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Financial Planning > Behavioral Finance

Dr. Klontz’s Financial Therapy Aims to Cure Your Clients’ Fear of Change

By Jane Wollman Rusoff

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Financial advisors who give financial therapy can stop clients from making portfolio-blowing investment decisions and encourage them to follow their advice overall.

So says Dr. Brad Klontz, Psy.D., who is both a clinical psychologist and a certified financial planner.

Nowadays, more people are experiencing “financial anguish” regardless of the state of the economy or the market, Klontz argues. Consequently, training in the relatively new technique of financial therapy is growing in popularity among FAs who realize that their job is much more than investing clients’ money: It’s about understanding human behavior.

Klontz’s training programs pivot on clients’ “money scripts” – ingrained beliefs they were taught about money while growing up that they carry around as adults.

A managing partner in Occidental Asset Management (OCCAM), Michigan-born Klontz is an associate professor of personal financial planning at Kansas State University, where, at its Institute of Financial Planning’s Financial Therapy Clinic, he trains both FAs and psychologists in financial therapy.

Klontz’s research has delved deeply into people’s relationships to money. He has written five books on the psychology of money, including “Financial Therapy: Theory, Research and Practice” (Springer-2014 and 2015).

Though no accreditation in financial therapy is available as yet, Kansas State offers a certificate in the technique. The six-year-old Financial Therapy Association has 200 members and conducts webinars on various aspects of the method. The FTA’s annual conference was held in Mexico last week. 

Six months ago, Klontz and his father, Ted Klontz, a Ph.D. in psychology and consultant to advisors who is located in Nashville, Tennessee, co-founded the Financial Psychology Institute. It trains FAs in financial psychology and certifies them as behavioral specialists.

In talks to advisors, “How to Break Your Clients’ Resistance to Change,” Brad Klontz addresses self-destructive behavior concerning finances and provides FAs with practical tools for how to change it.

Donning his clinician’s hat, he is campaigning for psychologists to recognize the magnitude of money issues and that the question of financial stress should be brought up as part of the routine patient take-in process.

ThinkAdvisor recently said aloha to Klontz, who was speaking from the Hawaiian island of Kauai, where he is based.  Here are highlights from that conversation:                         

ThinkAdvisor:  Why might clients need financial therapy?

Brad Klontz:  Money is the No. 1 stressor in the lives of three-quarters of Americans and has been for about a decade. But people have very little insight into their relationship with money and are wired to self-destruct around their financial decisions without knowledge of their blind spots.

So if you meet with an advisor trained in financial therapy, you “lie down on the couch” and start talking?

No. But this meeting is going to help you in a very different way from the average financial planner meeting in terms of understanding your beliefs around money, your impulses and your family’s functioning around money. We have research to back up financial therapy’s effectiveness. How do you define financial therapy, and who practices it?

It’s integrating psychology and financial planning to help clients improve their financial health. It’s used by financial planners who want to understand [human] psychology and gain tools to help clients, and by mental health providers who want to learn more about helping clients manage the No. 1 stressor in their lives. They’re also treating mental illness, such as pathological gambling or hoarding disorder. By the way, we just finished a study showing that therapists are more likely to have worse financial health than other professions we looked at.

How can financial therapy help in investing and retirement planning?

A person trained in financial therapy understands behavioral finance in a very specific way as it relates to client behavior and the portfolio. They help people not to sabotage their financial health by succumbing to the cognitive biases, such as overconfidence, excessive trading and loss aversion. These are ways in which people blow their portfolios. The buying high-selling low phenomenon seems to affect most people because we’re very emotional when it comes to our investments.

You’ve conducted a great deal of research into “money scripts”: what people have been taught by their parents, grandparents and the culture. The basic scripts are?

Money avoidance, money worship, money status and money vigilance. By looking at these, we can predict people’s income, net worth and a whole host of financially destructive behaviors. Because of their own history around money, people think that the issue is black and white: This is what you’re supposed to do.

Money vigilance sounds like a positive script, though. Is it?

Of all the scripts, it’s the healthiest one. It’s a combination of secretiveness and some anxiety around money. You need to be anxious if you’re going to save any money. So from that aspect, it’s really healthy.

What’s the downside?

If anxiety around money is [deep], you’re never at peace in your relationship with it. When some people reach retirement, for example, they’re so anxious about money that they can’t enjoy it. In the extreme, they’re Ebenezer Scrooge-types who won’t go to the dentist even though they’re millionaires. At the far extreme, they’re money hoarders.

Where does money stand as an issue with couples?

It’s one of the top things that most couples argue about. Money is the No. 1 reason for divorce in the first three years of marriage.

Why do couples fight so much about finances? Why can’t these issues be resolved with logic?

Because the odds that you and your partner are on the exact same page with a spending-and-savings plan are not very likely. The bottom line is that people have conflicting money scripts: They were raised differently concerning money. Couples-therapy research shows that seven out of ten times, you’re not going to convince your partner to look at the world the way you do.

How can financial advisors help couples resolve friction over money?

I have clients talk about what their mothers and fathers taught them about money, what their biggest fears are about money and what their biggest goals are. This is a conversation that couples should have had on their third date. How does that tack work out?

After doing it with dozens and dozens of couples, I’ve found that when they have a clear understanding of where their partner is coming from about money, it’s much easier to negotiate a solution on the latest thing they’ve been fighting about.

How honest with each other are couples when it comes to money?

One out of three, if not half, the people in relationships admit to some financial-infidelity behavior. They’re lying about the money they’re making, the money they’re spending, the money they’re investing. There’s a long list.

Why do they lie?

Sometimes a spouse will try to cover up a compulsive buying disorder. Sometimes their spouse is a controlling bully. But it’s like sexual infidelity: You can blame the person doing it — but you have to look at the relationship and try to figure out what’s really going on.

How does financial infidelity relate to money scripts?

We’ve found that, for instance, money-vigilant people are more likely to be secretive with other people about how much money they have but not lie about money to their spouses.

Some partners keep a separate, secret bank or investment account their spouse doesn’t know about. How smart is that?

It’s a terrible idea. It’s part of financial infidelity, and we’ve found that people who engage in it are more likely to have self-destructive beliefs and behaviors about money. So, again, this is a symptom of a much larger problem.

What happens when a husband’s or wife’s financial infidelity is revealed?

It can become a crisis in the relationship. Sometimes couples get divorced over it. The other spouse says, “You’ve been lying to me about money! What else are you lying to me about?”

Do FAs often encounter financial infidelity among their clients?

All the time.

How do they handle it?

In general, not very well because they’re not trained to. Some financial planners will say, “I work with you as a couple, so don’t tell me anything that you don’t want your spouse to know because I can’t keep track of that stuff.”

How do you incorporate financial therapy in your own practice as a financial planner?

We build discussions about money scripts into our process. In relation to risk tolerance, I test clients and ask them questions about their beliefs around money. I use cognitive behavioral therapy to help people identify their beliefs about money, help them change dysfunctional [behaviors] and ultimately change their relationship with money. But I’m not working as a psychologist in the traditional sense. If I find, say, that a client has severe depression, I refer them to another mental health provider for treatment.

What are some of the problems you typically help financial-planning clients with?

Couples who are in conflict around money, or who are trying to help an adult child financially without creating a financially dependent person, or someone who has come into a significant amount of money and isn’t equipped psychologically to handle it well. How can financial therapy help with clients who are resistant to change?

If an advisor suggests: “You need to get a will” and the client doesn’t follow that advice, financial therapy can motivate them to do so. A huge part of our training is to [give FAs] techniques that they can use to be more effective in bringing about an important change. You’re not doing psychotherapy, but you’re being very therapeutic because you’re helping motivate people to change.

Is confronting the client a good approach?

Confrontation is a dirty word right now in psychology and financial planning because all the research shows that confrontation backfires. If a client isn’t following through on your advice, the more confrontational your statements are, the less likely they are to change since they’re ambivalent [about the issue]: part of them wants to get a will; part of them doesn’t. And the more you take the side of “You need to get a will,” the more they will argue why they don’t want to do it. Then they’ll leave the meeting less likely to do it than if you never talked to them about it to begin with.

What if a client is frightened about running out of money and winding up homeless in old age. To what extent do they need financial therapy?

If it’s the run-of-the-mill: “I’m scared about the market. I lost money the last time around,” I use psychology to help them cope with anxiety. But if it goes into the realm of a mental disorder and is severely impairing their ability to function, I refer them to somebody else for treatment. It’s unethical to be anyone’s psychologist and their financial planner.

Can financial therapy help if one spouse wants to invest conservatively and the other insists on being more aggressive?

Absolutely. Having a deeper understanding around risk tolerance can be beneficial because [our standard] assessment of risk tolerance is a very flawed concept. It isn’t a stable personality trait: In a bull market, everybody is really aggressive; in a bear market, everybody is really conservative. So a good financial planner who has knowledge in financial therapy can help come up with a workable solution.

Are there intrinsic or culturally generated differences between men and women as investors?

Men are more likely to make investment mistakes because they’re overconfident. That’s why women statistically have better returns than men.

So women don’t become overconfident?

Women are more likely to examine their role in a situation, whereas men [typically] place the blame outside themselves and maintain their ego. It’s that lack of confidence women have that’s healthier in terms of money management.

— Check out Greed, Sex and Drugs on Wall St.: Therapist to Financial Pros Tells All on ThinkAdvisor.

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