The article discusses the importance of integrating psychology into the field of financial planning and highlights the need to understand and address the psychological aspects of financial decision-making and client relationships.

Untangling Behavioral Finance and the Psychology of Financial Planning

  • Bradley T. Klontz, Psy.D., CFP
  • Journal of Financial Planning, January 2023
  • A version of this paper can be found here
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What are the Research Questions?

The author asks the following questions:

  1. How has the financial planning profession evolved in terms of recognizing and embracing the psychology of financial planning over the past few years?
  2. What are the specific challenges that financial planners encounter when dealing with clients’ behavioral aspects and psychological issues related to financial decision-making?
  3. How have some financial planners developed a holistic approach to client relationships that goes beyond traditional financial advice, and what skills do they possess?
  4. What initiatives and changes have been introduced by organizations like the CFP Board to formalize the importance of understanding a client’s financial psychology in the financial planning profession?
  5. What are the key components of the psychology of financial planning, and how do they equip financial planners with the knowledge and tools to enhance client relationships and improve clients’ financial well-being?

What are the Academic Insights?

  1. The financial planning profession has evolved by placing greater importance on understanding and addressing the psychological aspects of financial planning. Financial planners now recognize the need to consider clients’ emotions, biases, and unique financial psychology when developing strategies and providing advice. This shift towards a more client-centered and holistic approach is aimed at improving the effectiveness of financial planning and enhancing clients’ financial well-being.
  2. Financial planners face a range of challenges when dealing with clients’ behavioral aspects and psychological issues related to financial decision-making, such as: Emotional Decision-Making, Cognitive Biases, Lack of Self-Control, Short-Term Focus, Resistance to Change, Family and Relationship Dynamics, Cultural and Value Differences and Communication Barrier. These challenges require planners to possess not only financial expertise but also strong interpersonal and counseling skills to help clients overcome their psychological barriers and make sound financial choices.
  3. By recognizing that clients’ financial well-being is closely intertwined with their emotional, psychological, and interpersonal aspects of life. These planners possess a unique set of skills and attributes that enable them to provide comprehensive support to their clients. Such skills are: Active Listening, Empathy, Relationship Building, Counseling, Conflict Resolution, Financial Psychology, Crisis Intervention, and Personal Development.
  4. The Certified Financial Planner (CFP) Board, among other organizations, has taken several initiatives and introduced changes to formalize the importance of understanding a client’s financial psychology in the financial planning profession. Here are some key initiatives and changes:
    • Inclusion of the Psychology of Financial Planning in the CFP® Exam Curriculum
    • The CFP Board’s inclusion of topics related to behavioral finance to learn about cognitive biases and behavioral tendencies that impact financial choices
    • The knowledge category related to principles of counseling indicates the need for financial planners to possess counseling skills
    • Emphasis on communication, which underscores the importance of clear and empathetic communication in the financial planning process
    • The CFP Board may introduce continuing education requirements related to the psychology of financial planning, encouraging certified financial planners to stay updated on the latest developments in this field
  5. These components go beyond traditional financial advice to address the emotional, psychological, and behavioral aspects of financial decision-making. Here are some:
    • Client and Planner Attitudes, Values and Biases
    • Knowledge of behavioral finance principles to recognize and address cognitive biases and behavioral tendencies that may lead to suboptimal financial decisions
    • Principles of Counseling
    • General Principles of Effective Communication
    • Crisis Events with Severe Consequences
    • Multicultural Psychology
    • Developmental Psychology
    • Personality Psychology
    • Marriage and Family Psychology
    • Neuropsychology by understanding the neurological underpinnings of financial decision-making
    • Conflict Resolution Techniques
    • Motivation and Goal Setting
    • Personal Development

Why does this study matter?

This paper equips financial planners with the knowledge and tools to address the psychological and emotional aspects of financial decision-making, leading to improved client outcomes, stronger relationships, and greater financial well-being. This approach benefits not only individual clients but also has the potential to positively impact the financial health of society at large.

The Most Important Chart from the Paper:

Abstract

This paper explores the evolving landscape of financial planning by emphasizing the pivotal role of understanding the psychology of money. Over the past few years, the financial planning profession has seen a significant shift towards recognizing and embracing the psychological aspects of financial decision-making. This shift is characterized by a holistic approach that goes beyond traditional financial advice and delves into the emotional, psychological, and behavioral aspects of clients’ financial lives.

Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen published a book on research-backed investment ideas, titled Smarte(er) Investing. How Academic Insights Propel the Savvy Investor. You can find additional information at Academic Insights on Investing.