Psychology of Financial Planning

DR. BRAD KLONTZ is an expert in financial psychology, financial planning, and applied behavioral finance. He is a clinical psychologist, a Professor at Creighton University Heider College of Business, and a Certified Financial Planner® practitioner. He is an award-winning academic and researcher but also a practicing financial planner and owner of Your Mental Wealth Advisors, a Registered Investment Advisor (RIA) firm, where he works directly with clients in a financial planning capacity. His unique background and perspective have helped make him a leading expert in financial psychology creating educational content that goes beyond just theory and can be directly applied into a real-world financial planning context. DR. CHARLES CHAFFIN’s work encompasses a broad range of fields, from educational and cognitive psychology to financial planning. He has served as the author or lead editor of 6 different books within financial planning and cognitive psychology, helping practitioners become more client-centered and helping individuals and companies address the pushes and pulls on attention in the workplace. He has taught at the undergraduate and graduate level, as well as in a variety of executive education programs. For over a decade, Dr. Chaffin served as Director of Academic Initiatives with CFP Board in Washington, DC, working with a variety of financial planning programs and led research initiatives that directly or indirectly related to financial planning practice. He consults with financial service firms and is a regular keynote speaker at a variety of conferences. PAUL T (TED) KLONTZ, Ph.D., Associate Professor of Practice of Financial Psychology and Behavioral Finance at Creighton University’s Heider College of Business, Founder and CEO of Klontz Consulting Group and Co-Founder and Director of the Financial Psychology Institute®, is based in Nashville, TN. He has a 40+ year career in counseling, consulting and advising that has included authoring, co-authoring and/or contributing to six financial psychology related books: Money Mammoth: Unlocking the Secrets of Financial Psychology to Break from the Herd and Avoid Extinction:,Mind over Money: Overcoming the Money Disorders that Threaten Our Financial Health, Wired for Wealth, Financial Wisdom of Ebenezer Scrooge, Facilitating Financial Health, Financial Therapy: Theory, Research and Practice.

About the Authors xv

Introduction xix

Part I The Psychology of Money 1

Chapter 1 Financial Instincts: Why We Are Bad With Money 3

The Survival Instincts of Our Ancestors 3

Sharing Is Caring ... and Surviving? 5

The Anti- Saving Instinct 6

I Want It Now! 7

Herd Instinct 8

What’s Your Financial Comfort Zone? 9

Fear of Missing Out (FOMO) 12

Social Status and Relative Deprivation 13

Two Systems 14

Understanding Financial Instincts 15

Key Concepts 16

CFP Board Learning Objectives Covered in This Chapter 16

Chapter 2 Behavioral Finance: Understanding Cognitive Biases and Heuristics and What to Do About Them 17

What Are Cognitive Biases and Heuristics? 18

The Role of the Financial Planner 34

Eliminate the Friction 35

Techniques for Overcoming Biases 36

Key Points 37

CFP Board Learning Objectives Covered in This Chapter 37

Chapter 3 The Environment 39

Environment: Culture, Generation, Class, and Community 40

What’s Next 44

Key Concepts 44

CFP Board Learning Objectives Covered in This Chapter 44

Part II Understanding a Client’s Financial Psychology 47

Chapter 4 Financial Flashpoints: Exploring a Client’s Financial Background 49

Financial Flashpoints 51

Key Points 60

CFP Board Learning Objectives Covered in This Chapter 60

Chapter 5 Money Beliefs 61

Money Scripts 62

The Role of the Financial Planner 67

Key Points 69

CFP Board Learning Objectives Covered in This Chapter 69

Chapter 6 Financial Behaviors and Outcomes 71

Overspending and Undersaving 72

Financial Denial 72

Financial Paralysis 73

Financial Infidelity 73

Financial Enmeshment 74

Financial Enabling 74

Financial Dependence 77

Money Disorders 78

The Role of the Financial Planner 80

Key Points 81

CFP Board Learning Objectives Covered in This Chapter 81

Part III Principles of Counseling, Psychology, and Communication 83

Chapter 7 Sources of Money Conflict 85

Conflict with Oneself 86

Conflict with Spouse or Partner 88

Conflict with Family 92

Conflict with Others 95

Key Points 97

CFP Board Learning Objectives Covered in This Chapter 97

Chapter 8 The Principles of Effective Communication 99

Being Present 99

Communication Skills to Establish Rapport 100

Effective Communication Techniques in Practice 108

Key Points 112

CFP Board Learning Objectives Covered in This Chapter 112

Chapter 9 Solution-Focused Techniques in Financial Planning 113

The Client Has the Power 114

Financial Self- Efficacy 114

A Focus on Solutions, Not Problems 115

Solution-Focused Techniques for the Financial Planner 116

Lead with Curiosity 119

Key Points 120

CFP Board Learning Objectives Covered in This Chapter 120

Chapter 10 Cognitive Behavioral Approaches in Financial Planning 121

The Cognitive Model in Practice 123

Cognitive Behavioral Techniques for Financial Planners 124

Key Points 129

CFP Board Learning Objectives Covered in This Chapter 130

Chapter 11 Positive Psychology in Financial Planning 131

An Infusion of Optimism 131

The Three Levels of Positive Psychology 133

The Role of the Financial Planner 135

Key Points 137

CFP Board Learning Objectives Covered in This Chapter 137

Chapter 12 Working with Couples and Families: A Systems Perspective 139

The Self- Aware Financial Planner 139

Maintaining Neutrality 140

Transference versus Countertransference 141

Couple Conflict 142

Financial Infidelity 142

Financial Abuse 143

Strategies for Helping Couples Resolve Financial Conflicts 144

Tools for Resolving Conflict in Couples and Families 145

Separate or Combined Finances 147

Scenario Planning 148

Monitoring 148

Key Points 148

CFP Board Learning Objectives Covered in This Chapter 149

Part IV Client and Planner Attitudes, Values, and Biases 151

Chapter 13 Multicultural Competence in Financial Planning: Understanding Your Client’s Cultural Identity 153

The Multiculturally Competent Financial Planner 154

Self- Awareness Around Majority and Minority Status 155

Recognizing Majority Group Privilege and Minority Group Disadvantage 156

Cultural Humility 157

Ten Areas of Culture and Majority/Minority Status That Impact Financial Planning 158

Key Points 164

CFP Board Learning Objectives Covered in This Chapter 165

Chapter 14 Financial Risk Tolerance 167

Risk Tolerance 167

Emotions, FOMO, and Risk Tolerance 170

Development, History, and Family 171

Loss Aversion 171

Assessing a Client’s Risk Tolerance 172

Key Points 174

CFP Board Learning Objectives Covered in This Chapter 175

Chapter 15 Client-Preferred Learning Styles: Getting and Keeping Your Client’s Attention 177

What Is a Preferred Learning Style? 178

A Multifaceted Approach 182

Talk Less; Listen More 183

Key Points 183

CFP Board Learning Objectives Covered in This Chapter 183

Chapter 16 Client Values and Goals 185

Maslow’s Hierarchy of Needs 185

Three Universal Human Needs: Self-Determination Theory 186

Making Sense of Client Needs in Financial Planning 187

Human Needs and Self-Destructive Financial Behaviors 188

Responding Without Judgment 189

Does Your Client Believe That They Have the Ability to Reach Their Goals? 189

Financial Self-Efficacy 191

The Advisor and Client Financial Self-Efficacy 192

Nine Things Every Financial Planner Should Know About Goals 192

Key Points 194

CFP Board Learning Objectives Covered in This Chapter 194

Part V Integrating Financial Psychology into Financial Planning 195

Chapter 17 Getting the Client to Take Action: Motivational Interviewing in Financial Planning 197

The Change Process 198

Encountering Resistance to Change 204

Conversational Pitfalls to Avoid with Clients Who Are Not Ready to Change 205

Nine Evidence-Based Techniques for Overcoming Client Resistance to Financial Advice 207

Taking “No” for an Answer 212

Key Points 212

CFP Board Learning Objectives Covered in This Chapter 213

Chapter 18 Helping a Client in Crisis 215

Crisis Events with Severe Consequences 215

The Importance of the Client–Planner Relationship 217

The Financial Planner’s Role in Helping a Client Navigate Crisis 217

Six Steps for a Financial Planning Crisis Event 218

Before a Crisis 221

After a Crisis 222

Key Points 224

CFP Board Learning Objectives Covered in This Chapter 224

Chapter 19 Assessment in Financial Planning 225

Observations 226

Interviews 227

Key Points 230

CFP Board Learning Objectives Covered in This Chapter 230

Chapter 20 The Role of the Financial Planner: Ethical Considerations in the Psychology of Financial Planning 231

A Financial Planner Is Not a Mental Health Provider 232

Contents xiii

When and How to Refer 233

Ethical Considerations 234

The New Financial Planner 235

Key Points 237

References 239

Index 255