With the arrival of behavioral finance and life planning, the importance of adding an understanding of basic psychology to an advisor's skillset is becoming ever more apparent. Now, a relatively new branch of psychological study has emerged from which some interesting parallels can be drawn to the financial planning process.
As one of the field's newest arenas, "positive psychology" differs from most other psychological specialties in that it focuses on understanding human prosperity. For much of the last century, most psychological research was focused on the negative—i.e., identifying problems and finding ways to cure mental illness.
By contrast, positive psychology starts with the premise that it takes more for an individual to truly thrive than simply the absence of problems. The question becomes, what does it take for a normal, mentally healthy individual to move beyond a neutral state of mere existence to one of fulfillment and emotional prosperity?
While on the surface the question may seem somewhat existential, it goes straight to the heart and purpose of the financial planning process. "Our job is not to maximize returns," says Harold Evensky, president of Evensky & Katz, a fee-only financial advisory firm based in Coral Gables, Fla., "but to help our clients maximize the quality of their lives as they define it."
Like psychology, much of what we do as financial advisors is also focused on the negative—identifying and solving our client's financial problems. For the mass market and mass affluent, this often means helping them manage risk and accumulate enough assets to achieve basic financial security—in this analogy a neutral state.
But once those problems are solved and a certain level of affluence is achieved, how do we help our clients move beyond this basic financial security to accomplish those personal goals that make life worth living? As importantly, is it our role to do so?
Clues to answer the first question might be found in the new book Flourish: A Visionary New Understanding of Happiness and Well-Being, by Dr. Martin Seligman of the University of Pennsylvania's Positive Psychology Center. In it, Dr. Seligman introduces his theories of happiness and well-being.
Seligman's original theory of authentic happiness suggests that there are three levels of happiness: positive emotions, engagement and meaning.
Positive emotions are created by those things that bring us temporary pleasure. From a financial planning perspective, creating an income sufficient to allow the client to participate in whatever activities bring them joy—dining out, travel, golf, etc.—will allow them to achieve what Seligman calls the "pleasant life."
The second level of happiness is engagement. Here, the individual becomes so engrossed in whatever activity they are pursuing that they lose track of time and become virtually oblivious to anything else going on around them. Clients often indicate a desire to find engagement through expressions like, "I don't want to retire so that I never work again. I want to retire so I can finally do what I've always wanted to do."
Finally, Seligman's third level of happiness is in finding meaning by belonging to or serving something that you believe is bigger than yourself or serves humanity in a meaningful way. From a financial planning perspective, our thoughts here might immediately turn to charitable giving or other philanthropic activities.
More importantly however, is the need to actively and personally participate in these meaningful activities. In fact, in a 2011 report Insights on Wealth and Worth, U.S. Trust found that affluent investors cited "the ability to take action on important goals" twice as frequently as "giving back through philanthropy" as a "very important" measure of personal worth.
As advisors, we can use our understanding of these levels of happiness to not only help our clients achieve their most important goals but also strengthen client relationships. "We know that these three elements are a critical part of the overall human experience," says San Francisco based Financial Psychologist Joanne Martin-Braun, PhD. "If advisors listen to their client's goals through the lens of this three-level model they may be able to identify gaps and initiate conversations that produce more meaningful client goals."
Martin-Braun says that advisors should "listen for what's not there" when discussing their client's goals. While many clients may indeed be sufficiently satisfied with the "pleasant life," others may be looking for more engagement or meaning but not know how to express what they're feeling. Simply telling stories of what other clients have found to be important is often enough to help clients define and articulate their own goals.
Additionally, a client may be hesitant to express their true goals if those goals seem at odds with maximizing their financial plan. Evensky tells the story of a client physician who loved his job but was considering retiring because continuing to work would actually cost him $20,000 per year in lost retirement benefits. "I told him to keep working anyway," says Evensky. "First because he could afford to, but also because it would likely cost him $100,000 a year in therapy to find something equally meaningful."
In what might be considered financial blasphemy, additional research has found that increased income provides an ever-diminishing contribution to overall well-being. A study released last year from Princeton University's Woodrow Wilson School concluded that for individuals with incomes of less than $75,000 per year, an increase in income did indeed lead to improved day-to-day happiness, but for incomes above $75,000 the correlation between increased income and improved daily happiness essentially disappeared.
All of this, however, raises the secondary question: Is it our role as financial advisors to assist clients in finding happiness or is it our role to remain strictly on the financial side? As with any service an advisor may offer, it comes down to training and competency. "The fundamental difference between a planner and a broker is that a planner will go to the next step of helping a client make good decisions about their goals and how their resources will help them accomplish those goals," says Evensky. But, he cautions, advisors must be careful not to overstep their expertise. "It's not my role to help clients discover what makes them happy. Most planners are not trained to do that. It's my job to help them achieve it once they know what it is."
For those who do advocate a life planning approach, the benefits of helping clients find meaning and engagement go beyond deeper client relationships; they actually lead to increased business. In a 2008 study released by FPA Press, (Communication Issues in Life Planning: Defining Key Factors in Developing Successful Planner-Client Relationships) the Life Planning Consortium found that clients of planners who help them identify meaningful personal and financial goals are almost twice as likely to follow through on planner recommendations and provide referrals to others.
As with all areas of planning, advisors should only venture into areas in which they have been competently trained. But with increased understanding of how we define our personal goals, training in the basics of positive psychology may very well become an essential tool for financial advisors to possess.
Keith Weber is a program management consultant and practice management coach. More information can be found at www.kjweber.com.
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