Dr. Amy Hubble and Dr. John Grable wrote the attached paper in late 2019. The paper was discussed in The Wall Street Journal. The paper has since gone on to be one of the most requested papers from the Lab. Unfortunately, the paper is difficult to obtain via the internet.
The attached copy is an “author proof.” To access the final version of the paper please consider subscribing to the Journal of Investing.
This post is really short …
If you would like to learn more about financial risk profiling, we strongly recommend that you download the following paper. This paper describes how Drs. Hubble and Grable, working with the CFA Institute, arrived at a model of risk profiling that can be used by financial planners.
https://www.cfainstitute.org/en/research/foundation/2017/financial-risk-tolerance
John Grable, Ph.D., CFP®
It is April 2020. Not only is April financial literacy month, April puts college students one month closer to the day significant life choices must be made. For some students, the prospect of a summer job or internship is just around the corner. For others, summer school looms large, and for those in their final semester of school, graduation is coming up quickly. If you are a soon-to-be graduate, you are likely thinking about your next step, which could include full-time employment or graduate school.
Graduating seniors have lots of questions and concerns, not the least of which may be the status of the job market. During the best of times, the end of a school year can set off feelings of excitement, nervousness, and apprehension. In the world of Covid-19, this time of year may instead be setting off alarms of dread, fear, and loathing. If you are feeling this way it is important to gain perspective before setting off on your lifetime financial journey.
As you know, many people have lost their jobs as a result of measures taken to combat the COVID-19 pandemic. At the same time, the investment markets have been fluctuating widely up and down, with periods of sustained price depreciation. If you are like millions of others, you may be tempted to question the importance of creating and following a long-term spending plan, which includes regular saving and investing. Before giving up on your spending and saving plan, either now or in the future, it is worth stepping back for a moment to gain perspective.
There is some good news in the midst of what appears to be mass financial chaos and fear. Let’s start with a dose of reality. The Covid-19 pandemic has played, and will likely continue to cause, dramatic shifts in the way people interact and the way business is transacted. It is worth keeping in mind, however, that this transformational process, which seems unique to our times, is rather commonplace in the annals of economic history. In fact, history tells an important story. First, economic panics like the one we are living through right now are relatively common, and second, most panics are short lived. This means that if you convert your financial capabilities into daily actions you can emerge from the current financial crisis with a greater sense of financial control. Let’s take a brief walk through history to learn about other financial crises and see what happened.
The common theme that runs throughout history is that those who are living during a moment of economic panic and chaos often become so fearful, thinking that what they face is unique and singularly dangerous, that they lose perspective. Fears turn to rash thoughts and actions. People stop saving and investing. In fact, they often sell their investments. This sometimes is the logical thing to do, especially if someone is faced with ongoing expenses and no employment prospects. However, for those who stick to their long-term spending plan, times of panic often provide the foundation for long-term wealth accumulation. There is nothing nefarious or illegal involved with making money. Accumulating wealth over one’s life involves—and this is a cornerstone of being financially literate—staying calm when others panic and sticking to one’s financial plan even when every emotion says to sell and join others in proclaiming the end of times.
Let’s end this story with one final note to those who will be graduating over the next few months. The job market may be tight. This will not be the case forever. The stock market may look unsafe and rigged against the small investor. This is an illusion. Those who maintain a long-term perspective almost always emerge from an economic panic with greater financial confidence. When you are feeling particularly worried, just think back to those people in the 1800s who experienced staggering and regular panics but lived to see better days. You will too, and when you get that job, start saving and investing. Over time, you will be very happy that you stuck to your financial plan.
Publisher: Wiley
There are lots of options available in the personal finance/financial literacy field. While each book provides great information and a unique approach to delivering content, Lance Palmer and I kept running into the same problem: students were not reading the material. This became a problem because we ended up spending so much class time getting students up to speed that we missed opportunities for real engagement. Sound familiar? We felt like the books were missing the mark in terms of building financial literacy and financial capacity. This is the reason we decided to rethink the way personal finance education is being delivered.
This book presents personal finance material in the framework of a lifetime journey (thus the graphic on the book cover). Rather than force students to read through 16 to 18 densely written chapters, our approach is totally modular. This means that instructors can choose what they want students to read and in what order material is covered. Additionally, the topics (which are grouped by chapter) are short, engaging, and fun.
Based on student feedback, this is what we have learned. First, students are finally reading the material! Why? Because the topics fit the lifestyle of 21st century learners. Second, students are using the built in assessments prior to class. This makes class discussions more engaging and fun. Third, students appreciate that the “math” element of the class is focused on practical applications rather than on developing skills to become a financial analyst. Finally, instructors love the idea that they can choose topics to include or exclude from the class with very little disruption to the overall flow of the content delivery for students. It’s easy and simple! For example, one of our colleagues really likes discussing human capital, risk tolerance, and other “interior finance” topics. The course allows him to make these topics visible to students. Another colleague prefers to focus on investment topics so she hides some of the softer topics from student view and allows them to access all of the investment topics.
If you are looking for content
that was developed specifically to make personal finance fun and engaging, this
book is for you.
Publisher: Wiley (available at: https://www.wiley.com)
The purpose of this book is to provide financial planners insights into improving their communication and counseling skills. The approach presented in the book is based on helping financial planners develop, practice, and use skills associated with the formal and informal sharing of information between a client and the financial planning professional in an empathic manner that enhances the client-financial planner relationship.
This book was written to be a useful resource for both professionals and students who work with clients on a day-to-day basis. The Certified Financial Planner Board of Standards, Inc. (CFP Board)—the primary academic standards setting and enforcement board for college and university programs[i]—has identified communication and counseling skills as an essential element of financial planning competency. Some have even argued that “Effective communication is vital to successful financial planning.”[ii] The content of this book, along with the video examples, can help improve a financial planner’s proficiency (a) when evaluating client and planner attitudes, values, biases, and behavioral characteristics and the impact these have on financial planning; (b) in communicating with clients; and (c) with counseling skills.
Publisher: Wiley
When Wiley—a global publisher with an outstanding track record for developing exam preparation for CPA and CFA exams—approached Swarn Chatterjee, Joe Goetz, Lance Palmer, and me to help develop content for Wiley’s CFP Exam Review, we jumped at the opportunity. The result is the kind of resource we had always wanted to recommend to students. Using our years of combined knowledge, we helped create a set of resources shaped around student needs, providing a comprehensive and user-friendly approach to learning. Some highlights for us are:
Feedback from students has been exceptional, with a great response to both the quality of the course and the value for money in comparison to the competition. Along with a 2-volume Study Guide set, it also includes a full-length mock exam, a 500+ question test bank, more than 1400 online flashcards and 15+ hours of video lectures and so much more. Go ahead and take a look for yourself.
Publisher: National Underwriter
The Case Approach to Financial Planning: Bridging the Gap between Theory and Practice, Fourth Edition, fosters sound financial planning logic and decision-making using the CFP Board of Standards, Inc. newly-revised 7-step systematic financial planning process. This textbook provides the tools and foundation for helping aspiring financial planners learn by doing. The material in this book provides students with real-world scenarios that can provide insights into the financial planning process as they put their financial planning skills to the test.
This new edition features:
Publisher: National Underwriter
Fundamentals of Writing a Financial Plan provides a new and unique approach to helping aspiring financial planners write a comprehensive financial plan. The book shows how the CFP Board of Standards, Inc. newly-revised 7-step systematic financial planning process can be applied when writing a comprehensive financial plan for an individual or family.
The core of the book is focused on writing a comprehensive financial plan. Students learn the writing process by following a running case—Chandler and Rachel Hubble—and observing how elements of a financial plan can be written and presented to clients. This book features:
Publisher: Springer
The personal, household, and consumer finance field is growing quite rapidly, especially as universities and policy makers see the need for additional research and clinical application in this dynamic area of study. Currently, the profession is advancing towards the stage where professional practice becomes increasingly evidenced-based. Financial Planning and Counseling Scales provides educators, researchers, students, and practitioners with a much needed review of reliable and valid personal assessment scales and instruments that can be used for both research and clinical practice. In addition to presenting actual scales and instruments with applicable psychometric details, the book also includes an overview of measurement issues and psychometric evaluation.
[i] “CFP Board is a professional certification and standards setting organization founded in 1985 to benefit the public by establishing and enforcing education, examination, experience, and ethics requirements for CFP® professionals. Through its certification process, CFP Board established fundamental criteria necessary for competency in the financial planning profession.”
[ii] Sharpe, D. L., Anderson, C., White, A., Galvan, S., & Siesta, M. (2007). Specific elements of communication that affect trust and commitment in the financial planning process. Journal of Financial Counseling and Planning, 18(1), 2-17. grateMute=!0
Someone who has followed the Lab for several years asked if we could post an op-ed piece that was published in Financial Planning Magazine in 2013. This is a bit controversial, but maybe it may help financial planners and investment advisers develop systems to bring more people into contact with financial planners/advisers …
To be a financial planner in the 21st Century is a wonderful thing. What other field of practice brings together diverse and competing practitioners—financial advisors, planners, counselors, therapists, and brokers—to help ensure the financial stability and security of American families? No other profession comes close to serving the interests of both Wall Street and Main Street in relation to money management services, wealth accumulation and protection planning, and legacy counseling. When viewed holistically, the financial planning profession is robust and profitable. Further, the profession’s net addition to the general welfare of the country is positive. Financial planning practitioners, on the whole, improve the social good.
Amidst this glowing recognition of the profession, it is important to recognize a distinct and important debate that is occurring almost daily within certification, association, and regulatory establishments, as well as colleges and universities that teach financial planning. The debate has potentially far reaching and negative implications for financial planning practitioners. On one side of the debate are consumer activists who are begging to ask why the profession has failed to transfer the benefits of financial planning to households at all levels of the socioeconomic spectrum. Stated another way, they ask if the financial planning process is so effective in changing behavior, why are financial planning services biased towards high wealth clientele?
Sitting on the other side of the debate are those contend, conceptually, that financial planning has the power to help all American households, but the way in which planning services are currently provided—either through a fee or commission structure—simply does not allow financial planners the freedom to work with clientele who may not at this time have the financial stability to “pay” for planning. In effect, their argument comes down to an implicit acknowledgement that as presently practiced, the financial planning process is an effective tool only for wealthier Americans.
This is not to say that the leadership within the financial planning profession agrees with those who believe financial planning is a service for the wealthy. In fact, leading practitioners and oversight bodies have, over the past several years, taken steps to encourage financial planners to at least appear to be serving underserved markets. The latest involves promoting pro-bono work; that is, some financial planners volunteer their time during organized “financial planning” events as a way to help those who have financial questions and concerns. While a noble concept, and one well worth pursuing, the actual number of truly needy individuals who receive help, and whether the advice received results in tangible changes in attitudes or behavior, remains totally undocumented; however, there is certainly a “feel good” effect for the financial planning profession.
There is likely another reason leaders within the profession have full heartedly backed pro-bono efforts. The impact of the mortgage crisis and backlash against Wall Street banks has not gone unnoticed. It is only a matter of time before consumer activists and policy makers shift their gaze towards the financial planning profession. The pro-bono movement is one way to divert attention from what is actually occurring within the profession. So, what might a policy maker observe if they started looking into the day-to-day workings of the financial planning profession?
Those scanning the profession from the outside will be stunned. They will find a business model that manages nearly $44 trillion in wealth. They will see a profession dominated by four large firms but encompassing about 136,000 firms overall. [i] They will be astonished at the profitability of financial planning. Revenues in 2012 exceeded $46 billion, with after-tax profits of nearly $8.5 billion. [ii] They will then wonder why it is that less than 25% of all American households are being served by financial planners. The numbers tell the story. Excluding the four largest firms that control approximately 46% of the market (i.e., Morgan Stanley Smith Barney, Wells Fargo, Bank of America, and Amerprise), the ratio of financial planning firms to individuals living in the United States is relatively low at about one firm for every 2,400 persons. The ratio of CFP® professionals to consumers is rough one for every 5,000 people. This compares to one attorney for every 584 Americans or one physician for every 434 people currently residing in the United States. Even if more financial planners suddenly flooded the marketplace, current compensation methods make it nearly infeasible, if not impossible, to work with middle- to low-income households.
Here is the question those in the profession hope is never asked: What is the overall reach and effectiveness of pro-bono and other efforts in helping middle- and low-income consumers? There are simply no data available to answer this question. A reasonable guess would be “not much” to both queries. Isn’t it time, then, that the financial planning profession stand up in a united stance and proclaim the universality of the financial planning process before being forced by consumer activists and policy makers to broaden the market for financial planning? What if there was a way to increase the market penetration of financial planning to all segments of American society without a noticeable decrease in revenues or profits within the profession? Well, such a solution exists.
Here is a modest—but serious—proposal. The foundation of the proposal is based on three assumptions. First, the compensation structure in the U.S. makes it difficult for financial planners to offer services to middle- and low-income households profitably. Second, those in the profession have a sincere desire to encourage financial literacy and wealth development among all Americans. Third, there are many advisors who are interested primarily in helping middle- and low-income households, but they cannot afford, any more than traditional financial planners, to build successful practices in this marketplace. A solution can be found in pay-as-you go social service insurance programs currently in place at the state and federal levels. Consider the following model:
Obviously, the infrastructure for such a system will need to be developed. Factors such as the size and scope of the OFPR need to be addressed, as do concepts relating to the registration and certification of approved financial planners who wish to receive reimbursement for services. Fortunately, much of the groundwork for infrastructure planning exists in other disciplines, such as health care, marriage and family therapy, psychology, and social work.
A more important question involves how such a plan would be funded. It is unfortunate that the financial planning profession has not been able to develop a planning model that is universally accessible. It is hoped that all firms would voluntarily participate in the funding of a financial planning insurance program, but to believe this will happen without some incentive is naive. As in nearly all cases where industry participants cannot agree on procedures, it may be necessary for regulatory bodies, such as FINRA, the SEC, and NAIC, to mandate binding contributions to an insurance pool. The good news is that on an individual advisor basis, the annual contribution would be modest.
Multiple funding mechanisms exist, but the simplest involves the placement of a levy on managed wealth, in the form of an assets-under-management (AUM) tax. In 2012, financial planners and associated advisors managed $43.8 trillion in household wealth. A flat-tax equivalent to one cent for every $10,000 in AUM would generate $43,800,000 annually as a financial planning insurance pool. This works out to a firm tax of less than $400 annually (by default, the largest firms in the marketplace will absorb close to 50% of all payments made to the insurance pool). When evaluated on either a firm or employee basis, the binding contribution is likely less than the total labor value associated with pro-bono efforts currently underway throughout the United States; however, for the first time it will be possible to begin providing financial planning services to the broadest spectrum of American households.
Here is an example of how implementation of this proposal might work. Consider the state of Georgia. Financial planning firms located in Georgia generate approximately 1.5% of the total AUM revenue in the United States. As such, Georgia would be entitled, under this proposal, to $657,000. After paying, say, $20,000 to help offset the national OFPR operating budget, approved financial planners in Georgia could access $637,000 in total reimbursements for the year. This works out to over 25,000 hours of billable time at a reimbursement rate of $25 per hour. Obviously, a $25 per hour reimbursement does not provide enough income to support a large financial planning practice. It does, however, provide a base level of income for those interested in providing financial planning and counseling, financial therapy, financial social work, or some life planning solutions in the marketplace as an aspect of a more expansive practice. The reimbursement pool also offers a platform for new advisors to build a practice that includes middle- and low-income households. In the state of Georgia, even a modest financial planning insurance pool of less than three-quarters of million dollars would allow hundreds of advisors to reach out to currently underserved markets.
Those who view this modest proposal adversely will likely couch their arguments in terms of opposing an additional burdensome mandate and another regulatory infringement. In some ways, their argument is spot-on. Had the profession been working proactively to design a platform to increase access to financial planning then a proposal, such as this, would not be needed. There are times—and this is one of them—when regulatory intervention is needed to increase the social welfare for all Americans. Those who believe that financial literacy, wealth generation, and financial numeracy are values that should be held by all Americans, regardless of wealth or income, might find this modest proposal worthy of enactment.
Note: This was originally published as “Financial Planning for All: An Insurance Solution.”
[i] Investment Adviser Association. (2011). Evolution Revolution 2011—A Profile of the Investment Adviser Profession. Washington, DC: IAA.
[ii] Schmidt, D. (2012, March). Financial Planning & Advice in the US: IBIS World Industry Report 52393. Report available at www.ibisworld.com
As I write this, the Financial Therapy Association is in the process of launching a certification in financial therapy. This momentous event is causing some financial therapy stakeholders concern. There are a few mental health professionals who have expressed alarm that a non-mental health licensed professional—including financial planners, financial counselors, and some financial therapists—will use this certification as blanket approval to begin diagnosing clients and providing advice that is outside the scope of their practice. Some financial planners/counselors are equally concerned that unregulated mental health professionals will begin providing investment advice. On top of these issues is the notion of “dual relationships,” which under Financial Therapy Association rules would prohibit a financial therapist from meeting with clients in most social situations.
When viewed individually, some of the concerns raised about certification seem insurmountable. The purpose of this brief overview of financial therapy is to provide context for worries and to provide a clear visualization of financial therapy’s unique niche in the professional landscape. To begin, let’s look at a client case.
Here is the scenario. You just finished meeting with a prospective client. The person came to you based on your reputation—a current client referred the person to you. After meeting with the prospective client, you walk with him to his car. You immediately notice that the car is rather old, unwashed, and filled with what someone might rightly call ‘trash.’ When the prospective client opens the door to the car you notice that there are, literally, hundreds of shopping bags full of what appear to be unopened purchases from large retailers in the area. This catches you off guard a bit but don’t think much about it until you meet the person again the following week.
During the meeting the person, who has now engaged your services as a client, indicates that he is anxious about his financial situation. He has been spending money on things without really using the purchased products. Upon further conversation, it becomes clear that the client is angry, upset at this inability to manage his financial situation, and quite anxious. Given this information, what would you do?
The answer to this question will be based on the dominant professional field in which the professional practices. Because there are so few financial therapists, answers tend to be weighted either heavily in financial planning/counseling or mental health. Consider state of the financial therapy profession today. On one side are financial therapists whose training and background have followed a traditional financial planning or counseling path. On the other side are financial therapists who have taken on financial issues from a mental health perspective. In the middle are financial therapists in the pure sense of the term—they have been trained in the functional elements of both personal finance and mental health. Let’s see how each might address the client’s issue.
Financial Planner/Counselor
A financial planner/counselor would almost immediately delve into the client’s financial situation. The unwrapped bags in the client’s car would hint at a spending problem, which would lead to creating a cash flow statement to determine the client’s income and expense situation. A net worth statement would also be developed as a tool to help determine the financial capacity of the client to withstand financial shocks. Data from these tools would be used to obtain a “financial snapshot” of the client’s situation using financial ratios. Concurrently, the financial planner/counselor would be assessing the client’s attitudes, beliefs, and behaviors. Information obtained from a standard data gathering form, which might include measures of risk tolerance, expectations, and financial satisfaction, would be evaluated in the context of the client’s financial objectives and goals. A well-trained financial planner/counselor would then process the information at hand using the six-step financial planning process in the development and implementation of recommendations designed to help the client balance his financial situation (i.e., ensure that income exceeds expenses).
Mental Health Professional
A competent and well-trained mental health professional would look at the same situation and immediately begin implementing assessment and diagnosis tasks. The unopened bags in the client’s car would hint at an underlying psychological condition, which would lead a mental health profession to begin administering diagnostic assessments related to compulsive disorders, compulsive shopping, addiction, depression, and other clinical scales. Results from these tests would then be used to match the client’s stated goals with (a) the results of the diagnostic tests and (b) the treatment preference(s) of the mental health professional. In nearly all cases, the mental health professional will engage in therapeutic interventions to help the client uncover the issues that may be prompting him to spend more than he earns. The therapeutic model developed by the mental health professional will be designed to provide the client with strengths to deal with current and future stressors.
Financial Therapist
A financial therapist would look at this case and the manner in which the financial planner/counselor and mental health professional dealt with the situation with puzzlement. While both professionals should be commended for jumping into the case with the intent of helping the client solve his problems, both dealt with the situation with non-integrative techniques. They used the unopened bags as a clue to guide their intervention preferences. The financial planner/counselor attempted to provide a solution to the question by providing recommendations that were designed to fix the situation. This approach excluded, to a great extent, any attempt to understand the psychological or behavioral motivations of the client. The mental health professional, on the other hand, dealt with the situation almost entirely by focusing on the mental aspects of the client’s situation. No attention was paid to how the client should deal with day-to-day allocations of income and expenses.
Although this summary implies a criticism of these two approaches, these professionals are actually to be congratulated because many of their colleagues would choose not to work with this client. Many financial planners/counselors might find the client’s situation too daunting and unprofitable. Some mental health professionals, likewise, might find that their diagnoses are not billable under traditional insurance programs, and as such, refer the client to someone else. Others may simply assume that the financial problems faced by the client are nothing more than a symptom of a deeper emotional problem, and thus completely avoid dealing with the client’s financial situation.
This is where a financial therapist, as envisioned by the Financial Therapy Association, fits into the picture. A financial therapist—even one who is just beginning his or her professional career, would likely combine aspects of what the financial planner/counselor and mental health professional did. That is, the financial therapist would evaluate the client’s current financial situation and assess the client’s attitudes, beliefs, and behaviors. The information obtained from the “financial” side of the evaluation would be merged with the “therapy” side of the case to arrive at a series of “treatments.” The key takeaway is that both tasks are needed and used by a financial therapist.
Financial therapy treatments will generally be comprised of very applied financial solutions and/or interventions designed to stabilize and improve a client’s financial situation, while at the same time the financial therapist would employ evidence-based treatments to help his or her client find the strength, courage, and resources needed to deal with the emotional aspects of managing his or her household’s financial situation on a day-to-day basis.
And it is here the biggest obstacles to financial therapy exists. Two concepts cloud how financial therapy can work in practice. The first opaque issue is related to assessment. The second is associated with the concept of therapy.
Only a licensed mental health professional or medical physician can engage in a diagnostic assessment. According to the Minnesota Department of Human Services, whose rules mirror that of nearly every other state regulator, a diagnostic assessment is a written report that documents the clinical and functional face-to-face evaluation of a recipient’s mental health. A diagnosis must include a summary of the nature, severity, and impact of behavioral difficulties; the client’s functional impairment; an evaluation of subjective distress; and a review of client strengths and resources. In general, a diagnostic assessment is necessary to determine whether a client will be eligible for mental health services.
It is important to be clear on this point! The diagnosis of an issue or impairment can only be made by a licensed professional; however, any professional may use assessments when working with clients for the purpose of information gathering and referral.
Let’s revisit the earlier case. It is permissible for a financial therapist (or a financial planner/counselor) to ask questions related to a client’s attitudes, beliefs, feelings, and emotions as an element of the data gathering process. For example, it would be acceptable to ask the following questions of all clients:[2]
| 1. Overall, how would you rate your health during the past 4 weeks? | |||||||||
| Excellent | Very Good | Good | Fair | Poor | Very Poor
|
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| 2. During the past 4 weeks, how much did physical health problems limit your usual physical activities (such as walking or climbing stairs)? | |||||||||
| Not at all | Very little | Somewhat | Quite a lot | Could not do physical activities
|
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| 3. During the past 4 weeks, how much difficulty did you have doing your daily work, both at home and away from home, because of your physical health? | |||||||||
| None at all | A little bit | Some | Quite a lot | Could not do daily work
|
|||||
| 4. How much bodily pain have you had during the past 4 weeks? | |||||||||
| None | Very mild | Mile | Moderate | Severe | Very severe
|
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| 5. During the past 4 weeks, how much energy did you have? | |||||||||
| Very much | Quite a lot | Some | A little | None | |||||
It would be inappropriate, and potentially illegal, for a non-licensed professional to then use the information obtained to make a diagnosis of, say, depression. On the other hand, a financial therapist could certainly use data obtained from a client from these questions to obtain a more comprehensive picture of the client’s situation. If, based on the scoring methodology of the questions or scales used, a client appeared to be at risk either mentally or physiologically, this should prompt two actions: (1) a discussion with the client and (2) a potential referral to a licensed professional who could legally make a diagnosis. This entire point is mute, however, if the financial therapist is licensed to provide a diagnosis.
The confusion over assessment and diagnosis is one that has hampered the growth of financial therapy. Financial professionals have been told that they cannot diagnose clients. This is absolutely the case. What is forgotten, or conveniently not disclosed by the person making the statement, is that an assessment is not a diagnosis. This leads into the second area of confusion surrounding the practice of financial therapy, and that is the word therapy.
Therapy is a curative process that is designed to help others obtain relief from a presenting problem. Anyone may act therapeutically by exhibiting signs of caring, empathy, and helpfulness. To be therapeutic does not require a legal ability to make a diagnosis or the use of a license.
A similar level of confusion exists for mental health professionals who want to provide financial therapy services. Under federal and state mandates, it is against the law to provide investment advice for a fee without being duly registered with an appropriate authority (e.g., Securities and Exchange Commission) or being licensed by the Financial Industry Regulatory Authority (FINRA). This rule does not, however, prohibit someone—anyone for that matter—providing financial education or information about investments or advice about non-investment financial strategies. Just as a non-mental health licensed financial therapist would refer a client to another professional for a mental health diagnosis, a non-investment licensed/registered financial therapist would refer a client to another professional for specific investment advice and counsel. Or the mental health professional could obtain the appropriate license/registration to begin making investment recommendations. The key element is this: a financial therapist must provide services within their scope of practice. This is a clear practice standard for all Financial Therapy Association members.
The Financial Therapist-Client Engagement
Consider again the three pathways to financial therapy practice. Because nearly every practicing financial therapist has come to the field from either financial planning/counseling or mental health, most have had a difficult time describing when one service is being offered versus another. Financial planners/counselors often say something like, “How do I know when I am practicing as a financial planner versus a financial therapist? After all, I went into financial therapy in order to incorporate therapeutic techniques into my daily practice.” This is important because under Financial Therapy Association practice standards, a financial therapist may not have a dual relationship with a client. This means, quite simply, that a client is a client, not a client and friend or client and colleague. The line between therapist and client is sacred and distinct. This is not the practice among financial planners/counselors who regularly meet with their clients in social situations. How then does a financial therapist who is not also a mental health professional deal with this situation?
The answer is quite simple and straightforward: the client engagement or contract dictates whether a client is a financial therapy, financial planning/counseling, or mental health client. What doorway is the client entering the relationship? If the arrangement is a financial planning/counseling engagement, the rules dictating the professional’s practice are in play. If the contract is based on receiving mental health services, then those rules and regulations apply. If the engagement is for financial therapy, then the practice standards and code of ethics as outlined by the Financial Therapy Association apply.
Of course, this leads to an ancillary question, namely, what if the client wants to change from financial planning/counseling or mental health services to financial therapy? Again, the solution is defined by the engagement process. When and if this were to occur, the professional would need to disclose and explain to the client that this step entails a new client engagement, and that going forward, a new set of standards applies. This is no different than the situation for a dually-registered financial professional who is licensed by FINRA while being registered by the SEC. Under one situation (FINRA), suitability rules apply, whereas under other cases (SEC) the fiduciary standard applies. It is the legal and moral responsibility of the financial professional to disclose when he or she is working under a new engagement. Similarly, a financial therapist is under an obligation to disclose the applicable practice standards associated with financial therapy and to obtain a new client engagement before providing services.
As illustrated in these examples, it is possible to work primarily as a financial planner/counselor or mental health professional and occasionally provide financial therapy services. It is also possible to be engaged in financial therapy services on a full-time basis. The contract or client engagement will dictate what is appropriate and when such services can be appropriately provided.
Summary
The worries expressed by practicing financial planners/counselors and mental health professionals about the role of financial therapy are legitimate; however, nearly all the unease stems from the lens in which the financial therapy stakeholder is viewing the situation. The Practice Standards promulgated by the Financial Therapy Association clearly indicate that a certified financial therapist (e.g., CFT-I) must provide services within his or her scope of practice. If the professional is not a licensed mental health professional he or she may not make mental health diagnoses, although he or she may use psychological, behavioral, and attitudinal assessments in their practice. Mental health professionals who are not licensed or registered to provide investment advice may not provide direct investment recommendations, but they may teach, inform, and discuss financial and investment topics with clients. In both scenarios, a financial therapist can (and must) be therapeutic when delivering services. The type of service provided will be dictated by the client engagement and the professional’s scope of practice.
It is entirely possible that within 10 years this review will be obsolete and read only as a curious insight into the beginnings of a new profession. If financial therapy does blossom as a profession, then the pathway to becoming a financial therapist will be more structured. Rather than come from current financial planning/counseling and mental health fields, financial therapists will receive education and training holistically and enter the field as a “financial therapist.” The rules regarding practice standards will need to be expanded to determine when it is appropriate for a non-certified financial therapist to practice. The profession is obviously not in that position yet, but that day is coming soon.
Notes
[1] The information presented in this review does not necessarily represent the opinion or stance of the Financial Therapy Association or any other organization or institution. The opinions expressed are those of the author.
[2] These items were taken from the Healthy Living Questionnaire (https://www.integration.samhsa.gov/clinical-practice/Healthy_Living_Questionnaire2011.pdf) from the US Department of Health and Human Services.
Financial Planning
The Basics of Planning Theory
The purpose of financial planning is to facilitate financial goal formation, taking into account attitudes and behavior, and use of individual and household level financial data to explain and predict current and future behavior to help clients reach their goals.
Five sub-fields comprise the discipline of financial planning:
Financial planning is a unique discipline within the academy. While the five sub-fields that comprise financial planning may be informed by other disciplines (e.g., economics, psychology, accounting), the broader concept of financial planning is distinctive in its purpose.
Behaviorists, wealth managers, specialists, and generalists work with clients using evidence-based models. An evidence-based model is an approach in which recommendations are based on published work that has been subject to clinical or expert review showing the technique to be more effective that other recommendation development approaches. Quants tend to focus their work in helping other financial planners make better decisions and recommendations.
Faculty and students working in the Lab are using this framework to conceptualize one or multiple “theoretical frameworks” for financial planning. If you have thoughts about the theoretical basis of financial planning, please send us a note.
Researchers working in the field of psychotherapy have, for more than 50 years, attempted to document what are known as significant moments of change during which a client’s attitudes and behaviors undergo transformation.[i] Financial counseling and planning and planning, as a sister profession to psychotherapy and the mental health field, has adopted many of the insights gleamed from these studies. Consider the acceptance of therapeutic interventions and models. Today, it is common for financial advisors to conceptualize the manner in which someone is willing to change behavior as a process. This process is best conceptualized in the transtheoretical model of change, in which people move through five stages starting with precontemplation and ending with behavioral maintenance.[ii] The adoption of cognitive-behavioral interventions is another example of the way financial counseling and planning and planning, as an emerging profession, has adapted clinically validated approaches used in the mental health field to the purposes of helping people better manage their household financial situation.
Interestingly, however, it has only been within the last decade that financial advisors have taken an interest in the way the planning environment may impact client outcomes. Some of the earliest work dealing with this topic was published by Sonya Britt and John Grable.[iii] They showed that the physiological response of clients undergoing financial counseling and planning and planning was significantly influenced by the physical environment where the client and advisor met. More specifically, Britt and Grable noted that financial advisors who use a therapeutic office setup (i.e., one with flexible seating), as compared to a more traditional financial planning arrangement (i.e., the use of desk), are able to solicit more information from clients, while at the same time reducing client stress.
The acknowledgement by financial advisors that the planning environment likely does have a potentially large impact in shaping a client’s willingness to change attitudes and behaviors creates an important practice management question: How should an office environment be structured to positively affect clients psychologically, emotionally, and physically? The following discussion highlights findings from the literature that provide insights into answering this important question.
The Office Environment: A Reflection of the Advisor
Financial advisors are rarely taught about ways to utilize their office environment as a tool to manage the financial planning process. Nearly all financial education focuses on the nuts-and-bolts of specific financial interventions or on the process of counseling and planning and planning, with an emphasis on communication and counseling and planning and planning theory. While these are obviously at the root of any successful financial advisory practice, it is important to note that an advisor’s office environment also plays an important role in shaping the experiences of clients.
The importance of the office environment is universal. This means that a financial advisor should spend time to create an environment that facilitates client financial health, regardless if the advisor is working out of their home, has a small office in a suburban center, or owns a suite of offices in a large building.
A financial advisor’s office environment consists of three dimensions:[iv] (a) physical, (b) mental, and (c) emotional. The physical dimension includes things such as how warm a room is and how light or dark the lights are during a session. The mental dimension includes the messages sent by an advisor to a client. Messages can be conveyed through pictures and personal objects in a room. The emotional dimension includes the elements in the environment that shape the way clients feel, including the use of colors and textures.
A financial advisor’s office communicates cues of safety, comfort, diligence, and competence. Eight elements constitute the counseling and planning and planning environment:[v] (a) office accessories, (b) color, (c) design and furniture, (d) lighting, (e) smell, (f) sound, (g) texture, and (h) temperature. According to Levitt and her associates,[vi] an advisor’s office environment is a projection of the person providing the service. As such, taking care when choosing the objects in meeting rooms, the comfort of meeting areas, and even the sights and sounds heard during sessions become important elements that should be controlled during the financial counseling and planning and planning process. A description of the most important environmental elements is presented below.
Environmental Accessories
Environmental accessories include things such as live plants, artwork, and personal objects (e.g., family photographs and mementos). If used appropriately, accessories relay meaning and the personality of the advisor to clients. There is a downside to the use of accessories as well. These elements generally require upkeep in terms of dusting, maintenance, and with plants, watering. The following are important takeaways when thinking about accessories in the counseling and planning and planning environment:
First, the financial advisor should choose accessories that appeal to the advisor. It is important for the advisor to take ownership of the environment because those who are “unhappy in their environments may inadvertently exhibit less positive attitudes and behaviors toward clients, and their judgments may be tainted by their dissatisfaction.”[vii]
Second, when maintenance can be ensured, the office environment should include live green plants. Plants represent renewed life and growth. Many clients also find plants soothing.[viii]
Third, advisor offices should include artwork. The consensus is that hung pictures should be texturally complex, representing natural scenes. Financial advisory clients typically find abstract art, urban scenes, and pictures of people to be stressful.
Fourth, cues of status and credibility should be used whenever possible. Clients often need reassurance that the person they are working with is competent. One way to signal competency is to display credentials, such as diplomas and certifications, in direct sight of clients.
Environmental Color
The choice and use of colors in the advisory environment can often lead to unexpected outcomes. In general, people respond positively to light colors and negatively to dark colors. However, responses can be skewed by the age and gender of a client. For example, young men report liking greens and browns, whereas young women prefer yellows and purples.[ix] Older women also like purples and grey to black hues. Older men have a dampened response to these colors. Physiologically, red and orange colors tend to increase blood pressure, pulse, and respiration. It is not surprising that fast food chains use these colors to speed up the time customers spend in restaurants. These colors should be avoided in most advisory environments. Instead, if color is to be used, blues and violets should be considered because these colors have been shown to reduce blood pressure and physiological reactions;[x] however, others have reported that blue-violet combinations prompt sadness and fatigue among clients.[xi]
As this summary indicates, the choice of colors for an office environment can be complex. Given that financial counseling and planning and planning appeals to older (not youths) males and females, and often couples, the following recommendations are presented as guidelines for choosing office colors:
First, the color chosen should match what the financial advisor finds pleasing. After all, the financial advisor will be working in the office environment daily, and as such, the color should be pleasing to the advisor and staff.
Second, the use of neutral wall colors is a good choice (e.g., off white, beige, light gray) for most environments. Color can then be added back to the room with art, plants, and furniture.
Third, if and when a non-neutral color is selected, blues and violets should be chosen over bright arousing colors.
Environmental Design and Furniture
The design of a room and the furniture in the room define a client’s ability to move around spatially. Furniture also creates visible and implied barriers and boundaries.[xii] For example, a chair without armrests can make a client feel vulnerable because they may feel that they have no personal space. Also, a desk in a room may signal a power relationship with the advisor “being in charge” and the client being in a weaker position.
Much of the research involving environmental design and furniture use has revolved around the concept of individual body buffer zones or what is known as interaction distances.[xiii] Everyone has an interaction preference, which is the distance between two or more people that should exist before discomfort sets in. Among US financial advisory clients, this distance is between 48 and 60 inches. Gender and cultural differences have an impact on these benchmarks. For instance, women are more comfortable with smaller buffer zones, whereas men prefer a larger interaction distance. When a client and financial advisor are of the opposite sex, clients tend to prefer a wider buffer zone. It is important to note that clients from what are known as ‘contact cultures’ (e.g., those from South America and France) often prefer a small buffer zone.
Having a rudimentary understanding of buffer zones is important when choosing how an office, where client meetings are held, is arranged. Office space can be described as either traditional or therapeutic. Figure 1 illustrates a traditional office environment. In Figure 1, the financial advisor sits behind a desk with the client sitting on the other side of the desk. This office environment facilitates the sharing of paper and provides a zone of familiarity for the client.
Figure 1. Traditional Financial Advisor Office Space
A therapeutic office environment is shown in Figure 2. In this office, the desk has been replaced with a small table that can be used to layout paper work and sign documents, if needed. The emphasis in the space, however, is the couch for the client and the chair for the advisor. This environment facilitates discussion and sharing of ideas.
Figure 2. Therapeutic Financial Advisors Office Space
Although nearly all financial advisors prefer an environment like that shown in Figure 1, clients generally find the space shown in Figure 2 to be preferable. Essentially, the desk in Figure 1 represents, figuratively and practically, a barrier between the client and advisor. Clients find advisors to be more accessible and friendly when the ‘barrier’ is eliminated. Interestingly, research suggests that clients do not find the use or lack of a desk to impact advisor credibility,[xiv] although women advisors are sometimes perceived as more competent when using a desk. Perceptions of competency for male advisors, on the other hand, have been reported to be higher in therapeutic office environments.[xv]
The following points highlight the research on environmental design and furniture use:
Lighting
Environmental lighting helps create client impressions about a financial advisor’s practice. Lighting is known to shape perceptions of spaciousness, privacy, and competence.[xvi] In general, the literature suggests that financial advisors should employ full-spectrum lighting in combination with natural lighting when possible. The strict use of florescent lighting, for example, should be avoided because this source of light tends to create a washed out environment that clients sometimes associate with uncomfortable clinical settings. The more natural light the better. Natural light reduces depressive symptoms and facilitates open dialog. It is important to remember, however, that client seating should always be situated so that the client does not face a window. Allowing a client to see outside during an advisory session can result in disengagement and distraction on the part of the client.
Smell
It is not surprising, but the psychotherapy literature clearly indicates that “exposure to specific odors affects various psychological processes such as mood, cognition, person perception, health, sexual behavior, and ingestive functions” (Levitt et al., p. 79). Financial advisors, like mental health professionals, should avoid the use of colognes and perfume. They should also ensure that their breath smells fresh during client meetings and that they do not have body odor. A simple strategy regarding office smells involves purchasing a plug in room deodorizer. Preferred smells include scents of baked foods and fruit fragrances.
Sound
External sounds during counseling and planning sessions are known to reduce advisor task performance and reduce sharing of information on the part of clients. Clients often assume that if they can hear sounds occurring outside of the room in which they are meeting with an advisor, others can hear their discussion. This can trigger an unexpected fracture in client-advisor dialog. This is the reason that nearly all psychotherapists recommend and use a sound masking device when working with clients. Figure 3 shows a typical device that sits on the floor outside of the counseling and planning room. This particular device creates swirling wind sound. Other devices can produce wave sounds and light music, both of which can also be effective in dampening outside noises.
Figure 2. Sound Making Device
Texture
Texture is a concept that touches nearly every aspect of a financial advisor’s office environment. Clients perceive texture through sight and touch. Nearly everything that a client interacts with in a financial advisor’s office (e.g., flooring, furniture, brochures, etc.) has some degree of texture. The general recommendation is that the office environment should be built around soft materials and textured surfaces that absorb sound. Using this approach reduces the ‘clinical’ feel of an office space and creates a more inviting environment.
Temperature
The final element associated with the physical office environment involves the temperature of the office and the space where the advisor and client meet. Issues to consider include placement of seating in relation to air vents and sources of heat, cold, and drafts (e.g., doors and windows). Generally, people prefer rooms that have an average ambient temperature between 69 and 80 degrees Fahrenheit, with 30 to 60 percent humidity.[xvii] Rather than allow a client to set the temperature, the financial advisor should set a comfortable temperature and make periodical changes throughout the day or as requested by a client.
Summary
As this discussion has highlighted, the environmental space in which a financial advisor works can play an important role in shaping client attitudes and behaviors. This is true across financial counseling and planning methodologies—the single office practitioner to the multi-staff counseling and planning practice. The office environment is something that all financial advisors should work to manage in ways that prompt client sharing of information and implementation of recommendations. While there is no “one best” approach for all financial advisors, the following are general guidelines that can be used by financial advisors when thinking about ways to optimize an environmental space:
Note: The information in this blog is copyrighted (John E. Grable, 2017(C).
For more information about ways the research happening in the Financial Planning Performance Lab contact Dr. John Grable: [email protected]
References
[i] Levitt, H., Butler, M., & Hill, T. (2006). What clients find helpful in psychotherapy: Developing principles for facilitating moment-to-moment change. Journal of Counseling and planning Psychology, 53, 314-324.
[ii] Prochaska, J. 0., DiClemente, C. C., & Norcross, J. C. (1992). In search of how people change: Application to the addictive behaviors. American Psychologist, 47, 1102-1114.
[iii] Britt, S., & Grable, J. (2012). Your office may be a stressor: Understand how the physical environment of your office affects financial counseling and planning clients. The Standard, 30(2), 5 & 13.
[iv] Venolia, C. (1988). Healing environments. Berkeley, CA: Celestial Arts.
[v] Pressly, P. K., & Heesacker, M. (2001). The physical environment and counseling and planning: A review of theory and research. Journal of Counseling and planning and Development: JCD, 79, 148-160.
[vi] See Levitt et al. (2006).
[vii] See page 150 of Pressly and Heesacker (2001).
[viii] Carplman, J. R., & Grant, M. A. (1993). Design that cares: Planning health facilities for patients and visitors (2nd ed.). Chicago: American Hospital Publishing.
[ix] Hemphill, M. (1996). A note on adults’ color-emotion associations. Journal of Genetic Psychology, 157, 275-278.
[x] Kwallek, N., Woodson, H., Lewis, C. M., & Sales, C. (1997). Impact of three interior color schemes on worker mood and performance relative to individual environmental sensitivity. Color Research and Application, 22, 121-132.
[xi] Levey, B. I. (1984). Research into the psychological meaning of color. American Journal of Art Therapy, 23, 58-62.
[xii] Ching, F. (1987). Interior design illustrated. New York: Nostrand Reinhold.
[xiii] Hall, E. T. (1969). The hidden dimension. New York: Anchor Books.
[xiv] Amira, S., & Abramowitz, S. I. (1979). Therapeutic attraction as a function of therapist attire and office furnishings. Journal of Consulting and Clinical Psychology, 47, 198-200.
[xv] Bloom, L. J., Weigel, R. G., & Trautt, G. M. (1977). Therapeutic factors in psychotherapy: Effects of office décor and subject-therapist sex pairing on the perception of credibility. Journal of Consulting and Clinical Psychology, 45, 867-873.
[xvi] Flynn, J. E. (1992). Architectural interior systems: Lighting, acoustics, and air conditioning. New York: Van Nostrand Reinhold.
[xvii] See Levitt et al. (2006).
This past year has been exciting and productive. Faculty and students published 10 peer-reviewed journal articles on topics ranging from physiological stress reactions during planning sessions to the determinants of financial risk tolerance. Dr. Grable’s latest book–the Case Approach to Financial Planning–was also published this year. A highlight for the year is that the following students graduated with their doctoral degree:
Abed Rabbani (now at the University of Missouri)
Wookjae Heo (now at the University of South Dakota)
Jorge Ruiz-Menjivar (now at the University of Florida)
Stephen Kuzniak (now at Cannon Financial)
We will highlight their dissertation work in 2017.
We are so thankful for the support of colleagues, students, and sponsors. This year, the work of the Lab would not have been possible without the generous financial support of Data Points. We look forward to working with Data Points and Sarah Fallaw in 2017!
Lab staff recently published a ‘fun’ paper documenting the value of collecting. The paper documents the extent to which collectors—specifically, those owning collectible classic US postage stamps—experience an opportunity cost associated with expenditures on their collection. Results show, based on stamp price, S&P 500, bond, and T-bill rate data over the period 1969 through 2013, that collectible stamps tend to underperform stocks and bonds on a risk-adjusted basis. Using estimates based on the Modigliani measure (M2), it was determined that collectors incur an opportunity cost when selecting collectible stamps over more traditional investments. However, it is known that collecting as a hobby provides sociological and psychological benefits. This paper adds to the literature by illustrating how collecting also provides psychic return benefits that can be valued similarly to investment returns. In this study, the foregone return rate of stamp collecting for those who allocate 100% of available resources to their collection equates to between 3% and 13% on an annual basis.
You can find the paper here: value-of-collecting (click to download)