Financial Advisor contributor Paul Ellis recently interviewed Sarah Newcomb, Ph.D., behavioral economist at Morningstar, to discuss her research with financial consumers and investors.

Ellis: Sarah, you’ve written a report recently, titled “When More Is Less: Rethinking Financial Help.” Tell the advisors who subscribe to Financial Advisor magazine what you discovered in that research with financial consumers and investors. 

Newcomb: I did a number of focus groups with financial advisors over several months, and in every session I requested the same information: “Tell me about the times when you sit with clients, and you find yourself thinking ‘This is an emotional issue, not a financial one.’” I wanted to learn what trends might emerge.

We know that financial behavior has more to do with the stories that we tell ourselves than the numbers, and we know that motivating behavioral change is not just about showing someone a prospectus or a solid plan. That works with our rational mind, but it doesn’t really work with our human mind.

My perspective on financial management is that we need to make it more human. We don’t need to make ourselves less human, we need to make money management more human. I wanted to learn what themes might be emerging for advisors so that I could take those back to the literature and exploratory research and find out, based on what the real need is, what can we do to address that need.

A couple of themes emerged. First, it seems that every advisor has at least one client, probably more, that are financially sound but completely ruled by anxiety when it comes to their money. The problem is that there is no number that puts their mind at ease. There’s never going to be enough. I think that gets at the biggest assumptions in the financial advice industry, and I really want to challenge them. The assumptions are that more is always better and that a financial advisor’s job is solely to help the rich get richer.

I don’t think that is the goal. I think the goal is to help people get healthy around money issues. For people who are wealthy, but not well emotionally, any financial algorithm out there is going to tell you that they’re in excellent financial health. But I disagree. And I think that we do them a disservice if we don’t address the emotional side of money management. This assumption that more is always better comes from an assumption that as wealth increases, peace of mind and life satisfaction will automatically increase. But my research shows that that’s not true. They’re correlated, but they’re not as strongly correlated as other factors.

I did a study in early 2017 based on the findings from those focus groups. I was looking for what factors from psychology advisors can incorporate into their practice. The ideas need to be efficient, effective and ethical. Efficient, because none of us have time to waste. Effective, means what you can actually have an effect on. It doesn’t matter what personality types tend toward certain money management styles if you can’t have any effect on that. I’m trying to identify the psychological factors in which we can make a difference that also affect people’s financial decision making.

What this newest research shows is that when it comes to economic well-being, the largest psychological factor is how far ahead somebody is thinking in time. This has a much larger effect than any of the demographic factors like income, age, education or gender.

Ellis: That was one of two things you ended up focusing on in this study.

Newcomb: Yes, I think what’s powerful about this work is not that people who think further ahead are better savers. That’s almost intuitive. What’s powerful is that the effect of mental time horizon was almost twice as large as the effect of income.

When I broke the results out by income group as well as by people who think less than 10 years ahead versus people who think 10 years or more ahead, it was staggering how much more those who think further ahead had in retirement savings across every income group. Income matters, but your perspective on time matters more to making your paycheck work for you vs. just working for your paycheck. It was a very simple study but the findings were profound.

Ellis: Let’s stop for just a second, because some financial advisors are going to read this and say “OK, show me your metrics.” I want to give people some information on your background. You’re an interdisciplinary Ph.D., so you have a Ph.D. in psychology and economics. You use science to get at these conclusions.

Newcomb: Yep, for the skeptical, and the academics in the group, I can say it was a small study, only 500 people, but the relative effect size was enormous when compared to income. I have replicated this in several other small studies, so this is not a one-off. This isn’t cherry-picking findings, this is real trend. I’ve seen this effect in every study that I’ve done over the last 10 years where I’ve looked at these metrics. In this study I targeted both time horizon and this other factor, locus of financial control, which is what seems to affect emotional well-being. This is more than just correlations. I did standardized regression models with demographics, psychographics and behavioral variables. This is a small but mighty study, put it that way.

Related to the locus of control, my definition of financial health includes emotional well-being as well as economic stability. And when I say emotional well-being, I’m talking about something very specific. It’s the emotions that people are experiencing with respect to their money over the last six months on a scale of “almost never” to “almost always.” We’re not talking about diagnosing mental health factors. We’re talking about understanding the emotional experiences that people are having with their money. Are they usually stressed? Are they at peace?

What I found was that as income increased, the overall emotional experience skewed more positive. But when I broke that down between people who believe that they have financial power moving forward and create their own financial destiny versus people who believe that they have very little power in their lives, you see a really striking difference in every income class. From less than $25,000 a year to well into the six figures the people who believe they create their own financial destiny were experiencing mostly positive emotions. They were experiencing more joy, peace, satisfaction and pride than sadness, anxiety, fear or anger related to their money.

There’s a very real psychological phenomenon called “learned helplessness,” and it’s not the same as playing a victim, it’s not a “poor me” attitude. I bring this up for advisors because I think it’s important for them to understand that if someone has internalized a belief of learned helplessness, if they don’t believe they have financial power in their life, they may have very good reasons for believing that.

Even if their situation has changed, they may need some help rewiring that belief. It’s not a character flaw, it’s not a personality failing. I think we look at people and think “Why don’t they just take the opportunities available to them?” If you have ever experienced being powerless, you know why.

We all can probably point to parts of our lives where we’ve tried and failed, and then when the situation changes we find we just don’t have the oomph to try again. And I think the concept of learned helplessness can help us understand that’s natural.  

Ellis: From your professional and personal point of view, does gender-lens investing reflect a change in the dynamics of wealth ownership in the U.S.?

Newcomb: I think that it’s part of the new financial narrative that we need to embrace moving forward. I believe that we need to change the narrative about what it means to be an investor. The old narrative is that capital is neutral and that you make your money wherever you can and then you give some back. I think that we collectively are growing beyond that.

We recognize that capital is not neutral, that every dollar that you invest moves the world economy one dollar in that direction. Being an investor has to do with what world are you invested in creating, and it stands to reason that the feeling of having a more positive effect on the world around you through financial choices hints at having power over your financial destiny.

Even so, I don’t think women know how much wealth we control, and women don’t know the numbers that show we’re just as good, if not better in certain circumstances, at making financial decisions. It’s like a learned helplessness, when you’ve been told for generations that you’re incapable of something. To then say that you are capable of it, or not incapable of it, not only requires personal ego strength, but it requires data. And the data shows that these stereotypes are faulty. But that doesn’t change what millennia have programmed into our unconscious minds.

Women, money and power is a topic that I have lots of thoughts about. Because I don’t think there’s enough research out there to be able to speak as a researcher on that topic, I am speaking as an individual.

Ellis: I’ve done several interviews in recent months with leading women advisors and executives in the financial services industry. Do you think women will expand their influence within the industry over the next decade?

Newcomb: I think it’s inevitable that women will become more involved in finance as women become more involved in their own careers. I work in narrative, and in understanding how the stories we tell affect our choices, and I think there are still some real cultural barriers to women embracing high earning, high achievement, and being comfortable wanting and pursuing wealth and power, for its own sake.

Ellis: Sarah, please tell our readers about your recently published book titled Loaded: Money, Psychology and How To Get Ahead without Leaving Your Values.

Newcomb: I wrote it for individual readers, but I think it’s an excellent tool for advisors to understand their clients better, to understand themselves better, and to give them a different language to speak with their clients. I definitely think that it’s one of the books that advisors should read if they want to really know where their clients are coming from.

Ellis: Sarah, will you be adding any additional psychological factors to future studies of financial consumers and investors?

Newcomb: I am currently adding two factors to my model: patience and social comparison, so I think financial advisors will want to stay tuned in to this work, Paul. 

Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.