Being a financial advisor has a lot in common with being a therapist. We listen to problems, offer advice, use different methodologies and lenses to analyze worldviews, and try to help our clients sort through their challenges most effectively. There’s also lots of listening and lots of understanding. Financial advice, like therapy, involves delving into our own backgrounds and experiences to understand and motivate solutions.
There’s a distinction here, of course: financial therapy is different from being a genuine registered member of the Financial Therapy Association (FTA). This is an organization made up of licensed professionals integrating cognitive, emotional, and behavioral aspects of well-being through a financial lens. While many financial advisors offer therapeutic advice, most of us aren’t licensed therapists and lack formal training in psychology. For the rest of us, the key is to think about principles of psychology and how they apply to a given situation. We need to humanize the numbers on the page.
For this article, I’m going to discuss that financial therapy for the rest of us. This is the everyday type of psychology we use when we make financial decisions; this is how our thought patterns, behaviors, and attitudes affect our financial well-being and our overall life outlook. We don’t have to get too far into the weeds to consider how psychology influences our spending and our saving. The goal is not to become a psychologist, but rather to become better at communicating, empathizing, and understanding.
Some people have genuine psychological challenges that negatively inhibit their finances. These range from gambling to addiction to compulsive shopping. Some are just genuinely bad at managing their money, unable to stop spending on wants or shirking their needs and the needs of their families in order to buy frivolous disposable things. Many just have bad habits ingrained and are unable to break free of the cycle keeping them in financial straits. For those with genuine psychological challenges they’d like to address, it’s best to seek out qualified professionals who can help manage the day to day process of betterment and recovery.
No matter what your challenge is for your money, there’s no shame in admitting it. We’ve all made bad purchases; everyone on the planet is guilty of wasting money at some point or other in their life. What matters is not one or two instances of falling off a wagon, but rather a sustained pattern of negative financial choices that can rack up debt and hobble us in our journey to do other things with our lives and wealth. It’s a problem when it holds you back; it’s a real problem when it outright prevents the things you want.
Gambling, for example, is a potent addiction affecting millions of Americans. Those who budget for limited gambling as an entertainment expense are different from those who gamble what they don’t have to lose. Thousands or hundreds of thousands of dollars gone overnight can severely prevent a good quality of life for most people. Houses, cars, families, credit card debt—the money could be used for just about anything else. Real gambling addiction can take expert resources beyond what a financial advisor can offer, but it’s always worth it to seek help and break the addiction.
The same goes for compulsive shopping. We live in a rapid all-you-can-eat-all-the-time world. Amazon has made it easier than ever to buy whatever you’d like whenever you’d like it. It’s safe to say that for those with a shopping addiction or a compulsive buying problem, navigating the world’s latest ecommerce tech has only made the process of breaking the habit that much harder. Even for those with casual money to spend, Amazon can prove far more alluring than we’d like.
How do we balance what we want with what we need? How do we know when a purchase is impulsive versus fun? There isn’t a mystical, universe-changing answer here. It all comes down to the numbers in our budget and our financial allocations.
The average person, however, simply doesn’t take the time to budget and keep to it. On the bright side, this is easier to solve than something like a gambling or a shopping addiction. But on the other hand, this can feel insanely hard to overcome. We’re not good at little changes and patience; it takes time to rectify and fix our finances properly. We like fast solutions that make it all go away while allowing us to keep living to our fun standards. Unfortunately, barring a sudden (and unlikely) financial windfall, the rest of us have to keep a budget and books.
Budgeting, if you’ve never done it before, will be mind-blowingly hard at first. I’ve discussed on this blog before how to best handle it, but it bears repeating that it truly can change your life. Besides paying down your debt, budgets also help you save for retirement, build a college fund for your kids, plan for new investments like a house or a car, and most importantly, give you peace of mind and some financial security for leaner times.
A surprising amount of psychology goes into our understanding of portfolios and balancing risk versus reward. It can feel a little bit like gambling to make investments in the stock market, for instance; there can be a high or a thrill to making monetary choices that might prove very successful. For others who are much more risk-averse, even the notion of investing money is repellant. We’ve all seen the stories of money lost, wasteful management, the 2008 crisis, and any other number of drawbacks.
Many people find they can’t take a step back and look at their finances dispassionately. That’s okay! It’s why I’m here. We can’t all be expected to rationally make good choices with something so personal all the time. An outside voice can help steer your financial future in a direction you might not have considered, and which you might be otherwise nervous about undertaking. Managing our fears and our anxieties, as well as reducing the copious stress that can arise from finances, is a core focus of communicating with an advisor, much like those elements are at play when communicating with a therapist.
The key to working with a financial advisor is understanding the role we play in managing your money. We don’t just give you good options or deal in numbers and statistics. We also get to know you and come to understand when you should take on more risk and when you should be more conservative about it. The objective analysis of a financial advisor can help you break down the walls keeping you from taking a leap when you need to. Alternatively, if you’re taking on too much risk, a financial advisor can help you rein it in and keep your portfolio building from becoming a gambling problem.
For example, many people have trouble objectively planning their estate. I can’t blame them: the topic involves death. Nothing is more personal than that. Retirement planning can be onerous enough. But the ability to think logically about our heirs after we die can be a serious roadblock for many people. We don’t like thinking of our own death, and we really don’t like imagining our loved ones and beneficiaries struggling to cope after we’re gone. A financial advisor can take the heartache out and make it a rational, thought-out process that functions like it should. It can be hard to envision the end goal, and that’s where the advisor steps in to alleviate the stress and show a path forward that is in everyone’s best interest.
Some valuable things to address before, during, and after a meeting with your financial advisor include:
- Am I getting what I want out of my finances?
- How do my life choices affect my financial standing? Vice versa?
- What behaviors or habits do I have that might negatively affect my financial situation?
- What level of wealth or income would make me happy?
- Can I control the risks that make me unhappy?
- Do I have the tools I need to fix my situation, or do I need external help?
Sometimes, what really matters in financial counseling and portfolio construction is simply a sounding board and a listening ear. Talking through goals and steps, like a therapy session, can be a terrific way to crystallize plans and help clients find what they want out of their financial lives in a natural way. The last thing a good advisor wants to do is impose constraints or unwanted pressure on a client. It’s a partnership. We need the give and take because it helps make the best choices.
