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Dick Wagner Smiles

Financial Planning Our Purpose

Jim Williiams

Only a few of the regular readers of this newsletter will get the reference in the title of this piece. Read on. I'll explain.

Just this last month, the CFP Board announced, based on a Practice Analysis Study (which describes what planners are actually doing in their practices), the addition of a new Principal Knowledge Topic: The Psychology of Financial Planning. As a Principal Knowledge Topic, the Psychology of Financial Planning will be included in the Body of Knowledge required of CFP Professionals. The topic will be included in examinations starting in 2022. This topic has grown up from the roots of the financial planning profession, and it is good news and none too soon.

The topics included under the Psychology of Financial Planning (with short summary descriptions; partly from the CFP Board materials and partly my own editorial) are:

  • Client and Planner attitudes, values, biases. Attitudes, values and biases can and do impact risk tolerance, loss aversion, financial and personal goals, as well as the process of financial planning.
  • Behavioral Finance. The study of cognitive biases and heuristics which we all (planners and clients) derive from our own psychology, including comfort zones, socialization, money beliefs, and past financial experiences and behaviors.
  • Sources of Money Conflict. Couples and families with intense money conflicts can be the most dysfunctional of all economic units. Also, situations of undue influence, control, abuse, or enabling land here. This can be treacherous and hazardous ground for the advisor, but the advisor with the right skills and sensitivity can be a blessing for these families.
  • Principles of Counseling. There are many versions of Principles of Counseling, but common themes are: A place of Safety, Relationship, Trust/Genuineness/Authenticity, Empathy, Respect, Confidentiality, Hope/Rational Optimism, and a clear sense of the limits and boundaries for the counselor's Use of Self. Financial Planners frequently find themselves in the role of counselor, and possessing the requisite skills and knowledge are critical to positive outcomes. 
  • General Principles of Effective Communication. Active listening, verbal and non-verbal communication, learning styles and preferences, and the duty of the speaker  to make the message understandable.
  • Crisis Events with Severe Consequences. Any type of sudden and unanticipated change in financial situation or financial expectations can be a crisis. This may include job or income loss, market correction or decline, adverse health effects, or sudden wealth such as inheritance, divorce settlement, lottery win, or liquidation of a  business. These changes are stressful, and this stress can be expected to bring emotional and psychological difficulty, and temporary cognitive decline.

In recent years, more attention has been paid to the subject of Behavioral Finance, which in its broadest sense identifies and describes various biases and heuristics which we all carry around to some degree or another. Where the study of and reference to Behavioral Finance falls short is somewhat outlined in the topic list above. Note the reference to attitudes, values and biases of both the client and financial planner. Likewise, the Principles of Counseling and Principles of Effective Communication are focused on the skills and self-knowledge of the financial planner.

Perhaps the most difficult aspect of the application of this body of knowledge is the self-examination and self-awareness required of the planner as counselor and communicator to help the client navigate this difficult terrain. It is more than a laundry list of the 20 most common biases and errors in investment management. It is the development and maintenance of a clear context for decision-making that arises from a meeting of the minds between planner and client.

We at J. F. Williams Co., Inc. have long operated on the premise that the most effective and impactful determinants of financial success are behavioral, not analytical. Analysis has its place, and we believe that sound decision making almost always requires recourse to the numbers. This is true whether addressing the somewhat narrower field of investments and investment management, or the much more global and comprehensive field of Financial Planning in general. Perhaps the most important point is that analytical results have value only in the context of the client’s psychological foundations. Better to find a reasonable answer that aligns with the client's values, beliefs and life experience than an analytically perfect answer that conflicts with the above. Achieving this alignment may require the most finely developed listening and empathy skills (and self-knowledge and self-discipline) available of the advisor. Again, this is not always all about the psychology of the client. As financial advisors, we operate in the context of a relationship with our clients. This is the only possible way to develop and maintain the working context that drives sound decision making.

There is much to like about this news from the CFP Board. Not least of which is that this is very aligned with the constant and thoughtful leadership applied and urged for many, many years by my dear friend, Dick Wagner. Dick was a thought-leader and trailblazer in the financial planning world. He was a prolific writer, speaker, and agitator. For years, Dick led the profession and urged the CFP Board to recognize and acknowledge the importance of client and advisor psychology in the financial advisory relationship. He cared deeply about the burgeoning profession of Financial Planning and he recognized the centrality of the role of the CFP® mark. His book, Financial Planning 3.0, published only months before his tragic and untimely death, is a legacy pointing the profession in just this direction. Speaking for all who knew and cared for Dick, we wish he were here to enjoy the moment. We can see him smile at the news.

More Good News

This month, our own Adam Van Wert achieved all the prerequisites for certification and use of the CFP® mark. Watching Adam’s growth and maturation in the time he has been here at this firm has been most gratifying. Join us in our congratulations for Adam Van Wert, CFP® Professional.

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The table below shows the returns through March 31, 2021 for selected investment asset classes. In most cases, the results below are appropriate benchmarks for the related mutual funds in your investment portfolio.