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As a psychologist, I’m used to hearing about the most personal issues in people’s lives. And I routinely find that the most personal issue people have is money. Most people would rather talk about anything — sex, death, illness, you name it — rather than money.
Yet conventional wisdom still advises us to keep emotions out of money decision-making, including planning and investing. But I’m here to say the opposite. Not only is it impossible to keep money and emotions separate, but also, when you try to do so, you incur a very high risk.
Why is it impossible to separate money and emotions?
Every money decision we make is fully layered with emotions. Daniel Kahneman, the Nobel Prize-winning behavioral economist, found that when it comes to financial decisions, emotions account for close to 90% of our decision-making. It is a fact of being human that we cannot separate money and emotions; they are inextricably woven together in every important decision, event, relationship and goal in our lives. Every time we decide what and how to spend, save, invest and donate, we bo th think and feel. Emotions in financial planning are always far more powerful movers and shakers than we allow for.
So what are the powerful emotions that come up when thinking and talking about money?
Think about a recent financial decision or action you made. When you paid a tax bill, did you have no feelings? What feelings came up for you? You might have felt wo rried, resentful or regretful. When you consider buying a new car, what feelings come up? Envy of others' cars; satisfaction about saving money by making do for another year; excitement, pride and power when you purchase it? Did a client of yours not start planning until his 40s? He likely feels powerful shame and anxiety about not saving more — and earlier. Have you ever given a client a plan which he or she agreed on, yet did not follow? It is likely that feelings (shame, fear, anxiety, guilt, power, strength), rather than rational thinking, ruled his or her decision.
Emotions in financial planning are always far more powerful movers and shakers than we allow for...
Why do we need to be aware of and talk about money feelings and history with clients?
Even if we agree that money and emotions are integrally connected, the question still remains as to why we need to go there. You could very understandably argue that an advisor isn't a therapist. And isn’t it intrusive and perhaps risky to open up emotional topics that may be too much to handle? Couldn’t raising these topics lead to upsetting and potentially losing a client? Furthermore, like most of us, who wants to bring up conflict-laden and difficult topics? Finally, these conversations can be time-consuming, and who has the time?
Here's why you DO want to discuss money emotions and money history
When you don’t make a personal and emotional connection in finan cial advising, clients tend to leave. Research has found that clients leave advisors most often not due to transactional problems, but due to issues in the relationship, i.e., not feeling connected and emotionally tended to. David Bach, author of Smart Women Finish Rich, says 70% of women leave advisors within one year of their hus band‘s death. Investment Data News reports that 66% of adult children fire their parents’ financial advisor after they receive their inheritance. The number one reason both wives and adult children cited in changing advisors was lack of relationship.1 Finally, the primary factor clients cite for choosing advisors is that s/he is “honest and trustworthy”; only one of the top reasons for leaving advisors involved financial performance.2
And if you don’t discuss how clients feel about their lives, financial plans or a particular financial decision, clients often agree with you in the moment, but then end up not following through, doing something else or avoiding it completely. Or avoiding you.
The more you know about your client's emotional and financial life, and the more you understand both, the more likely it is that clients will stay and follow your advice. Research has found, across a myriad of industries including financial advising, that leaders, financial advisors and sales people who attend to emotions in planning and in the client relationship have much higher rates of client retention and financial success than advisors who focused exclusively on transactions and selling products.3 Tending to the whole client, meaning his or her money and emotions, can lead to success — and for the right reasons, too.
How do you integrate emotions into your advising?
First, consider a shift in mindset. Take pride in the fact that most of your clients will welcome and appreciate you expanding the conversation to include their personal, emotional experience related to money. They will appreciate your interest and caring, and could feel relieved to be a whole person in these stressful topics, not just dealing on a transactional level. Second, consider each and every interaction you have with a client as personal, not just transactional. Your clients can be greatly influenced by how you connect with them personally and emotionally, perhaps even more so than what you do for them.
Specific questions to ask your clients
How does your mother think and feel about, and deal with money? Your father? Your grandparents? How do you know? What impact does it have on you?
How did your parents talk about money between themselves and in the bigger family? Was it easy to talk about, or a secret or conflict? What was the tone and feeling? Were there fights? How has this affected you?
What are your earliest memories of money in your family? What feelings come up for you around this?
Was money viewed as good, bad, scary, dirty, neutral?
How do you get your money? What does your family feel about sav ing, spending and sharing? Who earns money? Who is in charge of spending? Saving? Sharing?
Do siblings treat money differently? Did gender and birth order affect how siblings were treated around money?
What class did you grow up in? Where are you now? What classes were your parents and grandparents from? How has this affected you? How has this affected you?
2http://www.thinkadvisor.com/2014/03/27/top-4-reasons-clients-leave-advisors (This was A Vanguard-Spectrem study asked 3,000 investors with net worth from $100,000 to $25 million to rank the main causes for switching financial advisors.
3http://www.academia.edu/1293046/The_Business_Case_for_Emotional_Intelligence. Joshua Freedman
The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds. The information contained herein should not be construed as investment advice or a recommendation of any product or service nor should it be relied upon to, replace the advice of an investor’s own professional legal, tax and financial advisors. Hartford Funds Distributors, LLC.