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Industry Spotlight > Advisors

What Many Advisors Overlook in Boosting Clients' Financial Security

By Ben Hampton

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What You Need to Know

  • The psychology of money is becoming core to the financial planning profession.
  • Helping your clients develop greater psychological resiliency around money now could help reduce financial vulnerability in the future.
  • A good starting point: Ask your clients probing questions or use the Klontz Money Script Inventory tool.

Historically, financial planners have been trained to assist clients with objective financial matters. A formal educational foundation related to the psychological aspects of financial planning has been lacking.

The result is that many advisors overlook how the interaction of psychological considerations and hard-dollar deliberations can result in greater financial vulnerability among their clients.  

However, as evidenced by the recent addition of the psychology of financial planning as a principal knowledge domain for certified financial planners, this is changing. So how might advisors seeking to address the psychological aspects of financial planning more intentionally get started?

A great step would be seeking to discover clients’ beliefs about and attitudes toward money. This could be done by simply asking clients questions about how money affects their thoughts, feelings, behaviors and relationships — or by using a more formal assessment such as the Klontz Money Script Inventory-Revised tool.

Gathering this information can help advisors gain a deeper understanding of their clients and learn how to communicate with them more effectively, especially when it comes to identifying their financial vulnerabilities. For example, clients who believe that the primary purpose of money is to provide security may find spending money in retirement difficult — even if they objectively have little chance of encountering financial hardship.

An advisor who knows this can tailor communications and recommendations in ways that will help the client feel more secure, which may in turn make it easier for the client to spend money. Additionally, clients could benefit from gaining more awareness of their money beliefs and cognitive biases that might be undermining their progress toward reaching their financial goals.

Related Research

Those seeking to learn more about the psychological aspects of financial planning should consider reading the Certified Financial Planner Board of Standards’ new book published by ALM, “The Psychology of Financial Planning.”

This planning discussion is also informed by a new research paper, “Americans’ financial resilience during the pandemic,” by Robert Clark of the Poole College of Management at North Carolina State University and Olivia Mitchell of The Wharton School at the University of Pennsylvania.

Clark and Mitchell find that policies and interventions aimed at increasing the financial resilience of lower- and middle-income households can help them better respond to unanticipated income needs. They also seek to determine the factors and characteristics correlated with financial resilience — and to identify if these changed during the COVID-19 pandemic.

In the study, financial resilience is defined “as a household’s ability to withstand acute shocks having an adverse effect on its financial well-being.” While some of the inputs are objective, such as the ability to immediately cover three months of expenses in cash, other inputs are psychological in nature, such as whether respondents perceive their debt to be manageable and whether they are anxious about their finances today and in retirement.

Clark and Mitchell find that respondents’ average resilience scores remained relatively stable across the first two years of the pandemic period, but some variation between groups of respondents was found. The more financially resilient households were older, better educated and earned higher incomes.

Additionally, and not surprisingly, federal stimulus checks improved resilience, as did higher levels of financial literacy. By contrast, the authors explain, those with higher personal discount rates were less resilient.

What It All Means

Clark and Mitchell argue that their results suggest that programs aimed at improving financial resilience and financial literacy can both help households better cope with financial shocks and more successfully respond to unanticipated income needs.

They point out that, although financial resilience stayed relatively stable over the first two years of the pandemic, this may not necessarily continue as stimulus checks are no longer being issued. They conclude the paper by identifying the need for additional research to identify whether and which households continue to be financially resilient.

One key implication that financial advisors can take away from this study is the importance of psychological factors, in addition to objective financial measures, in the financial planning relationship. Helping clients to improve in both domains of financial resilience now may reduce their chances of being financially vulnerable in the future.

Ben Hampton, CFP, is a doctoral student at the University of Georgia.

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