How to integrate psychology into financial planning

6 ways to implement psychology in advisory practices

June 28, 2024 3:34 PM

With growing links between psychology and financial planning, there are beginning to be a lot of terms to describe that field, Morningstar Senior Behavioral Researcher Samantha Lamas said.

For example, some financial advisors may be referring to planning pioneer George Kinder's "life planning" movement in the profession, she noted. Others may simply be talking about the need to be something of a coach, a therapist or a financial counselor to clients. Or, they could be analyzing clients' behavioral biases, thinking about people's often-traumatic relationship with money or considering the pursuit of certain professional designations or academic degrees.

All of those topics boil down to "this more human side of money," Lamas said.

In an effort to explain the burgeoning professional interest in psychology among planners and other industry professionals, Financial Planning compiled the below slideshow documenting six key takeaways from interviews with Lamas and six other experts. The lessons relate to practice management and professional development in ways that may be surprising to anyone suggesting that planning is primarily a numbers-driven or emotionless field of finance. In fact, the seven experts shed light on the ways that money involves those psychological topics.

Morningstar Senior Behavioral Researcher Samantha Lamas — Samantha Lamas is a senior behavioral researcher with research, technology and asset management firm Morningstar

"There are a lot of phrases being thrown out," Lamas said. "It's all of these things, but it's really that personal side of personal finance."

FP also spoke with:

Rahkim Sabree, a financial therapist and accredited financial counselor;
Julie Genjac, vice president of applied insights for Hartford Funds, where she coaches financial advisor teams in practice management;

Sarah Stanley Fallaw, founder of client and advisor behavioral finance assessment firm DataPoints;

Danielle Labotka, a behavioral scientist from research, technology and asset management firm Morningstar;

Ashley Agnew, the director of relationship development for Needham, Massachusetts-based Centerpoint Advisors and the current president of the Financial Therapy Association, a professional development group that is the certifying organization for the certified financial therapist designation; and

Travis Sholin, the CEO of Omaha, Nebraska-based Keystone Financial Services and a board member of the Financial Therapy Association.

The field poses the potential for altering clients' relationship with money and highlighting the experiences of many Black, Hispanic, Native American or other minority clients and professionals who may have previously been "shut down" by the industry "from the perspective of, 'Oh, you're playing the victim card,'" Sabree said. For some who are making six figures or more yet are "still in the mindset of survivor mode," financial therapy amounts to a primer on "how to help them feel safe," he said in an interview.
"I think it's more important than ever that these diverse voices speak up very candidly and very bluntly," he said. "You have permission to relax. You have permission to enjoy your money. You have permission to feel safe. Financial therapy — by itself, it's words in a textbook. It's the practitioner that makes the difference."

For insights on integrating behavioral investing research, financial therapy and other psychological principles into advisory practices, scroll down the slideshow. And find additional FP coverage of that practice management topic here:

In some ways it’s nothing new

Julie Genjac is vice president of applied insights for Hartford Funds.

Hartford Funds

The myriad issues involved with money have prompted conversations beyond picking stocks and building investment portfolios for as long as there has been financial advice.

"Advisors have always done behavioral finance. They've always had to be that guiding hand for their client," Lamas said. "However, I think it's kind of been kicked into overdrive more recently."

"We're taught in life that emotions around money are bad in so many ways," Genjac said. "Those words are coming out of your mouth, but you're not understanding the root of it. Having those 'why' conversations and really getting to the root of it is such a powerful partnership between a client and a financial professional."

"For a lot of people, making decisions with their money and investing is incredibly stressful, and it's something that feels very, very high stakes as well," Labotka said. That can cause "times when we leave behind what we think of rational thought" and behavioral biases that are "part of how our brain works to help us and our ancestors make really quick, important decisions."

"As long as we've been interacting with some form of currency, there has been more than just a transactional approach to navigating that," Sabree said, noting psychological and policy and cultural factors like trauma, consumerism and capitalism that interact within the field. "Our reaction to the financial traumas and financial stress that comes from the culture of money that we experience in the United States and around the world. … The message that tells us, 'You're not good enough, if you don't have the nicest, newest insert item here.' People are battling against these mixed messages, and they're not understanding what's happening to them on a psychological level, on a nervous system level and even sometimes on a spiritual level."

Barriers to grasping the terminology

Rahkim Sabree is a financial therapist and accredited financial counselor.

Rahkim Sabree

Pinning down definitions or accepting the role of financial therapy in an advisory practice requires getting past some mental blocks, experts said.

Some challenges to integrating financial therapy into advisory practices relate to the fact that "some people don't have a great tolerance" for "acknowledging some of the historical and institutional mistreatment of African Americans," Sabree said. On the other hand, for some clients and professionals, confronting "some of that pain that they've had to overcome in order to show up and exist as they exist" makes it "hard to be reminded of that sometimes," he said. "I can see that translating out into how people perceive the conversation around what it is that they've had to do in order to survive and, in some instances, thrive."

Even though there is "a lot of jargon out there," an understanding of "some of the theories from therapy, from the mental health world" can benefit advisors and clients, according to Agnew, who cited one called "transference" or "countertransference" that can sometimes show up in their relationships. "It's the patient directing feelings about a person onto a therapist. They might be mad at their therapist because they remind them of their mother," she said. "Even just that one powerful theoretic lens can be so important to the way that financial advisors work with their clients."

Tapping into external firms and professionals

Travis Sholin is the CEO of Omaha, Nebraska-based Keystone Financial Services.

Keystone Financial Services

Outside firms can assist advisors in areas outside their primary realm of expertise.

While "not everyone needs to go out and become a financial therapist," advisors would be "doing yourself a disservice and you'd be doing your clients a disservice" if they don't acquire a basic foundational understanding of the field, Sabree said. "It's really important as the field furthers that people are OK with specializing in what they specialize in, and, in the process, they're building a network where, 'This is not my forte, so I'm going to recommend that you see this person who's better equipped on these issues than I am."

Sholin's firm uses client education on "common behavioral biases and how they can impact investment decisions" and shifting "the focus of financial planning from purely financial goals to include emotional and lifestyle goals," he said in an email. In addition, Keystone employs "behavioral assessments and questionnaires to understand clients' risk tolerance, decision-making tendencies and emotional responses to market fluctuations. This information can help tailor investment strategies to better align with clients' psychological profiles."

Besides reading Morningstar research such as the annual "Mind the Gap" study tracking the harmful impact of bad decisions, advisors can find other materials through the firm that provide ways of "making it easy for your clients" through automatic methods and creating "easy, simple rules that they can depend on when they're overwhelmed by all this information," Lamas said.

Genjac's firm has created two behavioral learning modules called "Your Money Story" and "Family Money Talks" to aid advisors in adapting behavioral research into their practices, she noted. The field gives advisors an edge in differentiating themselves from potential competitors seeking to work with their clients, according to Genjac. "The volume and velocity of information that they can access on their own is really increasing, and so their expectations of their advisors are increasing as well," she said. "The behavioral finance avenue is such an unbelievable arrow in the quiver, if you will."
Fallaw's firm offers behavioral assessments that track investors' degree of confidence about whether or not they display forms of bias that they "may or may not recognize as being detrimental to their long-term investing strategy," she said. "We focus on helping advisors understand which clients may be more prone to engaging in these types of behaviors or these types of biases."

Direct applications to practice management

Danielle Labotka is a behavioral scientist with Morningstar

Matthew Gilson

The principles of financial therapy apply directly to many complex issues that advisors help clients navigate in their planning for the long term.

Genjac cited the dynamics of a marriage or another long-term relationship. "You have two sets of family lessons that are sitting at the table that are potentially clouds over you that you don't even realize and are potentially causing conflicts," she said. "It's a fascinating conversation for a financial professional to be able to have with partners and spouses."

Advisors and their clients can put "plans in place to help them make better decisions" in times of stock volatility that identify the "stressors that are going to cause them to squirm" and set boundaries such as a prohibition on looking through a portfolio unless the customer is in the planner's office, Labotka said. "People want to act, and when they're stressed they're going to make mistakes."

Advisors can use DataPoints' assessment and investor profiles as part of their onboarding process "to understand where the client is coming from instead of just assuming some things" and "go away from the idea that you can ask five questions or ten questions" to get a full grasp of the incoming customer's goals and needs, Fallaw said. "They use the results as a way to facilitate really deeper conversations around investing-related experiences."

Agnew's firm has implemented financial therapy into its onboarding, through "training the team to notice red flags" in their discussions with clients and as part of estate planning, she noted. "We have some families who are projecting their own experiences with money on their family," she added. "As the financial advisor, even if you're not taking part in the full estate plan, being curious about how they came to that decision can lend a lot of insights into how they think about planning and investing."

Professional development with financial therapy

Ashley Agnew is the director of relationship development for Needham, Massachusetts-based Centerpoint Advisors and current president of the Financial Therapy Association.

Centerpoint Advisors

Planners interested in financial therapy can find resources through the Financial Therapy Association or peers who are conversant in the field already.

Sholin's firm teaches communication strategies that "take into account clients' behavioral tendencies" and techniques like "nudging and framing to guide clients toward more rational decision-making" to encourage a long-term perspective, he noted. Keystone calls on clients to "resist the temptation to react impulsively to short-term market fluctuations" by "emphasizing the importance of staying disciplined and sticking to the investment plan, even during periods of market volatility."

The growing ranks of the Financial Therapy Association and certified financial therapists, as well as a number of academic programs at institutions such as Kansas State University, University of Georgia, Texas Tech University, Golden Gate University, University of Arizona and University of Kentucky, reflect the rising interest in the field, Agnew noted. Compared to three years ago, the group has added 116 more members to reach 440 and the number of certified financial therapists has more than doubled to 98. "There are a lot of academics that are actually interested in this field, especially in the personal fin planning space," she said. "We are seeing exponential growth, especially since COVID."

Fundamentals of the job

Sarah Stanley Fallaw is the founder of client and advisor behavioral finance assessment firm DataPoints.

DataPoints

Financial therapy and other behavioral investing research tie into some of the deepest ideals, goals and mission of the planning profession, according to experts.

"At the end of the day the longest running relationship in our life is our relationship with money," Genjac said. "We think that — paired with the financial planning process and having just a really meaningful conversation — that's what really solidifies the relationship. That's where you have that relationship that becomes that lifelong relationship and, hopefully, a multigenerational one at that."

A familiarity with psychological topics can aid advisors trying to guide a client who has "that high confidence level but maybe really doesn't have all the education needed," Fallaw noted. "If that client wants to succeed and meet their goals and achieve financial wellness, there might be some areas where the firm can help them. Adopting a new view of investing can help them achieve their goals. Being humble and being understanding can certainly be helpful. Education is one of the things that an advisor can certainly do to help the client understand what it takes to be a great investor."

"The role of financial advisor is changing. The industry is changing, but what remains important for investors and clients is the same as it has been for a long time," Labotka said. "These behavioral biases aren't going anywhere anytime fast and an advisor who can help clients work to combat their behavioral biases is an advisor who's going to help clients reach their goals. And that's the most important thing an advisor can do."
The field poses ethical, legal and emotional questions for advisors and clients, according to Agnew. "As client relationships get more and more complex, so does our involvement in that client's life, and we have to be clear on our boundaries," she said. "It's a lot of responsibility on the professional."
The simple three-part exercise of asking clients to identify their financial goals, then presenting them with a master list of aspirations and requesting that they list them again can make a big difference, Lamas said. "We find that advisors using those processes, having those deep conversations with clients can really understand their clients and help them really understand what they're doing all this for."