Traditional rhetoric promotes that emotions have no place in business. That when too much sentiment is involved, the decision-making process is at risk of being compromised. But rather than suggest we keep emotions separate from financial decisions—which seems nearly impossible—perhaps it’s more important to learn how to make the right decision while managing these feelings.

Now more than ever, financial planners need to expand their value by equipping themselves with the knowledge and skills of financial psychology to help clients overcome these mental impediments. And while the results may not be directly reflected in the clients’ financial statements, the relationship it helps build is invaluable.

The Path To Financial Psychology
In recent advisor research, we discovered that while they are familiar with financial psychology, advisors are more familiar with behavioral finance. We found that 85% of advisors are at least somewhat familiar with the topic of behavioral finance, with 40% saying they’re very familiar with it. This is compared to 71% who are at least somewhat familiar with financial psychology and just 26% who say they are very familiar with it (Source: eMoney Evolution of Advice Research, July 2022, Advisors n=300). We believe this may be due in part to the fact that behavioral finance has been around longer gaining widespread popularity in the 1970s.

To advisors, definitions of behavioral finance were decision- and action-oriented, with the most common definition cited as “Psychological factors that influence how clients (or markets) act/behave.” While definitions for financial psychology implied a more emotive state towards money, with the most cited definition being “The client’s relationship/emotions towards money and investing.”

The topic of financial psychology speaks to a deeper range of emotions than that of behavioral finance, including how a client’s relationship with money was formed over their lifetime, and how that relationship impacts their life and finances today. The complexity of getting to the heart of someone’s relationship with money may contribute to financial psychology’s lesser familiarity among advisors who are often seeking efficiencies in their planning processes.

Growth In Financial Planning Profession Impacts Use Of Financial Psychology
The number of CFP professionals worldwide surpassed 200,000 by the end of 2021 and has reached the highest number ever. The current count in the U.S. is over 95,000.

But whether experienced or new to the profession, the CFP Board encourages planners at all stages of their careers to learn more about the psychology of financial planning. In our research we found that experienced advisors (46 and older) more strongly believe in the importance of implementing financial psychology, while younger advisors (45 and under) are more familiar with it.

As you would expect, those who believe in the importance of financial psychology have significantly greater use of it in their practice and we anticipate this to significantly increase in the years to come with the CFP Board’s latest addition to their principal knowledge domains, The Psychology of Financial Planning, requiring all new planners to have competency in this area.

Putting Financial Psychology Into Practice
Much of financial planning is about supporting our clients, promoting their financial and emotional well-being, and helping guide them through major life transitions. In fact, people often initially meet with a financial professional due to a significant life event which can mean engaging clients in deeper conversations that involve tough emotions, making the planning process even more impactful.

Good communication is the cornerstone of fostering a trusting, productive financial planning relationship. Much of this begins with truly being present, developing skills for listening and allowing the client to lead.

Start by quieting your inner dialogue. Research shows that almost everyone has a persistent inner dialogue that prevents them from truly hearing what another person is saying. Active listening helps demonstrate empathy and responsivity to clients and can further encourage openness.

Practice awareness by looking for both verbal and non-verbal cues from the client to decipher whether specific communication has been received positively or negatively. Consider the environment and the link between the physical setting provided and the client’s perceived psychological comfort. Many clients prefer privacy when discussing their finances and value the integrity of their confidentiality (Source: Chatterjee, Swarn & Sages, Ron. “Multifaceted Communication.” In The Psychology of Financial Planning. Certified Financial Planner Board of Standards, Inc., 2022).

Finally, check for effectiveness. Successful communication is when a client demonstrates understanding or interprets the message correctly.

Overcoming The Barriers To Implementing Financial Psychology
There are unquestionably a number of benefits as a result of applying financial psychology, but planners should also be aware of possible barriers they may face when implementing these strategies and techniques.

Just as planners are learning about the effectiveness of financial psychology, so are the clients they serve. To help set client expectations, begin finding ways to communicate and market these services. For existing clients, help set the stage by introducing these techniques as something you are all going to explore together and encourage honest feedback.

It can seem as though there is never enough time to serve clients at the level they prefer. Leverage the support of technology to efficiently collect client information and incorporate effective planning workflows to maximize time spent with the client.

Continue to educate yourself. The CFP Board released their book The Psychology of Financial Planning structured around the six principal knowledge topics that comprise this domain, several experts in the field regularly offer webinars and continuing education opportunities, as well as courses.

Self-Study Improves Understanding
Perhaps one of the best ways for financial planners to gain a better understanding of financial psychology is to undergo an exploration of their own money story. It will provide a means of lending authenticity to your practice—an important part of the financial planning profession. By spending time learning about and understanding their own financial psychology, financial professionals can embrace an integral part of the advisor-client relationship.

Dr. Emily Koochel is a senior financial planning education consultant at eMoney Advisor.