Financial advisors who give financial therapy can stop clients from making portfolio-blowing investment decisions and encourage them to follow their advice overall.
So says Dr. Brad Klontz, Psy.D., who is both a clinical psychologist and a certified financial planner.
Nowadays, more people are experiencing "financial anguish" regardless of the state of the economy or the market, Klontz argues. Consequently, training in the relatively new technique of financial therapy is growing in popularity among FAs who realize that their job is much more than investing clients' money: It's about understanding human behavior.
Klontz's training programs pivot on clients' "money scripts" – ingrained beliefs they were taught about money while growing up that they carry around as adults.
A managing partner in Occidental Asset Management (OCCAM), Michigan-born Klontz is an associate professor of personal financial planning at Kansas State University, where, at its Institute of Financial Planning's Financial Therapy Clinic, he trains both FAs and psychologists in financial therapy.
Klontz's research has delved deeply into people's relationships to money. He has written five books on the psychology of money, including "Financial Therapy: Theory, Research and Practice" (Springer-2014 and 2015).
Though no accreditation in financial therapy is available as yet, Kansas State offers a certificate in the technique. The six-year-old Financial Therapy Association has 200 members and conducts webinars on various aspects of the method. The FTA's annual conference was held in Mexico last week.
Six months ago, Klontz and his father, Ted Klontz, a Ph.D. in psychology and consultant to advisors who is located in Nashville, Tennessee, co-founded the Financial Psychology Institute. It trains FAs in financial psychology and certifies them as behavioral specialists.
In talks to advisors, "How to Break Your Clients' Resistance to Change," Brad Klontz addresses self-destructive behavior concerning finances and provides FAs with practical tools for how to change it.
Donning his clinician's hat, he is campaigning for psychologists to recognize the magnitude of money issues and that the question of financial stress should be brought up as part of the routine patient take-in process.
ThinkAdvisor recently said aloha to Klontz, who was speaking from the Hawaiian island of Kauai, where he is based. Here are highlights from that conversation:
ThinkAdvisor: Why might clients need financial therapy?
Brad Klontz: Money is the No. 1 stressor in the lives of three-quarters of Americans and has been for about a decade. But people have very little insight into their relationship with money and are wired to self-destruct around their financial decisions without knowledge of their blind spots.
So if you meet with an advisor trained in financial therapy, you "lie down on the couch" and start talking?
No. But this meeting is going to help you in a very different way from the average financial planner meeting in terms of understanding your beliefs around money, your impulses and your family's functioning around money. We have research to back up financial therapy's effectiveness. How do you define financial therapy, and who practices it?
It's integrating psychology and financial planning to help clients improve their financial health. It's used by financial planners who want to understand [human] psychology and gain tools to help clients, and by mental health providers who want to learn more about helping clients manage the No. 1 stressor in their lives. They're also treating mental illness, such as pathological gambling or hoarding disorder. By the way, we just finished a study showing that therapists are more likely to have worse financial health than other professions we looked at.
How can financial therapy help in investing and retirement planning?
A person trained in financial therapy understands behavioral finance in a very specific way as it relates to client behavior and the portfolio. They help people not to sabotage their financial health by succumbing to the cognitive biases, such as overconfidence, excessive trading and loss aversion. These are ways in which people blow their portfolios. The buying high-selling low phenomenon seems to affect most people because we're very emotional when it comes to our investments.
You've conducted a great deal of research into "money scripts": what people have been taught by their parents, grandparents and the culture. The basic scripts are?
Money avoidance, money worship, money status and money vigilance. By looking at these, we can predict people's income, net worth and a whole host of financially destructive behaviors. Because of their own history around money, people think that the issue is black and white: This is what you're supposed to do.
Money vigilance sounds like a positive script, though. Is it?
Of all the scripts, it's the healthiest one. It's a combination of secretiveness and some anxiety around money. You need to be anxious if you're going to save any money. So from that aspect, it's really healthy.
What's the downside?
If anxiety around money is [deep], you're never at peace in your relationship with it. When some people reach retirement, for example, they're so anxious about money that they can't enjoy it. In the extreme, they're Ebenezer Scrooge-types who won't go to the dentist even though they're millionaires. At the far extreme, they're money hoarders.
Where does money stand as an issue with couples?
It's one of the top things that most couples argue about. Money is the No. 1 reason for divorce in the first three years of marriage.
Why do couples fight so much about finances? Why can't these issues be resolved with logic?
Because the odds that you and your partner are on the exact same page with a spending-and-savings plan are not very likely. The bottom line is that people have conflicting money scripts: They were raised differently concerning money. Couples-therapy research shows that seven out of ten times, you're not going to convince your partner to look at the world the way you do.
How can financial advisors help couples resolve friction over money?
I have clients talk about what their mothers and fathers taught them about money, what their biggest fears are about money and what their biggest goals are. This is a conversation that couples should have had on their third date. How does that tack work out?
After doing it with dozens and dozens of couples, I've found that when they have a clear understanding of where their partner is coming from about money, it's much easier to negotiate a solution on the latest thing they've been fighting about.