First there was financial services. Then wealth management. Then FinTech. Then BeFi (behavioral finance).
Now it’s time for FinPsych—tapping into the many fascinating and alluring avenues of human psychology to better understand what makes clients tick, learn what they want from a financial planning relationship, and discover how you as their wealth advisor, can help them make their dreams come true.
It used to be that most financial advisors were successful because they were financially savvy and had mastered math literacy—they knew how to use math to make money for their clients. Today, the role is evolving to financial and life coaching and more. Soft skills of empathy and emotional intelligence may prove key to growing an advisor’s book, keep clients engaged, and earning the right to work with their client’s next generation of family members.
According to Steve Gresham, managing director of The Execution Project and Next Chapter (which partners with Financial Advisor magazine), savvy advisors are boosting their financial psychology chops by learning new ways to incorporate emotional intelligence and empathy into client conversations “The best advisors have learned to listen carefully, ask the right questions, and realize the emotional coaching role they can play for each client—one that goes far beyond financial analysis, portfolio construction and diversification strategies.”
Financial Psychology Becomes A Required Topic
The industry has jumped on the bandwagon to get more advisors trained on key elements of financial psychology. Earlier this year, the Certified Financial Planner Board of Standards (CFP Board) added a new category titled “Psychology of Financial Planning” to the list of topics that prospective certified financial planner certificants will need to know to pass the CFP exam.
The updated topic will require knowledge of client and planner attitudes, values, and biases; behavioral finance; sources of money conflict; principles of counseling; general principles of effective communication; and crisis events with severe consequences It will be integrated into the education requirements for CFP certification and assessed on the CFP exam starting in March 2022.
Kevin Ruth, founder of financial literacy website Finance411, creator of the Give-Get financial literacy program, and chair, CFP Board's Standards Resource Commission, believes this decision will educate future financial planners about the various biases their clients they may encounter on a daily basis—and know how to handle them.
“Certified financial planners do an excellent job of showing clients how their numbers work in their clients’ financial plans. But when clients do not implement the financial advice, CFPs are left on their own to try to figure out why,” says Ruth. “By adding the ‘Psychology of Financial Planning’ to the Principal Knowledge topics, the CFP Board is arming future CFPs with the knowledge for how to deal with the important underlying emotional ramifications of their client’s financial decisions.”
A Family Affair
According to Kimberly Beck, vice president at iPipeline, advisor training is quickly evolving to incorporate empathy and emotional intelligence. “Financial training is shifting dramatically these days. When I started in this business, it was all about product—knowing how each financial product worked and how it could fit into a client’s portfolio. Today, everything is centered around understanding a client’s needs, and that takes a strong grasp of emotional intelligence and empathy concepts and as well as how to put theories into action,” says Beck.
Over the years of developing training programs for thousands of advisors, Beck has focused efforts on helping them better understand the holistic needs of their clients by getting advisors to ask more values-based questions based on their life stage like:
• What changes to your life have transpired since we last met?
• In saving for your children’s education, do you want to your children to have skin in the game, or should you try to fund all of their college expenses?
• How do you feel about accepting a new job opportunity?
• How have those changes shifted your financial goals?
• What do you want to do in retirement? How much do you want to travel? Do you plan to downsize your home?
• What upcoming life transitions keep you up at night?
One of the biggest opportunities for advisors is to focus on current clients’ families, the “NextGen.” “We’re evolving into a space where we believe the client is the entire family, not just the primary income earner. So, it’s important to know how to employ financial education for the extended family,” she explains. “That means really getting to know the spouse/partner and engaging with their children. One simple start is for the advisor to send a birthday card to a client’s kids. That’s what my own advisor does and it’s an effective way to show you care, but also to help introduce yourself to the extend family.”
According to Beck, empathy is a fantastic and important skill to master, but it takes time. “Hopefully, tech solutions for advisors will continue to evolve to help automate more of their daily routine tasks, so they can free up time to collaborate with clients on a deeper level,” advises Beck.