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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Psychology of Financial Planning: The Practitioner’s Guide to Money and Behavior
In PSYCHOLOGY OF FINANCIAL PLANNING: The Practitioner’s Guide to Money and Behavior, distinguished authors Drs. Brad Klontz, CFP®, Charles Chaffin, and Ted Klontz deliver a comprehensive overview of the psychological factors that impact the financial planning client.
Designed for both professional and academic audiences, PSYCHOLOGY OF FINANCIAL PLANNING is written for those with 30 years in practice as well as those just beginning their journey.
With a focus on how psychology can be applied to real-world financial planning scenarios, PSYCHOLOGY OF FINANCIAL PLANNING provides a much-needed toolbox for practicing financial planners who know that understanding their client’s psychology is critical to their ability to be effective.
The PSYCHOLOGY OF FINANCIAL PLANNING is also a much-needed resource for academic institutions who now need to educate their students in the CFP Board’s newest category of learning objectives: psychology of financial planning.
Topics include:
- Why we are bad with money
- Client and planner attitudes, values, & biases
- Financial flashpoints, money scripts, and financial behaviors
- Behavioral finance
- Sources of money conflict
- Principles of counseling
- Multicultural competence in financial planning
- General principles of effective communication
- Helping clients navigate crisis events
- Assessment in financial planning
- Ethical considerations in the psychology of financial planning
- Getting clients to take action
- Integrating financial psychology into the financial planning process
PSYCHOLOGY OF FINANCIAL PLANNING goes beyond just theory to show how practitioners can use psychology to better serve their clients. The accompanying workbook provides exercises, scripts, and workshop activities for firms and practitioners who are dedicated to engaging and implementing the content in meaningful ways.
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Seitenzahl: 462
Veröffentlichungsjahr: 2022
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Table of Contents
Cover
Title Page
Copyright
Dedication
About the Authors
Introduction
THE IMPERFECT HUMAN
OUR VALUE AS FINANCIAL PLANNERS
HOW TO USE THIS BOOK
PART I: THE PSYCHOLOGY OF MONEY
CHAPTER 1: Financial Instincts: Why We Are Bad With Money
THE SURVIVAL INSTINCTS OF OUR ANCESTORS
SHARING IS CARING … AND SURVIVING?
THE ANTI‐SAVING INSTINCT
I WANT IT NOW!
HERD INSTINCT
WHAT'S YOUR FINANCIAL COMFORT ZONE?
FEAR OF MISSING OUT (FOMO)
SOCIAL STATUS AND RELATIVE DEPRIVATION
TWO SYSTEMS
UNDERSTANDING FINANCIAL INSTINCTS
KEY CONCEPTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 2: Behavioral Finance: Understanding Cognitive Biases and Heuristics and What to Do About Them
WHAT ARE COGNITIVE BIASES AND HEURISTICS?
THE ROLE OF THE FINANCIAL PLANNER
ELIMINATE THE FRICTION
TECHNIQUES FOR OVERCOMING BIASES
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 3: The Environment
ENVIRONMENT: CULTURE, GENERATION, CLASS, AND COMMUNITY
WHAT'S NEXT
KEY CONCEPTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
PART II: UNDERSTANDING A CLIENT'S FINANCIAL PSYCHOLOGY
CHAPTER 4: Financial Flashpoints: Exploring a Client's Financial Background
FINANCIAL FLASHPOINTS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 5: Money Beliefs
MONEY SCRIPTS
THE ROLE OF THE FINANCIAL PLANNER
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 6: Financial Behaviors and Outcomes
OVERSPENDING AND UNDERSAVING
FINANCIAL DENIAL
FINANCIAL PARALYSIS
FINANCIAL INFIDELITY
FINANCIAL ENMESHMENT
FINANCIAL ENABLING
FINANCIAL DEPENDENCE
MONEY DISORDERS
THE ROLE OF THE FINANCIAL PLANNER
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
PART III: PRINCIPLES OF COUNSELING, PSYCHOLOGY, AND COMMUNICATION
CHAPTER 7: Sources of Money Conflict
CONFLICT WITH ONESELF
CONFLICT WITH SPOUSE OR PARTNER
CONFLICT WITH FAMILY
CONFLICT WITH OTHERS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 8: The Principles of Effective Communication
BEING PRESENT
COMMUNICATION SKILLS TO ESTABLISH RAPPORT
EFFECTIVE COMMUNICATION TECHNIQUES IN PRACTICE
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 9: Solution‐Focused Techniques in Financial Planning
THE CLIENT HAS THE POWER
FINANCIAL SELF‐EFFICACY
A FOCUS ON SOLUTIONS,
NOT
PROBLEMS
SOLUTION‐FOCUSED TECHNIQUES FOR THE FINANCIAL PLANNER
LEAD WITH CURIOSITY
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 10: Cognitive Behavioral Approaches in Financial Planning
THE COGNITIVE MODEL IN PRACTICE
COGNITIVE BEHAVIORAL TECHNIQUES FOR FINANCIAL PLANNERS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 11: Positive Psychology in Financial Planning
AN INFUSION OF OPTIMISM
THE THREE LEVELS OF POSITIVE PSYCHOLOGY
THE ROLE OF THE FINANCIAL PLANNER
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 12: Working with Couples and Families: A Systems Perspective
THE SELF‐AWARE FINANCIAL PLANNER
MAINTAINING NEUTRALITY
TRANSFERENCE VERSUS COUNTERTRANSFERENCE
COUPLE CONFLICT
FINANCIAL INFIDELITY
FINANCIAL ABUSE
STRATEGIES FOR HELPING COUPLES RESOLVE FINANCIAL CONFLICTS
TOOLS FOR RESOLVING CONFLICT IN COUPLES AND FAMILIES
SEPARATE OR COMBINED FINANCES
SCENARIO PLANNING
MONITORING
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
PART IV: CLIENT AND PLANNER ATTITUDES, VALUES, AND BIASES
CHAPTER 13: Multicultural Competence in Financial Planning: Understanding Your Client's Cultural Identity
THE MULTICULTURALLY COMPETENT FINANCIAL PLANNER
SELF‐AWARENESS AROUND MAJORITY AND MINORITY STATUS
RECOGNIZING MAJORITY GROUP PRIVILEGE AND MINORITY GROUP DISADVANTAGE
CULTURAL HUMILITY
TEN AREAS OF CULTURE AND MAJORITY/MINORITY STATUS THAT IMPACT FINANCIAL PLANNING
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 14: Financial Risk Tolerance
RISK TOLERANCE
EMOTIONS, FOMO, AND RISK TOLERANCE
DEVELOPMENT, HISTORY, AND FAMILY
LOSS AVERSION
ASSESSING A CLIENT'S RISK TOLERANCE
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 15: Client‐Preferred Learning Styles: Getting and Keeping Your Client's Attention
WHAT IS A PREFERRED LEARNING STYLE?
A MULTIFACETED APPROACH
TALK LESS; LISTEN MORE
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 16: Client Values and Goals
MASLOW'S HIERARCHY OF NEEDS
THREE UNIVERSAL HUMAN NEEDS: SELF‐DETERMINATION THEORY
MAKING SENSE OF CLIENT NEEDS IN FINANCIAL PLANNING
HUMAN NEEDS AND SELF‐DESTRUCTIVE FINANCIAL BEHAVIORS
RESPONDING WITHOUT JUDGMENT
DOES YOUR CLIENT BELIEVE THAT THEY HAVE THE ABILITY TO REACH THEIR GOALS?
FINANCIAL SELF‐EFFICACY
THE ADVISOR AND CLIENT FINANCIAL SELF‐EFFICACY
NINE THINGS EVERY FINANCIAL PLANNER SHOULD KNOW ABOUT GOALS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
PART V: INTEGRATING FINANCIAL PSYCHOLOGY INTO FINANCIAL PLANNING
CHAPTER 17: Getting the Client to Take Action: Motivational Interviewing in Financial Planning
THE CHANGE PROCESS
ENCOUNTERING RESISTANCE TO CHANGE
CONVERSATIONAL PITFALLS TO AVOID WITH CLIENTS WHO ARE NOT READY TO CHANGE
NINE EVIDENCE‐BASED TECHNIQUES FOR OVERCOMING CLIENT RESISTANCE TO FINANCIAL ADVICE
TAKING “NO” FOR AN ANSWER
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 18: Helping a Client in Crisis
CRISIS EVENTS WITH SEVERE CONSEQUENCES
THE IMPORTANCE OF THE CLIENT–PLANNER RELATIONSHIP
THE FINANCIAL PLANNER'S ROLE IN HELPING A CLIENT NAVIGATE CRISIS
SIX STEPS FOR A FINANCIAL PLANNING CRISIS EVENT
BEFORE A CRISIS
AFTER A CRISIS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 19: Assessment in Financial Planning
OBSERVATIONS
INTERVIEWS
KEY POINTS
CFP BOARD LEARNING OBJECTIVES COVERED IN THIS CHAPTER
CHAPTER 20: The Role of the Financial Planner: Ethical Considerations in the Psychology of Financial Planning
A FINANCIAL PLANNER IS
NOT
A MENTAL HEALTH PROVIDER
WHEN AND HOW TO REFER
ETHICAL CONSIDERATIONS
THE NEW FINANCIAL PLANNER
KEY POINTS
References
Index
End User License Agreement
List of Illustrations
Part 1
FIGURE I.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 1
FIGURE 1.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 2
FIGURE 2.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 3
FIGURE 3.1 Klontz‐Chaffin Model of Financial Psychology
Part 2
FIGURE II.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 4
FIGURE 4.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 5
FIGURE 5.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 6
FIGURE 6.1 Klontz‐Chaffin Model of Financial Psychology
Chapter 20
FIGURE 20.1 The roles of financial planners and mental health providers
Guide
Cover Page
Title Page
Copyright
Dedication
About the Authors
Introduction
Table of Contents
Begin Reading
References
Index
Wiley End User License Agreement
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Psychology of Financial Planning
The Practitioner’s Guide to Money and Behavior
Dr. Brad Klontz, CFP®
Dr. Charles Chaffin
Dr. Ted Klontz
Copyright © 2023 by Brad Klontz, Charles Chaffin, and Ted Klontz. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
Limit of Liability/Disclaimer of Warranty: While the publisher and authors have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Cover Design: Wiley
Cover Image: © VectorMine/Shutterstock (modified by Wiley)
To past, present, and future financial planners. You are helping heal the world of one of the biggest sources of stress, conflict, and well‐being—money.
About the Authors
Bradley T. Klontz, PsyD, CFP®
Dr. Brad Klontz is an expert in financial psychology, financial planning, and applied behavioral finance. He is a clinical psychologist and a Certified Financial Planner® practitioner. He is an award‐winning academic and practicing financial planner and owner of a Registered Investment Advisor (RIA) firm, where he works directly with clients in a financial planning capacity. His unique background and perspective have helped make him a leading expert in financial psychology, creating educational content that goes beyond just theory and can be directly applied into a real‐world financial planning context.
Dr. Brad Klontz is an associate professor of practice at Creighton University Heider College of Business, co‐founder of the Financial Psychology Institute, and managing principal of Your Mental Wealth Advisors. He is co‐author/co‐editor of eight books on financial psychology, including Money Mammoth: Unlocking the Secrets of Financial Psychology to Break from the Herd and Avoid Extinction (Wiley, 2020), Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists (NUCO, 2008; 2016), and Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health (Broadway Business, 2009).
Dr. Brad Klontz is a Fellow of the American Psychological Association (APA) and a former president of the Hawaii Psychological Association. He was awarded the Innovative Practice Presidential Citation from the APA for his application of psychological interventions to help people with money and wealth issues and his innovative practice in financial psychology for practitioners across the country.
Dr. Brad Klontz has been a columnist for the Journal of Financial Planning, On Wall Street, and PsychologyToday.com. His work has been featured on ABC News' 20/20 and Good Morning America, and in USA Today, The Wall Street Journal, the New York Times, the Washington Post, the Los Angeles Times, Time, Kiplinger's, Money magazine, NPR, and many other media outlets. He has an avid social media presence of over 1,000,000 followers across platforms including LinkedIn, Twitter, Facebook, Instagram, YouTube, and TikTok.
In 2019 he was appointed to the CNBC Financial Wellness Council and received the 2018 and 2021 Montgomery‐Warschauer Award from the Journal of Financial Planning, honoring the most outstanding contribution to the betterment of the financial planning profession. He has partnered with organizations including Capital One, JPMorgan Chase, Mutual of Omaha, and H&R Block in efforts to help raise public awareness around issues related to financial health and financial psychology.
Dr. Charles Chaffin
Dr. Charles Chaffin's work encompasses a broad range of fields, from educational and cognitive psychology to financial planning. He has served as the author or lead editor of six different books within financial planning and cognitive psychology, helping practitioners become more client‐centered and helping individuals and companies address the pushes and pulls on attention in the workplace. He has taught at the undergraduate and graduate levels, as well as in a variety of executive education programs.
Prior to The Psychology of Financial Planning: The Practitioner's Guide to Money and Behavior, Dr. Chaffin wrote Numb, which focuses on life in the Information Age, ranging from confirmation bias and tribalism to choice overload and compassion fatigue. Numb is designed to help readers use information, and the technology that goes along with it, as a tool for better productivity, deeper relationships, and authentic experiences … as opposed to a destination.
For over a decade, Dr. Chaffin worked as director of academic initiatives at CFP Board, developing instructional programs, books, and research initiatives that directly or indirectly related to financial planning practice. He served as co‐academic director of the client psychology program at Wharton Executive Education as well as program lead for the financial planning teaching seminar at Columbia University. He consults with financial service firms and is a regular keynote speaker at a variety of conferences.
Ted Klontz, PhD
Paul T. (Ted) Klontz, PhD, associate professor of practice of financial psychology and behavioral finance at Creighton University's Heider College of Business, founder and CEO of Klontz Consulting Group and co‐founder and director of the Financial Psychology Institute®, is based in Nashville, Tennessee. He has a 40+‐year career in counseling, consulting, and advising that has included authoring, co‐authoring, and contributing to six financial psychology–related books: Money Mammoth: Unlocking the Secrets of Financial Psychology to Break from the Herd and Avoid Extinction; Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health; Wired for Wealth; The Financial Wisdom of Ebenezer Scrooge; Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists; and Financial Therapy: Theory, Research and Practice.
Dr. Ted Klontz is a published researcher, professional speaker, and trainer with corporate groups focusing on communication skill development and anxiety management. He is a designer and facilitator of workshops (including “Exquisite Listening®,” “Ultimate Listening,” “Touching Mortality,” and “Experiential Tools for Change”); consultant to major entertainment management groups; consultant to the United States Defense Department; and has a private practice focused on working with professional athletes, entertainers, and financial professionals.
Dr. Ted Klontz has served in expert roles as an advisor to Congressional committees and is regularly quoted in national and international media including The Today Show, CNN, Good Morning America, Larry King Live, The Oprah Winfrey Show, NPR, The Wall Street Journal, Money magazine, and the New York Times. Ted's Healing Money Issues Workshop was featured on ABC News' 20/20 and Good Morning America. He was also featured on the Oprah Winfrey Network. He has served as one of the founding executive officers of the National Financial Therapy Association, and is co‐founder of Your Mental Wealth®, a direct‐to‐consumer personal finance brand.
Introduction
Successful financial planners understand one crucial thing about their clients: Personal finance and psychology are inextricably linked. If someone is not good with people, they're not going to be a good financial planner. Because when a planner gives their client advice, they are facing off against hundreds of thousands of years of human psychological conditioning, as well as their client's unique beliefs, behaviors, habits, and background. Knowledge of clients' financial psychology has never been more essential to the practice of financial planning. As technology continues to advance, making information more and more accessible to clients, there is a greater need for each financial planner to maximize their relevance through a keen ability to understand, respond, and in some cases predict, their client's behavior relative to a variety of circumstances and life events. The financial planner is no longer the gatekeeper to client data, and clients are not interested in receiving cookie‐cutter advice. The value and future of this great profession is on the human side, being able to understand each client's circumstance – financial and otherwise – so that they are adequately heard and served in their own unique way by a trusted advisor.
Getting to know your client sounds like a simple proposition: Schedule a time to meet, ask about their goals, and just listen. But, as accomplished planners will tell you, it is so much more than that. Today's financial planning is about more than just portfolios and products. The field has evolved to take into consideration all of the areas in a client's life that are impacted by money: their pursuit of meaning; financial goals that are in line with their values; and concerns about the impact of money on those who matter most to them. At the same time, a less‐evolved financial planner will say to us, “I have been doing this for 10 years now and I know my clients.” That may be true. They may serve their clients well, build relationships with them and their families, and help them meet their financial goals. But what about the client who did not return after the discovery meeting? How about the client who didn't follow through on every aspect of their financial plan? More importantly, what about the clients the planner hopes to add to their practice who may bring different life experiences and perceptions than their own or the colleagues at their firm?
THE IMPERFECT HUMAN
The truth is, our primal brains are not wired to make smart money decisions. They are wired to survive in the moment, grab instant gratification, save nothing, and share everything. Our smartphones, tablets, apps, and computers all get regular software updates, but our brains have essentially been the same for tens of thousands of years. We are still wired like our tribal ancestors, designed to exist in the harsh wilderness. In prehistoric times, there was no way to save the meat of a woolly mammoth for later. The tribe needed to consume it quickly before it spoiled. If a member of the tribe refused to share the meat with others, they would be banished and ultimately die. That hunter‐gatherer, tribal mentality is still alive inside our modern‐day minds. Centuries of these experiences created the social creatures who, in many cases, struggle to think of the long term because of short‐term emotions such as fear, FOMO, and the countless biases that impact our decisions and, ultimately, our financial and overall well‐being. Stacked on top of this are our backgrounds, beliefs, and experiences around money – all of which shape our unique financial psychology.
There is an old adage in education, “telling isn't teaching.” This means that true learning comes from experience and engagement with content, not from someone reciting facts for the purpose of passing an exam. A similar philosophy holds true with financial planning: Merely telling clients the right thing to do is not enough to bring value in this competitive market. Furthermore, there are countless online sites and media “experts” who tell people to “buy low and sell high,” to not drink expensive lattes, or to just save more than they spend. People already know this. They know they should save money, avoid revolving debt, make smart investments, and live within their means. Yet, so many people struggle with these basic concepts because of their financial psychology: They know better, but they just can't seem to do better.
Consider the following examples:
Our epidemic of overspending and undersaving
Buying when the market is high and selling when it is low, doing the exact opposite of what's in their best interest
Trying to get rich quick
Having a lack of diversification
Saying they want one thing but failing to follow through
Having trust issues around money
Blowing a bonus, inheritance, lottery win, or even a big sports contract
Failing to put a will or trust into place
Getting rid of money out of feelings of guilt
Providing financial support to adult children when the client can't afford it
and/or
the children misuse the money
Having trouble saying “no” to requests for money from family and friends, even when the client knows they should
Chronic money conflicts with spouses, partners, and family members
Lying about or hiding financial actions from a partner or spouse around money
Failing to follow through on financial advice, even when they requested it
Feeling too anxious to spend money even when they can afford to
Sacrificing health, relationships, and emotional well‐being in the pursuit of more, even when by all objective evidence they have enough
Avoidance around money issues
A lack of motivation, creativity, and passion in occupational pursuits
OUR VALUE AS FINANCIAL PLANNERS
So, given all our imperfections as they relate to money, financial planners must equip themselves with the knowledge and tools to help clients overcome these mental obstacles. Being knowledgeable is not enough. Financial planners must then use this knowledge to understand their clients' unique personal, family, and cultural backgrounds and how they impact their financial goals. To do this, financial planners must first understand their own psychology of money, including the worldview and biases they bring to the client relationship. This will enable them to be sensitive to each client's unique worldview and biases. Finally, the practitioner's knowledge, as well as their understanding of their client, must be enacted with a variety of tools and techniques that help the planner lead the client toward their goals.
We considered all of the above as we were writing this book. Our goal was to bring relevant research from various disciplines, understanding, and compassion to financial planning. We provide a broad overview of everything that makes the financial planning client “tick,” what motivates them, hinders them, and affects their biases, beliefs, and behaviors. Next, we wanted to help you as a financial planner better understand your own worldview and biases, enabling you to better engage and retain clients, most notably ones who differ from you. Finally, we wanted to be specific in providing tools and techniques that you can use in your practice to better serve each and every client with whom you work. The Psychology of Financial Planning combines the science of the mind with the science of money, demonstrating proven techniques to help clients feel, think, and behave in a financially healthy and responsible way. Just as importantly, it is designed to help you help your clients based not on your worldview and experiences, but theirs. If we are going to be client‐centered, it needs to be about the client! We believe this book can help you do that and ensure that both you and your clients are successful.
HOW TO USE THIS BOOK
The inclusion of the psychology of financial planning in the requirements for current and prospective CFP® professionals is another step forward for the profession in becoming more client centered. We've organized this book into five sections, focusing on key elements that impact a client's financial psychology, incorporating all of the learning objectives and, more importantly, bringing contexts, tools, and solutions to addressing each of them. We do not just “cover” them. We dive deep into what they mean, why they are important, and, most importantly, what to do when addressing these objectives in real‐time. Our goal is not only to explain financial psychology and how it contributes to problem financial behaviors, triggers, flashpoints, beliefs, and cognitive biases, but to provide exercises and tools designed to help facilitate behavioral change in a compassionate and effective way. Planners can fall into the trap of asking the wrong questions, therefore impeding or even halting a clients' progress. The Psychology of Financial Planning, along with the accompanying toolkit, helps financial planners, investment advisors, financial counselors, money managers, coaches, financial therapists, clergy, and psychotherapists—including psychologists, psychiatrists, social workers, counselors, and marriage and family therapists—avoid common pitfalls and get to the root of financial difficulties with their clients. When a planner gets inside the client's mind, they'll get a glimpse of the best ways to help them break free from problem financial behaviors so they can enjoy financial freedom.
We envisioned this book with the practitioner, and future practitioner, in mind, with the intention that it will be referenced throughout the career of the financial planner, specifically when you have a difficult issue with a client or are feeling as if your firm is not being as responsive or client‐centered enough in some way. It is designed to make practitioners know, and ultimately serve, their clients better. This book is a bit of a paradox of sorts. It is all about your success as an advisor because the book is all about your clients and your relationship with them. We hope this book contributes to the further success of you, your client, and your firm.
Now, let us begin the journey.
PART ITHE PSYCHOLOGY OF MONEY
Evolutionary psychology and research in behavioral finance have shown us that we are naturally bad with money. The instincts that helped us survive and thrive in prehistoric hunter‐gatherer tribes often hurt us in our modern financial lives. Delaying gratification, saving for the future, acquiring resources without sharing with our friends and family members, and suppressing our instinct to flee with the herd in the midst of a stock market correction all challenge our natural hardwiring. Our brain has not received any software update in thousands of years. Our Stone‐Age brains are designed for hunters and gatherers, not accountants, plumbers, lawyers, and all of our other occupations. This certainly holds true with managing our finances as well.
We developed the Klontz‐Chaffin Model of Financial Psychology to illustrate the factors that impact money and behavior (Figure I.1). This model is a comprehensive overview of all that influences, motivates, and impacts our financial behaviors as well as what may hinder our ability to meet our financial goals. This model is a representation of the content of this book and accompanying advisor toolkit.
In Part I we answer the fundamental question: “Why are human beings so bad with money?” We explore our prehistoric development and its impact on our cognition, with a focus on why what helped us back then hurts us now in our relationship with money. We also explore the impact of our environment on our cognitive biases. We encourage you to read the entire part (Chapters 1–3) as one module.
FIGURE I.1 Klontz‐Chaffin Model of Financial Psychology
CHAPTER 1Financial Instincts: Why We Are Bad With Money
In the late twentieth century, economists began to come to terms with what psychologists had known for hundreds of years: Human beings do not always act rationally and in their own best interests. In 2000, then‐future Nobel laureate Richard Thaler predicted that the field of economics would evolve to incorporate this basic acceptance of human psychology. Rather than assuming that human beings are rational financial actors, he believed that economics would shift to developing more realistic assumptions about actual financial behaviors. Specifically, he anticipated that economics would focus more on the exploration of human cognition and emotion and how they impact financial decision‐making [1]. If we want to understand, predict, and help shape financial behaviors, we need to understand how humans think and feel, and the impact of cognition and emotion on financial behaviors. In this chapter we focus on the impact of financial instincts on our financial psychology, as illustrated in Figure 1.1.
THE SURVIVAL INSTINCTS OF OUR ANCESTORS
When it comes to money, food, exercise, or anything that takes us outside our comfort zones, our brains are wired to do it all wrong. As we said, they are in desperate need of a software update, because we are designed for hunting and gathering and not the complexities of modern life. When the power of our primal instincts are considered, it's a miracle any client follows the advice of a financial planner. Overspending and undersaving are not the result of some tragic character flaw. Financial mismanagement occurs because of hundreds of thousands of years of neural programming in the human brain. When a client stays on the right financial track, they are doing so because they have been able to override their natural, instinctive impulses. These impulses have a powerful hold on human behavior. Our prehistoric ancestors lived in small groups of closely related nomads facing harsh conditions of scarcity and danger. If they were to survive, they had to work together with the rest of the tribe. If one member went against the group, they faced banishment, which equaled death in such a dangerous environment.
FIGURE 1.1 Klontz‐Chaffin Model of Financial Psychology
Human beings are optimized to survive in small, 100‐ to 150‐person groups. Our brains helped our ancestors survive by keeping the tribe closely related and dependent on each other, which made sense back when we were early humans on the plain, but now explains our penchant for self‐destructive financial behaviors. Once a financial planner understands this important factor, they can help clients work around their survival instincts so they can make better financial decisions. It can be helpful to normalize the instinctual destructive financial thoughts and behaviors clients have, because all human beings are vulnerable to them.
SHARING IS CARING … AND SURVIVING?
The indigenous people of the Northwest had a culture and economy that were based on the principle of sharing. The members of the tribe who gave away the most were often regarded as having the highest status in the tribe. In some native cultures, if a member of the group stole something, they were punished, but the person they robbed was also punished for failing to see that a member of the tribe needed or wanted something they possessed. Many indigenous people continue to rely on a culture of sharing within their communities and families rather than saving for themselves. The pressure to share is alive in today's communities and cultures, especially in places where financial disadvantages and a lack of resources are prevalent. In some cultures and communities, people will look down on members of their families if they don't share what they have with other members if the group is in need.
There are many examples of professional athletes who come from humble beginnings who lose millions in earnings because they gave their money away. They sometimes have difficulty saying “no” when family members ask them to carry the financial burden for the entire family. Sharing is how less affluent communities survive, whether it is food, labor, medical expenses, childcare, transportation, or money. In today's world, it is unlikely that a person will face certain death if they are banished from the tribe. However, the brain instinctually thinks we will die if we don't stay closely intertwined with our people. This makes it difficult to change course from deeply ingrained cultural norms. Even if the tribe may be moving against our own best interests, our instincts tell us to stay with our group.
In addition to contending with a long history of expected sharing, the human brain releases feel‐good chemicals whenever we do give to others. Some may find it more convenient to overlook those who are struggling and need help, rationalizing that it's okay to feel comfortable while others are doing without because they “work hard and deserve” what they have. But most people enjoy giving back to their communities, whether that's through donating to charities, volunteering, or just helping the person in front of them. Compassionate contribution is in our DNA. We are hardwired to give to others. In one study, researchers found that the mesolimbic reward system, which includes the parts of the brain that are activated by stimuli such as food, sex, drugs, and receiving money, also becomes activated when giving to others [2]. In other words, charitable giving gets people high. For those who struggle with giving too much to family and friends, a reasonable charitable donation could help these clients curb that urge and still activate the feel‐good chemicals in their brains without depleting their savings in an endless cycle of sharing.
THE ANTI‐SAVING INSTINCT
Compounding the sharing instinct's potential impact on wealth accumulation is the anti‐saving instinct. The concept of saving is relatively new in human development. Our ancestors, and, in some cases, our current communities and family systems, value sharing over saving. Thousands of years ago, the act of saving for oneself would have been considered antisocial hoarding. Not only were our ancestors discouraged from saving for themselves, they also could be expelled from the tribe or even killed for being selfish. Hoarding would have threatened the survival of the whole group, so it was often forbidden. In addition, one of the most important resources for our ancestors was food. Without modern appliances, saving food today for safe consumption later was difficult. Therefore, for thousands of years, we consumed and shared without even thinking about saving. If saving was the result of a genetic trait, then according to Darwin's theory of evolution by natural selection, those traits would have died off with the killed or exiled hoarder. Therefore, the saving gene would not have been passed down in great abundance to future generations. The idea of saving was punished out of our primal relatives. Now, hundreds of thousands of years later, it is no wonder most of society struggles to save money. The true psychological wonder is that anyone saves at all. That's why it is crucial for financial planners to help clients override this deeply ingrained biological programming.
To this day, anti‐saver bias still has a powerful hold on our society. It is evident in the anti‐rich sentiment in the United States. People envy the rich and famous, but they also love watching them fall from their thrones. Ironically, there is a strong link (a correlation coefficient of 0.45) between beliefs that rich people are greedy and money corrupts and simultaneously wanting more money and believing that money will solve all of one's problems [3]. Researchers have described this simultaneous loving and hating money as “money ambivalence” [4]. They hypothesize that the psychological discomfort of money ambivalence can trigger cognitive dissonance, where in order to decrease their psychological discomfort, people create a narrative in which having money makes someone bad so they can feel better about not having as much.
Similarly, when someone comes from humble beginnings and achieves wealth, they may feel a sense of guilt as they have become what their family and friends have labeled as bad or corrupt, leading to all kinds of poor decisions and behaviors. In other words, when someone has something we want but don't have, we are likely to experience feelings of envy. To cope with those uncomfortable feelings, we disparage them. As such, those who advance above the middle class are often looked at as greedy, selfish, corrupt, or evil. People soothe those feelings of envy or jealousy with a balm of moral superiority. Society still shames and shuns people who hoard wealth rather than sharing it for the greater good. However, those who are shunned and shamed are no longer plucked from the gene pool. They can now pass those saving traits on to the next generation. As humans moved into the agricultural age, saving became crucial and thus more acceptable. A future orientation – the extent to which one plans ahead and thinks about the future consequences before taking action – becomes critical to survival. Farmers who saved a portion of their crops could invest in the following year's planting, contributing to the survival of the community. Still, from an evolutionary standpoint, the human being‐as‐saver concept is still in its infancy.
I WANT IT NOW!
We live in a world in which instant gratification has become the norm. We can get almost anything we want instantaneously, be it food, blue jeans, or lumber, all delivered to our front door within moments. We even have apps that can order up a potential mate who will show up at our house, one whose appearance and occupation we already know. Businesses of all kinds have worked to make our lives as frictionless as possible. The easier it is to buy something, the more we buy it. Forget worrying about cash, we do not even need to take our credit card out of our wallet to pay. With instant gratification comes changes in the neurological pathways in our brains. Once we receive a reward, we want that reward again and our brain will alter its neurological pathways to help us get it again.
In 1972, Walter Mischel and colleagues sought to examine the connection between a child's ability to forgo instant gratification (a marshmallow or pretzel) in favor of a larger reward later (a second marshmallow or pretzel). Children ranging in age from three to five years old were placed in a room with one treat in front of them. The researcher told the children they would receive an additional treat if they waited until the researcher returned. The researcher then left the room for 15 minutes while the children had the reward sitting in front of them. They found that the children who were able to delay their gratification to achieve the additional reward tended to have a series of better outcomes later in life, including higher educational attainment, SAT scores, physical fitness, and a host of other factors. Certainly saving, investing for retirement, and diet and exercise exemplify the benefit of delaying gratification. Putting away a larger portion of our salary for an emergency fund or forgoing that second helping of mac‐and‐cheese are ways we can think about the long‐term rather than short‐term satisfaction. Our distinguished colleague Hal Hershfield at UCLA discusses the power of thinking about your “future self,” imagining in very concrete terms what your savings, body mass index (BMI), or relationships can be like in the future if you avoid the pitfalls of instant gratification. As planners, it is up to us to find ways to help our clients think about the long‐term goal and, in some cases, be specific about what the future will be like if sacrifices are made in the short term.
In modern society, it's considered smart and savvy to save money. Whether this is a learned behavior, a genetic anomaly, or a combination of both, there are some people who have a knack for saving. In fact, some save too much and become hoarders. Those with a hoarding disorder place saving above everything and everyone else, often sacrificing relationships, physical and mental health, and emotional well‐being. In that instance, it is important for the financial planner to recognize this as something that needs attention from a qualified mental health professional. But in general, saving has proven to be beneficial for the individual and, therefore, their families. Families who master the ability to save over time pass down this mindset to their children, creating multigenerational wealth. However, savers seem to be few and far between, especially in the United States. Financial planners who can help clients overcome their primal programming and help them learn to save and grow wealth are contributing to a financially literate and prosperous society.
HERD INSTINCT
At the Black Hills Wild Horse Refuge outside Hot Springs, South Dakota, the thundering hooves of wild horses shake the ground. The horses at the head of the herd lead the charge. If the leaders gallop in any direction, the entire herd follows. The herd doesn't know what is driving the run – if the leaders are galloping because they sense a mountain lion, or if they just want to let off some steam. Where the leaders go, the herd follows. The herd trusts the leaders blindly. They could be guiding all the horses to safety, or they could be headed for the crumbling edge of a cliff. They won't know for sure until it's too late to change course. What they do know is that they don't want to be left behind. The herd is a protective force against predators, but only if they stay together. To stay safe, a horse doesn't have to be the fastest, they just can't be the slowest. Falling behind means death. Predators pick off the most vulnerable members that can't keep up with the rest of the herd, so the risk of plummeting off a cliff is much lower than the risk of being attacked from behind.
Just like those wild horses, we have a herd instinct. It ties into our tribal hardwiring. Humans and horses are biologically programmed to stay together, avoid straying, and follow a leader. This prehistoric instinct is alive and well in us today. Yet, it often operates outside our conscious awareness. When the herd instinct is activated, it hijacks the rational brain, throwing logic and reason aside in the name of primal survival. In modern society, we see examples of herd mentality in riots, gang violence, bullying, and even human stampedes. Think of the long list of soccer and Black Friday shopping disasters over the years. As the old saying goes, “When the whole world is running toward a cliff, he who is running in the opposite direction appears to have lost his mind.”
The herd instinct applies to financial behaviors as well. In fact, every stock market crash and bubble can be explained by a herd mentality. Once stock prices rapidly decline, everyone runs to sell, sell, sell. When the housing bubble was at its height, people were buying homes they couldn't afford because the herd was rushing into a home‐buying frenzy. Many of these behaviors, which may seem random and irrational, are the result of a predictable social dynamic that is baked into our DNA. It's easy to look at these incidents from afar and think, “I would never behave that way.” But anyone who has experienced the frenzy of collective human panic knows just how powerful that instinct is when activated.
WHAT'S YOUR FINANCIAL COMFORT ZONE?
There is intense pressure to stay within the financial circumstances that have been created for us by our families and socioeconomic cultures. The desire to stay with the herd prevents us from breaking free from our financial comfort zones: the socioeconomic herd with which we are most familiar and feel most comfortable. For people to break free, they must go against thousands of years of conditioning and leave the herd, embarking on a journey to new territory. If they are unable to resist the herd, they will often continue to subconsciously self‐sabotage and gravitate toward harmful financial behaviors that keep them in a perpetual cycle of drifting back to their socioeconomic herd. This helps explain why so many people blow lottery winnings and other sudden increases in income. Even though many of us would say we would like to have more money, the social and relational pressures that come to bear when we start to rise above the socioeconomic conditions of our family and closest friends can be too much.
The pressure exerted on us from others to stay within our financial comfort zone is often referred to as the crab‐barrel effect. Live crabs that have been caught and placed together in a barrel don't need a lid to keep them contained. If any determined crab scrambles to the top to escape, the other crabs will claw and pull it down in their own attempts to reach the top and free themselves. Regardless of the intent, it results in an “if I can't have it, neither can you” scenario. If a crab continues to try to free itself, the other crabs may even attack it, breaking its claws and making it impossible for the crab to escape. Communities in human society do this, too, except they don't use claws. They use sharp tongues, the threat of social isolation, and sometimes violence to keep everyone in check and within the confines of the financial barrel. A person's financial comfort zone is formed by the circumstances, communities, and families in which they are born and raised. Since they grow up in this environment, they consider these circumstances normal and familiar. The financial behaviors, beliefs, and situations of the herd plant themselves in the psyche, becoming second nature. But if the unhelpful financial beliefs and behaviors are never challenged, they become a barrel from which there is no escape.
Jim was able to break free from the financial constraints of his family and community. As one of eight siblings growing up on a farm with parents who barely made enough money to feed the family, Jim found familiarity in scarcity. However, from an early age, Jim decided there was no future for him on the family farm. So he worked after school and on weekends, saving everything he could to go to college and get his business degree. Farm life had taught him how to work hard, so he succeeded in the business world. After years of dedication and hard work, he finally became wealthy. He managed to break free from his financial comfort zone, much to the chagrin of his parents, siblings, aunts, uncles, and cousins. Each summer, Jim would visit his family at the farm. The reaction of his family was that of the crabs in a barrel, trying to pull him back down with verbal attacks and vicious gossip, saying things like,
“He is flying in, probably first class, just to show off how much money he has.”
“Guess he's too good to let us pick him up in the farm truck. No, he has to take some fancy car from the airport, wasting money when other people are starving.”
“He's probably too high and mighty to stay on the farm. He's probably racking up room service bills at the Four Seasons.”
“He's just doing all of this to show off because he thinks he's better than us.”
While Jim did what he could to break free from the financial constraints within his family, it came at a price. In exchange for escaping “the barrel,” he faced ridicule and ostracization. This social punishment is often strong enough to pull a person back into “the barrel.” Those who left their financial comfort zones may subconsciously sabotage themselves. As a result of the pressure from his family, Jim ran the risk of engaging in poor financial decisions and behaviors, such as overspending, giving away his money, or accumulating large amounts of debt. He worked against generations and millennia of ingrained thinking to do otherwise.
Even if a person manages to get out of their financial comfort zone, they may behave as if they are still in the same circumstances. Take, for instance, a previously highly compensated executive who lost their job and is struggling financially, yet continues to live a lavish lifestyle, or a self‐made millionaire who rides around in a used pickup truck that constantly breaks down. Both situations are potentially unhealthy and can compromise the person's well‐being. Whether a client has moved above or below their financial comfort zone, they may be feeling a great deal of stress from losing their place within the herd. They may be wondering who they are if they no longer belong and may struggle to fit in their new financial environment. It is important for people in this situation to examine some questions:
How do they identify themselves now that they are outside their original socioeconomic class?
What will people they know think of them?
What do they think of themselves?
What does it mean to become a person who exists outside their financial comfort zone?
What are the social rules and norms of this new zone?
Getting clarity around their new socioeconomic status and their place within it will help them steer clear of poor financial choices. Herd instincts are powerful, invisible barriers to the financial freedom so many are seeking.
FEAR OF MISSING OUT (FOMO)
FOMO, or fear of missing out, is anxiety caused by not being included in an exciting or interesting event that others are experiencing [5]. FOMO is often aroused by posts seen on social media, but it's actually an ancient survival instinct. When our ancestors brought food to the tribe, everyone benefited from taking notice and joining in on the feast. FOMO can also alter behavior in motivating the individual to act when they might otherwise not do anything. This applies to financial planning as well as parties and social events. Take, for instance, cryptocurrency traders, who tend to score higher on the FOMO scale [5]. Studies have shown that Bitcoin investors tend to be younger than typical investors, sharing a higher risk propensity, and an irrational optimism about getting rich quickly and easily, similar to problematic gamblers. These investors tend to be more sensitive to rewarding experiences, thus aligning with studies that suggest FOMO is a crucial driver in cryptocurrency investment settings [5].
Perhaps the tendencies of risk‐taking, irrational optimism, and enthusiasm served ancient tribal hunters. Surely these traits would enable hunters to take big risks in the face of danger. An irrational optimism is necessary to believe they would succeed in killing a huge woolly mammoth with tusks that could impale them at any second. However, if the hunter's behavior was too risky, they would quickly be killed and unable to pass on their swashbuckling genes. Risking all of the tribes' resources for a shot at something bigger could mean death for the members of the tribe. Any entrepreneur can attest that taking risks may be necessary to have a shot at success. Yet, making risky investments without adequate knowledge of the market or accurate assessments of the probability of success can be detrimental. The way we communicate in this information age certainly fuels FOMO in our clients. Perceived victories in the market can be communicated instantaneously through texts, news outlets, and social media. But perhaps more importantly, our innate desire to present ourselves as strong and competent motivates us to share victories far more frequently than we share defeat. If our clients are only hearing about the rewards and not the consequences of risk, then FOMO can become a powerful force in fueling decisions that may not be in their long‐term interests. Successful investors and entrepreneurs must strike a delicate balance between risk and reward, which requires open‐mindedness and flexibility in thinking.
SOCIAL STATUS AND RELATIVE DEPRIVATION
Do you consider yourself rich? We are wired to be acutely aware of our status within our reference group. In other words, what people think about us matters – a lot. While we like to think that we shouldn't care or that it isn't important what other people think, we just aren't wired that way. Within the tribe, awareness of social status was critical to our ability to survive and thrive. If individuals were perceived as somehow better than others in some way, then it was assumed on some level that they would receive more resources than others. In fact, managing how we are perceived by others takes up a lot of our time and mental resources. Social status can consume our time in doing everything from holding on to our class status to how we present ourselves on social media. Thousands of years ago, our status within the group meant more food; today, it can mean anything from more income and attention to more likes on Instagram.
Although such findings have been disputed by others, and they are in no way conclusive, some studies have suggested that there appears to be a magical cutoff between money and happiness [6]. For example, a 2018 study from Purdue University found that the desired annual income for optimal happiness is $95,000 for life satisfaction and between $60,000 and $75,000 for emotional well‐being [7]. Perhaps it is no coincidence that the median annual income in the United States in 2018 was around $64,000 [8]. The concept of relative deprivation may be the reason for this correlation between median income levels and happiness. The theory of relative deprivation posits that our sense of well‐being is not based on objective reality, but rather on our perceived status relative to the perceived status of others around us [9]
