The Psychology of Financial Planning

The psychology of financial planning is about how people think and feel about money, and leveraging its findings in an advisory practice can help get better results for both parties involved, according to Sonya Britt-Lutter, director of financial health and wellness at Texas Tech University’s School of Financial Planning.

The study of financial planning differs from behavioral finance, which is often cited by advisers and providers in retirement savings, in that the psychology of financial planning considers the way the mind works, not the practice of telling someone what they should think and feel, Britt-Lutter said during a fireside chat with Alison Mintzer, ISS Media publisher, at the 2023 PLANADVISER National Conference.

“It’s how they think and feel that guides how we communicate with them,” Britt-Lutter said. “It’s not therapy; advisers are not treating.”

She added that behavioral finance is a tiny segment of the psychology of financial planning, and it is what we use to make suggestions to help people improve financial behaviors.

According to Britt-Lutter, advisers’ own psychology about money will impact clients. “If we can check our own psychological stress, it will have an influence on clients,” she said.

Advisers can check for psychological stress, she noted, by considering their reactions to terms such as “old money” or hearing from a client who is part of “Generation Z.”

Britt-Lutter also suggested to the audience of advisers that they get into the habit of checking their hand temperature. She explained that when people feel stress, they go into fight-or-flight mode, and when that happens, blood goes from their extremities to their heart to prepare. Therefore, when a person is under stress, the temperature of their fingers goes down.

When advisers are feeling stressed, they should consider whether they are being authentic, Britt-Lutter said.

When it comes to clients’ psychological stress, the quickest way for advisers to recognize it is when they shake the client’s hand. “When the client is having a difficult time, their body goes into self-protection mode,” Britt-Lutter said. “They might make statements to prove they’re in charge or start arguing.”

If advisers recognize a client is feeling stressed and not prepared for a conversation, Britt-Lutter suggested asking the client how their day or week is going or, if they know the client well, ask about their family. “Within a matter of seconds, this light conversation can raise the temperature of their extremities,” Britt-Lutter said.

Ready for Change?

Advisers can also listen with their eyes, Britt-Lutter suggested. “When you say, ‘Let’s talk about retirement,’ does the client start shifting around, look at their spouse or change the subject?”

She said advisers should be comfortable saying what they see. For example, they can say, “This doesn’t seem important to you right now. Why is that?” or, “This seems not to align with your goals. Why is that?”

In a short time, advisers can focus on whether the client is ready for change or not. “If they’re saying, ‘I’m good,’ or ‘I’m just here because my friend/spouse suggested it,’ they are not motivated to change,” Britt-Lutter said.

If a client says they are only there because of someone else, extrinsic value will move them to be ready for change, she said. For example, the adviser can ask the client a question such as, “If you don’t change, how will this affect your children?”

If a client shows ambivalence, Britt-Lutter suggested that advisers focus on education and building confidence.

Focus on the Future

Another way to get a sense of a client’s thoughts and feelings about money and potential for change, according to Britt-Lutter, is to ask them about how their allowance (or lack of one) was handled while growing up. “Ask them what they are doing now and how that compares to what it was like growing up,” she said. “Ask them if they want to align with how it was growing up or do it differently.”

In terms of generational differences, Britt-Lutter said those in Generation Z and Millennials often value experiences and impact over building wealth.

“Turn the conversation into how they can have experiences and/or make a difference in the future,” she said.

Speaking to the idea that the industry is having a hard time defining financial wellness, Britt-Lutter said she is confident most people actually have a good idea of what financial wellness means.

“Looking at what people think, feel and do with money, when all three are in line, that is financial wellness,” she said. “If we can influence any one of these three, it will impact all three.”