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Financial Planning > Behavioral Finance

Why Psychology Is Now a Must for Building Your Business

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What You Need to Know

  • Emotion is a part of money, and the CFP Board has recognized its importance in this update.
  • The requirement of psychological testing in the CFP exam moves financial planning toward being a true profession by officially recognizing the important role emotions play in advice.
  • Now that psychology and human behavior are recognized as required areas to master, the industry will benefit from client experience models that will expand how advice is given to clients.

In April, the CFP Board made an easily missed — yet completely revolutionary — announcement that it would start testing prospective certificates on the “psychology of financial planning” for the certified financial planner exam.

If the COVID-19 pandemic proved anything, it proved that psychology not only has a place in financial planning, but also that it needs to have a central role in how financial advisors interact with their clients and guide their advice discussions.

At a time when people were afraid and uncertain, they often turned to their advisor to help them make sense of how to move forward with their lives and maintain security for themselves, their finances and their tax situations.

As someone who was trained in the human sciences, I believe that this move to require psychology is the best update the CFP Board has made in the last 20 years. Here’s what the update means for advisors and why it’s such a big deal from a practice management and growth perspective.

What’s in the Update

Newly minted advisors have always been well trained on the math and numbers of financial planning and investments, but they have traditionally been undertrained on how to communicate that hard data to clients in an understandable way that considers the client’s emotions.

Emotion is a part of money, and the CFP Board has recognized its importance in this update. The topic will be integrated into the CFP curriculum and exam in the spring of 2022.

A few of the topics now included in the exam include:

  • Behavioral finance.
  • Knowledge of client and planner attitudes, values and biases.
  • Sources of financial conflict.
  • Counseling principles.
  • Effective communication principles.
  • Crisis events with severe consequences.

The recent focus on comprehensive financial advice has already put these issues into the business of advisors nationwide. Now, the requirement of psychological testing in the CFP exam moves financial planning toward being a true profession by officially recognizing the important role emotions play in advice.

Why Psychology Requirements Matter

The reason I believe the addition of psychology matters so much is because a true financial advice profession cannot exist without knowing the psychology of money and human behavior.

Money and a person’s history with it has an energy. To best advise people when dealing with money, advisors have to understand the energy — and the psychology — behind the feelings that drive financial decisions. The same is true when you are managing employees.

Now that psychology and human behavior are recognized as required areas to master, the industry will benefit from client experience models that will expand how advice is given to  clients. This will improve the client communication skills of all advisors graduating from professional CFP programs.

It will create better-trained CFPs and will in turn generate better advice and financial plans for the clients of those advisors serving all segments of clients.

This is an amazing movement forward for our profession, and I couldn’t be more excited to see where the financial planning professional goes from here. I foresee that this movement will spur innovation in client experiences, better-trained advisors and hopefully a deeper understanding of how financial advisor career tracks will evolve and change with the profession.