Goetz, 2015). For example, going back to the discussion of Ben and Colleen, a financial planner who works with this couple should understand that Ben and Colleen’s perception of their finances and financial well-being are just as important for them as the objective measures of these characteristics. In psychology, this is known as anchoring (Tversky & Kahneman, 1974). Findings from a study by Ariely, Loewenstein, and Pelec (2003) would suggest that most individuals do not know how much money they need to maintain a standard of living that would maximize their utility either in the current period or in the future. Therefore, in many cases, well-intentioned people such as Ben and Colleen may use sub-optimal reference points from which they are anchored, particularly when this anchoring was based on observing their friends, relatives, and acquaintances to determine their optimal financial needs. Irrespective of how the broader market is performing, Ben and Colleen’s financial expectations and financial satisfaction may be anchored to the expectations and satisfaction of their friends, acquaintances, and their life experiences.
Additionally, the works of Richard Thaler (winner of the 2017 Nobel Prize in Economics) and other behavioral economists find that investors suffer from what is known as myopic loss aversion (Benartzi & Thaler, 1995). Myopic loss aversion is defined as a tendency of investors to compare the performances of their investment portfolios from the perspective of avoiding a possible loss rather than from the perspective of potential gains. This behavior is based on the amount of risk they perceive having taken within their investments. Other studies indicate that investors who frequently
