The Intersection of Psychology and Financial Planning

When you get people to open up about their innermost hopes, dreams and plans for their future, they often wind up sharing their emotions and experiences. And the successful financial planner is skilled at merging traditional financial advice with elements of behavioral finance. They know how to turn a moment of emotional frankness to their advantage in helping the client reach financial freedom.

Additionally, there are built-in psychological factors that must be navigated while helping guide clients to make the best decisions for them. As I point out in my book, Dr. Cole Cash Will See You Now: How He Helps Advisors See Their True Worth, there are plenty of ways you can overcome such obstacles. We all know people can be irrational when it comes to their money. They can make decisions based on fear and ignorance that wind up hurting them. The seasoned, insightful wealth manager understands how to overcome such emotional barriers.

In preparing my book, I relied heavily on the perceptive (and revealing) research of Professor Dan Ariely at Duke University. He is an internationally recognized expert on psychology and behavioral economics, and his work describes several powerful tools to assist you in addressing – and overcoming – your clients’ emotion-based obstacles.

For starters, accept that humans are irrational. They often make decisions that just plain don’t make sense. Consider this example: Ariely writes, “When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices. Watch out for relative thinking; it comes naturally to all of us.”

As a financial planner, it’s your job to help the client understand why certain investment steps are in their best interest when their intuition may be telling them otherwise.

Here’s another example. As Ariely correctly points out, fear is an important factor. “The fear of not having enough money, the fear of looking stupid (asking stupid questions, looking as if you are stupid for starting late or having so much debt, etc.), the fear of being exposed or humiliated. In this world of social media when the only things shared are the things to make people look smart or look like they are living the perfect life… it becomes even more difficult for people to face some of these fears with regards to their money. Because what they are seeing is everybody else has figured it out… when in reality, they have the exact same fears as you do.”

There was a reason why President Franklin D. Roosevelt said, during the depths of the Great Depression, “The only thing we have to fear is fear itself.” Likewise, the root source of fear and anxiety in money-related matters is rarely rooted in facts or reality. As Ariely explains, “…instead it is the result of your projection into the future. You imagine all of the horrible things that will happen if X or Y doesn’t change. To escape that scary future, you take action that you hope will prevent that imagined scenario.”

The single most important step you can take in breaking through psychological barriers is creating an environment with the client that encourages openness. You can’t help a client with their fears until they are shared with you. And that only happens in situations where there is trust, respect, and a sense of security. For instance, the client needs to be secure in knowing you won’t judge if they share something that may sound silly.

As I have shared before, that kind of trusting, accepting environment only comes with time. Clients must understand that you are not only making time to meet with them but have scheduled enough time to get to know them as individuals. That doesn’t happen in one session. Trust, like a brick wall, is built over months and sometimes years. The more you take advantage of the remarkable time-saving software and equipment, the more opportunities you have for quality time with the people whose wealth you manage.

Finally, take a course on basic psychology online or at a local college. I’m not talking about going back to school and earning a second degree in the field! But a class that gives you better insight into how human beings think and act, as well the forces that motivate them to do so, will be very helpful. Or if you want a book (it’s heavy, but great) look at Thinking Fast and Slow by Daniel Kahneman. It changed my perspective on the human mind.

An old saying reminds us, “Forewarned is forearmed.” When you know in advance what you might be facing in a certain situation, you can prepare yourself for it and give yourself an important tactical advantage. And in a field as fiercely competitive as financial planning, you need all the advantages you can get.

Matt Reiner is a CFA, CFP®, and partner at Capital Investment Advisors, a $2.8+ Billion RIA in Atlanta. Reiner is also CEO of Wela Strategies, a sister company to Capital Investment Advisors, and is the founder and CEO of Benjamin™. Benjamin is an AI technology created by Reiner after seeing the gaps in technology used in his own firm. Reiner's true passion is using his vast experience to coach other advisors across the country, helping them evaluate their firms' practices and find the best strategies for future success. To reach Matt Reiner, visit www.MattReiner.com.

Read more articles by Matt Reiner