{"id":9420,"date":"2024-05-16T16:31:42","date_gmt":"2024-05-16T16:31:42","guid":{"rendered":"https:\/\/emoneyadvisor.com\/blog\/?post_type=thought_leadership&p=9420"},"modified":"2024-05-16T16:31:42","modified_gmt":"2024-05-16T16:31:42","slug":"what-is-financial-psychology-and-how-can-financial-advisors-use-it","status":"publish","type":"thought_leadership","link":"https:\/\/emoneyadvisor.com\/blog\/what-is-financial-psychology-and-how-can-financial-advisors-use-it\/","title":{"rendered":"What Is Financial Psychology and How Can Financial Advisors Use It?"},"content":{"rendered":"

Financial psychology is becoming an increasingly popular and crucial practice in financial planning. Many financial planners now recognize the need to consider clients\u2019 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<\/sup><\/p>\n

Whether you need to refresh your knowledge or are just getting started, let’s dive into financial psychology. We\u2019ll 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.<\/p>\n

What Is Financial Psychology?<\/strong><\/h2>\n

Simply put, it\u2019s understanding why we do what we do with money\u2014it\u2019s the emotions and the human side of money. According to Dr. Brad Klontz, a well-known author and researcher on the subject, \u201cpersonal finance and psychology are inextricably linked.\u201d He asserts that knowledge of a client\u2019s financial psychology has never been more essential to financial planning, enabling advisors to understand each client\u2019s circumstances both financial and otherwise.2<\/sup><\/p>\n

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.<\/p>\n

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\u2014\u2018tagging\u2019 money with different emotions based on how it was received\u2014which influences what we do with it. Understanding these mental frameworks can not only help inform the financial plan but also help safeguard your clients\u2019 well-being.<\/p>\n

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.<\/p>\n

CFP\u00ae<\/sup> Board\u2019s Psychology of Financial Planning Books<\/strong><\/h2>\n

The psychology of financial planning is now considered an important competency for financial planners, making up 7 percent of the CFP\u00ae<\/sup> examination. In April 2022, the Certified Financial Planner Board of Standards, Inc. (CFP Board) announced the release of \u2018The Psychology of Financial Planning\u2019, a six-part book covering topics such as understanding a client’s psychology, principles of effective communication, and counseling, among others.<\/p>\n

In August 2023, the CFP Board released \u2018The Psychology of Financial Planning: Practitioner Resource Guide\u2019, a practical guide to help CFP\u00ae<\/sup> professionals further integrate financial psychology into their practice.<\/p>\n

These publications are beneficial for both practicing CFP\u00ae<\/sup> professionals who are looking to refine their practices, as well as CFP\u00ae<\/sup> candidates preparing for the CFP\u00ae<\/sup> certification.<\/p>\n

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

Helpful Financial Psychology-related Certifications for Advisors<\/strong><\/h2>\n

If you\u2019re looking to refresh or add to your knowledge of financial psychology, here are a few designations and certificate programs to choose from:<\/p>\n

1. Certified Financial Therapist\u2122 (CFT-I\u2122)<\/h5>\n

Issuing organization website: Financial Therapy Association<\/a><\/p>\n

2. Financial Psychology, Behavioral Finance, and Financial Therapy graduate certificates<\/h5>\n

Issuing organization website: Creighton University<\/a>, Kansas State University<\/a>, University of Georgia<\/a>, Texas Tech University<\/a><\/p>\n

3. Certified Financial Behavior Specialist\u00ae<\/sup> (FBS\u00ae<\/sup>)<\/h5>\n

Issuing organization website: Financial Psychology Institute\u00ae<\/sup><\/a><\/p>\n

4. Certified Financial Transitionist\u00ae<\/sup> (CeFT\u00ae<\/sup>)<\/h5>\n

Issuing organization website: The Financial Transitionist Institute<\/a><\/p>\n

5. Registered Life Planner\u00ae<\/sup> (RLP\u00ae<\/sup>)<\/h5>\n

Issuing organization website: Kinder Institute of Life Planning<\/a><\/p>\n

6. Certified Internal Family Systems\u2120 Practitioner<\/h5>\n

Issuing organization website: IFS Institute<\/a><\/p>\n

7. Accredited Behavioral Finance ProfessionalSM<\/sup> (ABFPSM<\/sup>)<\/h5>\n

Issuing organization website: College for Financial Planning<\/a><\/p>\n

8. Behavioral Financial Advisor (BFA)<\/h5>\n

Issuing organization website: Think2Perform<\/a><\/p>\n

9. Accredited Financial Counselor\u00ae<\/sup> (AFC\u00ae<\/sup>)<\/h5>\n

Issuing organization website: Association for Financial Counseling & Planning Education\u00ae<\/sup><\/a><\/p>\n

10. Psychology of Financial Planning Specialist\u2122 certificate<\/h5>\n

Issuing organization website: Financial Psychology Institute<\/a><\/p>\n

Learn more about these designations, as well as the eMoney CE Webinar series where you can expand your knowledge and earn CFP\u00ae<\/sup> CE credits, by clicking here<\/a>.<\/p>\n

How to Integrate Financial Psychology Into Your Practice<\/strong><\/h2>\n

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<\/sup><\/p>\n

Most advisors implement about eight actions on average. However, we\u2019ve 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:<\/p>\n