Wednesday, June 10, 2015

Why You Need An Emotional Adjustment Before Making Lasting Financial Change by Rick Kahler, CFP

How's it goin' everyone!

Last month I blogged about a topic I didn't even know existed, Financial Therapy, and whether or not it was legitimate.  The topic of investor psychology and how they affect capital markets is probably what most of us are familiar with.  But this is just a slice of the pie, as I discovered in reading the article cited in my blog post back on May 19th.

It's intuitive to believe that many of our regular, everyday decisions, are a combination of rational and emotional.  But how much does our emotional brain play a role in everyday, non-investing, money decisions?  I can't answer that, but as you will read from my learned guest, Rick Kahler, apparently there is a whole lot of underestimation going on (about our emotions and money) and both you and I should really start trying to be more conscious about it.  I'd like to thank Rick and his co-author, Kathleen Fox, for number one, opening my email.  Number two,  for agreeing to do a guest post.  And finally, for just caring.  It's hard to get people to take time out of their busy schedules these days to share their knowledge with others.  Rick and Kathleen, you've made a new friend in me, and also with all CCM blog readers!  Now here's Rick:

Why You Need An Emotional Adjustment Before Making Lasting Financial Change by Rick Kahler, CFP

If you want to stop a conversation cold, try bringing up the topic of financial therapy. It isn't a field most people have heard of, plus it combines two subjects that most people want to avoid: mental health and money. Put them together, and you have a real conversation killer.

Financial therapy addresses a need that, until recent years, most financial and mental health professionals didn’t even consider. The unconscious and unspoken thoughts, beliefs, and feelings around all things financial are crucial to our financial decisions and well-being. Yet few professionals in either financial planning or therapy have had the skills or knowledge to address that aspect of clients' financial and emotional health.

For years, financial advisors have been frustrated by a pattern of behavior that goes something like this: A client comes in wanting to change a financial behavior. Maybe the issue is needing to save more for retirement, pay off debt, or create an estate plan. The advisor works with the client to develop a suitable financial plan. The client says the plan is great and agrees to follow it. The client leaves. When the client comes back six months later, nothing has changed.


The problem in such a scenario isn't that the plan for financial change is flawed. It's that the plan doesn't help the client make the emotional changes that are necessary in order to make the financial changes.

As many financial professionals are beginning to understand, even though money seems to be all about numbers and knowledge, we don't make financial decisions logically. We make them, as we do most of our decisions, emotionally.

In addition, because money is such an essential element in our lives and carries so much emotional weight, most of us carry emotional baggage that shapes our financial decisions. We all have unconscious beliefs about money, or "money scripts," which are often formed by our childhood experiences and which are only partially true. An example of a money script is "More money will make everything better."

Because money scripts are unconscious and we hold them at such a deep level, we may follow them even in circumstances where they are unhelpful or even self-destructive. This is especially the case when money scripts have been formed by traumatic or difficult childhood circumstances. In such situations, we may not be served well by the emotions that are so important in our financial decisions.

This is where financial therapy can make a crucial difference.

Certified financial planners aren't required to have training in even basic communication skills, much less the more complex fundamentals of psychology or neuroscience. Likewise, therapists and psychologists aren't taught to deal with money, either in working with clients or in managing their own businesses.

As a result, neither profession provides the tools to address clients' problematic and often self-destructive beliefs and behaviors around money. Destructive behaviors around money usually aren’t about the money. For this reason, giving people more information about how money, investing, or financial planning works isn't enough.

Typically, financial therapy involves a client-centered, fee-only financial planner and a therapist or psychologist who conjointly work with clients. In my experience, this process helps clients who are in some way financially stuck make significant progress.

The one thing missing in the evolution of financial therapy until recently was the involvement of academia. Now, the Financial Therapy Association unites academics, therapists, and financial planners in a common pursuit of defining and developing the concept of financial therapy. This is essential if financial therapy is to become a profession.

The FTA says, "Financial therapy involves the integration of cognitive, emotional, behavioral, relational, and economic aspects that influence financial well-being, and ultimately, quality of life."

Admittedly, this definition is very broad. Anyone who applies a therapeutic methodology in helping someone deal with a financial issue probably qualifies as doing financial therapy. My personal view (not speaking for the FTA, of which I am a past president) is that financial therapy is conducted either by two professionals with formal education, one in financial planning and the other in counseling, or by one professional who has formal training in both disciplines. After evaluating the client’s emotional and financial health, the financial therapist(s) use a range of techniques based on experiential therapy, financial planning, dialogue, communication, and behavior change to improve the client’s financial and emotional health.

By that definition, my company doesn’t do a lot of financial therapy as we don’t yet have anyone on staff with formal training in counseling. We do have one of our associates obtaining her master’s in counseling. Today, I call what we do with most clients “financial coaching.”

We do work with a therapist to facilitate some of the exercises we use to help new clients identify their authentic life goals and gain a greater understanding of their relationship with money and how they make financial decisions. While this is more of a financial coaching engagement than a therapeutic engagement, it familiarizes clients with the idea of financial therapy. As a result, clients who could benefit from deeper financial therapy may be more inclined to take advantage of it.

Where I see the real need for financial therapy is when people get stuck around financial issues like estate planning, cash management, or assuming appropriate investment risk. They know what is in their best interests to do, but try as they may, they just can’t do it. That's when financial therapy becomes incredibly helpful. The client works both separately and conjointly with one of our planners and our therapist. What emerges from the process is often life-changing and even life-saving.


Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and president of Kahler Financial Group in Rapid City, South Dakota. He is the co-author of several books on the integration of money and emotions, including Conscious Finance and The Financial Wisdom of Ebenezer Scrooge.

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