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What Role Does Psychology Play in Wealth Management?

What Role Does Psychology Play in Wealth Management?

June 08, 2021
In 2008, the United States was in the midst of the great recession, brought about by the subprime mortgage crisis and the downturn in the US real estate markets. The US economy, banking system and financial markets were in such a state of distress, that we required government interventions and bailouts. 
That same year, I was asked to present Financial Planning as a career choice at a local high school’s career fair. I was one of 50 presenters that spent an evening talking with students about their college and career options.
It quickly became apparent that many of the students who came did so to receive extra credit from their social studies teacher. They had to get the questions answered by three different career presenters in order to get the extra credit. Unfortunately, most of the students asked the same three rote questions over and over, without thinking through it intentionally.
However, my faith was restored by a young lady who was a junior at the school who came up to me and asked me the best question I have heard from a student before or since. She asked, “If I were to pursue a career in financial planning, what courses would be most helpful to me, other than the economics and finance classes I would be required to take?”
This was a great question and showed considerable intuition and insight. I thought about it for a moment and the answer was clear. Anything that had to do with psychology or human behavior would be of enormous help to someone entering our field. Most people like to think that they make decisions based on logic and data. However, studies show that this is not possible with the way information flows through the human brain.
Therefore, as most people think about family, goals and the experiences they have had in life, they tend to make decisions that are emotionally and behaviorally based, then justified by logic. Not the other way around.
This is why in an effort to get to know our clients better, we often ask questions such as:
  • What was your first memory of money?
  • What was the best or worst financial decision you have ever made?
  • What is one life lesson or value that you would like to pass on to your kids and grandchildren?
  • How would you rate your financial status on a scale of 1 to 10? What is something that would allow you to rate yourself higher?
Questions such as these help us get to know who our clients are, how they view money, and how to best utilize the financial resources they have to accomplish what is most important in life. These are all psychological and behavioral aspects, which play a large part in helping us serve our clients with excellence.
Apparently, the CFP Board of Standards agrees with this sentiment, as they have now added the psychology of financial planning to their key study topics for both continuing education credits and the CFP exam.
As you can see from the chart above, CFP‘s and those hoping to become a CFP will now have to include this topic for study. Representatives from the CFP Board decided to include behavioral finance as part of their curriculum as advisors have increasingly been interested in this topic. This is especially important to understand when you look at emotional reactions people have to things such as the Great Financial Crisis or the COVID-19 coronavirus induced economic shutdowns and financial market swings.
The CFP’s of Impel Wealth Management believe this makes sense. It is a principal that we have not only supported but have incorporated into our general financial consulting and counseling for many years. We are gratified to see the CFP Board align their future curriculums and continuing education with this thought process. It is important to elevate our profession as we all continue “Moving Life Forward”.
© 2021 Jesse Hurst