The Psychology of Financial Planning
Financial planning is an inherently emotional process for many clients. Creating and achieving financial plans involves identifying a client’s personal goals, and those goals are influenced by a client’s mindset and emotional behaviors. Financial planners must understand what the client wants and why – including the influencing factors – in order to evaluate all the paths that the client can take to successfully achieve their desired outcomes.
Furthermore, financial planners must also recognize how their own attitudes, values and biases can impact their client relationships and services. An understanding of this collective psychology – the client’s, the planner’s, and the influencing factors – facilitates better communication and better outcomes between the planner and the client. This understanding can enable financial planners to ideate more solutions for their clients. As certain parts of financial services become automated, financial planners with a strong grasp of psychology can continue to differentiate themselves by providing the indispensable human element.
Financial planners trained in psychology can often get to the root of a client’s financial troubles, helping them to establish healthier habits and goals for the future.
In 2021, CFP Board’s Practice Analysis Study found that to effectively understand the factors that guide clients’ behaviors and decision-making and respond to them with effective, actionable advice, financial planners must understand the psychology of financial planning. As a result, Psychology of Financial Planning became the eighth Principal Knowledge Domain and was first tested on the March 2022 CFP® certification exam.
To help financial planners better understand this new domain and to incorporate it into their professional practice, in April 2022, CFP Board released a new book, The Psychology of Financial Planning. This book is a resource to help advisors evaluate what drives their clients’ decision-making. Topics addressed in the book range from client values, attitudes and biases to sources of money conflict and crisis events – as well as planner attitudes, values and biases. The theoretical and practical knowledge provided in the book can help advisors shape better client relationships and deliver the truly holistic advice required to stay competitive.
Understanding the factors influencing client mindset, behaviors and decision-making – and the complex interplay between client psychology and planner psychology – is key to dispensing the right advice and providing personalized service.
Learn more about how the psychology of financial planning can improve communication, relationships and results in a broader overview on the CFP Board website and by getting your copy of the new The Psychology of Financial Planning book today.