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What Is Financial Psychology and How Can Financial Advisors Use It?

Emily Koochel May 16, 2024

Advisor in meeting with client using financial psychology

Financial psychology is becoming an increasingly popular and crucial practice in financial planning. Many financial planners now recognize the need to consider clients’ financial attitudes and beliefs when developing strategies and providing advice. Yet, despite its significance, it remains a relatively untapped resource for many advisors. Surprisingly, research indicates that while 71 percent of advisors have some familiarity with financial psychology, only 26 percent feel very familiar with it.1

Whether you need to refresh your knowledge or are just getting started, let’s dive into financial psychology. We’ll examine how it can enhance your services, and most importantly, how you can integrate its principles into your practice to achieve meaningful outcomes for your clients.

What Is Financial Psychology?

Simply put, it’s understanding why we do what we do with money—it’s the emotions and the human side of money. According to Dr. Brad Klontz, a well-known author and researcher on the subject, “personal finance and psychology are inextricably linked.” He asserts that knowledge of a client’s financial psychology has never been more essential to financial planning, enabling advisors to understand each client’s circumstances both financial and otherwise.2

This shift toward a more client-centered and holistic approach takes the planning experience beyond traditional advice, exploring the complex reasons behind our financial choices, including cognitive, social, emotional, and cultural influences. It considers the thoughts and feelings that influence financial behaviors, such as spending and saving, and how these factors significantly shape our financial decisions.

For example, most people perceive a sudden money windfall as inherently good. However, when that money comes from a life insurance settlement that reminds us of our loved one, we often assign a subjective value to our money in ways that are less rational—‘tagging’ money with different emotions based on how it was received—which influences what we do with it. Understanding these mental frameworks can not only help inform the financial plan but also help safeguard your clients’ well-being.

Financial psychology, however, should not be confused with behavioral finance, a subfield of behavioral economics that emerged in the 1970s. While behavioral finance focuses more on decision-making, financial psychology delves deeper into emotional ties with money. It examines clients’ lifelong relationship with money and how it shapes their current financial and personal lives.

CFP® Board’s Psychology of Financial Planning Books

The psychology of financial planning is now considered an important competency for financial planners, making up 7 percent of the CFP® examination. In April 2022, the Certified Financial Planner Board of Standards, Inc. (CFP Board) announced the release of ‘The Psychology of Financial Planning’, a six-part book covering topics such as understanding a client’s psychology, principles of effective communication, and counseling, among others.

In August 2023, the CFP Board released ‘The Psychology of Financial Planning: Practitioner Resource Guide’, a practical guide to help CFP® professionals further integrate financial psychology into their practice.

These publications are beneficial for both practicing CFP® professionals who are looking to refine their practices, as well as CFP® candidates preparing for the CFP® certification.

To continue expanding your knowledge, let’s explore additional certifications for advisors and dive into actionable strategies you can integrate into your practice.

Helpful Financial Psychology-related Certifications for Advisors

If you’re looking to refresh or add to your knowledge of financial psychology, here are a few designations and certificate programs to choose from:

1. Certified Financial Therapist™ (CFT-I™)

Issuing organization website: Financial Therapy Association

2. Financial Psychology, Behavioral Finance, and Financial Therapy graduate certificates

Issuing organization website: Creighton University, Kansas State University, University of Georgia, Texas Tech University

3. Certified Financial Behavior Specialist® (FBS®)

Issuing organization website: Financial Psychology Institute®

4. Certified Financial Transitionist® (CeFT®)

Issuing organization website: The Financial Transitionist Institute

5. Registered Life Planner® (RLP®)

Issuing organization website: Kinder Institute of Life Planning

6. Certified Internal Family Systems℠ Practitioner

Issuing organization website: IFS Institute

7. Accredited Behavioral Finance ProfessionalSM (ABFPSM)

Issuing organization website: College for Financial Planning

8. Behavioral Financial Advisor (BFA)

Issuing organization website: Think2Perform

9. Accredited Financial Counselor® (AFC®)

Issuing organization website: Association for Financial Counseling & Planning Education®

10. Psychology of Financial Planning Specialist™ certificate

Issuing organization website: Financial Psychology Institute

Learn more about these designations, as well as the eMoney CE Webinar series where you can expand your knowledge and earn CFP® CE credits, by clicking here.

How to Integrate Financial Psychology Into Your Practice

In our 2023 Beyond the Plan research, we found that implementing financial psychology actions into your planning process dramatically improves client outcomes. This is because financial psychology in planning is not merely a theory; it is an approach that tangibly increases client satisfaction while diminishing financial anxiety. In fact, client satisfaction increases with each additional action an advisor takes.3

Most advisors implement about eight actions on average. However, we’ve identified the top five actions that have the greatest positive impact on overall client satisfaction and are most effective at decreasing client anxiety. These include:

  • Assisting clients in identifying meaningful personal and financial goals
  • Prioritizing and understanding clients’ values before offering financial advice
  • Always considering what clients value most in life
  • Making an effort to learn about clients’ money behaviors and attitudes
  • Communicating recommendations in terms clients can understand

While we know many advisors do one or many of these actions in practice, there is an opportunity for improvement. According to our research, advisors take these actions less than half of the time. Yet clients say that making an effort to understand their values is something they want their advisors to do more often.

Financial psychology does not require an all-or-nothing commitment. By acknowledging the significance of financial psychology in financial planning and integrating a few actions into your practice, you can enhance your client outcomes and see more client motivation, trust, loyalty, and referrals.

If you can fully commit to incorporating financial psychology into your client relationships, you will see even better outcomes across the board.

Want to learn more about how to use technology to increase the efficiency of your planning and take your financial psychology approach even further? Read our latest blog post Empowering Financial Wellness: How Client Portals Reduce Financial Anxiety.

Sources:

1.       eMoney Evolution of Advice Research, July 2022.

2.       Klontz, B., Chaffin, C., & Klontz, T. (2022). Psychology of Financial Planning. John Wiley and Sons.

3.       eMoney Beyond the Plan Research, July 2023, n=504 advisors, n=1,003 end-client investors

Image of Emily Koochel
About the Author

Dr. Emily Koochel is an experienced financial professional, academic, and researcher. She currently serves as a leader for eMoney Advisor’s Financial Education and Wellness initiatives in her role as Manager of Financial Wellness. Dr. Koochel’s PhD in Applied Family Science and Master’s in Financial Planning provide a multidisciplinary lens to inform her work where she focuses on understanding the effect of financial behaviors and financial decision making on personal and financial wellness. She serves as a subject matter expert in the field, reviewing and authoring peer-reviewed journal articles, book chapters, and contributing to public scholarship. Most notably, she served as a co-author for the CFP Board’s book – The Psychology of Financial Planning - and was awarded 2020 Outstanding Research Journal Article of the Year by the Association for Financial Counseling and Planning Education. She holds the Certified Financial Therapist – I designation and is an Accredited Financial Counselor and Behavioral Financial Advisor.

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