If it seems like your financial planner has gotten more touchy-feely lately, it might not be your imagination. The powers that be recently made the “psychology of financial planning” an official knowledge domain for CERTIFIED FINANCIAL PLANNER™️ certification. This formally recognizes the largely underrated role this less quantitative side of money plays in financial outcomes. It’s a little early to gauge the long term impact, but here’s why it matters to you and your money.
Financial planning embraces its “softer side”
In 2021, the CFP Board of Standards expanded its curriculum to include the psychology of financial planning as an education requirement. The news dropped with little fanfare, perhaps because: 1) It’s only 7% of what CFP®‘s study. And 2) most of us were preoccupied with other pursuits, most notably trying not to get COVID-19. But it's worth pausing to acknowledge this important milestone for financial planning.
To understand why, let’s look back. When I was preparing for the CFP® exam in 2001, it covered a dizzying array of dense, mostly quantitative subjects. Indeed, cash flow, insurance, investments, taxes, retirement, and estate planning formed the bulk of it all the way through 2021.
Then into the mix, enter the psychology of financial planning. It’s a topic so unlike the others as to trigger a chorus of The Muppets “One of These Things.” Although not 100% unprecedented, such material previously represented a mere 2 not-explicitly-required subtopics of the overall 72, smacking of afterthought. Officially earmarking even 7% of the pie validated what had become increasingly impossible to ignore: money mindset matters.
Why change now?
In my view, this formal elevation of the psychology of financial planning reflects underlying developments on three fronts.
1: Evolving cultural norms
I’d argue that a seed for this shift was planted with the 1978 advent of the 401k plan. In the decades following, the 401k became the financial equivalent of a snowball rolling downhill. That placed the stewardship of vast sums of money into the hands of individual investors, not all of whom have the training or temperament for it.
As an unintended consequence, it also offered individuals a new power to “put your money where your mouth is.” This spawned alternatives such as socially responsible and ESG investing.
Then along came COVID, giving rise to market upset, self-reflection, and reevaluation of individual and societal priorities. That paved the way for even greater interest in “softer side” topics like behavioral finance, values, attitudes, etc., in financial planning.
2: Ever smarter technology
Speaking of COVID bumps, it will come as no surprise to see technology on a list of change-drivers. As with other industries, financial services automation continues its Pac-Man-like crusade to gobble up previously manual tasks. These days, virtually free Roboadvisors complete in seconds tasks that just a decade ago took me hours using $1000+ software.
Delegating rote work to computers has freed up planners to direct more attention to the “squishier” aspects of their role. Glass-half-empty types might see this as scrambling for a way to justify their continued employment. It's a fair point, if you ignore the other factor at work here…
3: Research shifts its GAZE from math to mindset
The push to incorporate psychology as a financial planning consideration is not happening on a whim. Rather, it is at least in part in response to ongoing research exploring why individual investors consistently underperform the markets. Hint: It’s got little to do with financial expertise and everything to do with human nature.
As more thought leaders turn their focus in that direction, new findings suggest that mastery of the less quantifiable stuff could be worth more than in-depth expert analysis. Or as Morgan Housel, author of the acclaimed The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, concluded:
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
Or more bluntly: “A genius who loses control of their emotions can be a financial disaster.”
And consider industry luminary and self-described “money nerd” Michael Kitces, who holds an alphabet soup of technical accreditations. Back in the mid-2000s, Kitces became known presenting his super detailed quantitative analysis on safe retirement withdrawal rates to conference goers including yours truly. These days, his blog, podcast, and webinars also prominently feature a wealth of content (npi) on behavioral finance, advisor and client wellbeing, trust, communication, and the like.
OK, so anecdotal evidence from two experts does not a valid research project make. And I might not have recounted the backstory with 100% accuracy. Nonetheless it seems clear money psychology should be part of the financial planning conversation. Kudos to the CFP Board for making it official.
So what’s it to you?
Whether you welcome or dread the change that’s a-coming, there’s no putting this horse back in the barn. True, the new domain represents a mere 7% of what CFP®‘s study and it’s still optional for all but new certification candidates. As such, clients who prefer to stick to math and skip the “your money or your life“ conversations should have no trouble doing so.
On the other hand, the trends discussed — and the outsize benefits they deliver — are only poised to expand. New opportunities, products, and services are popping up every day for those who wish to leverage them. Whether you work with a planner or DIY, continually educating yourself about the psychology of financial planning could be the ultimate risk-free investment.
p.s. For more on what money has to do with mindset, Housel’s book is a great place to start. Prefer audio? Hear him discuss this with Dan Harris, TV-anchor-turned-podcast-host and author of Meditation for Fidgety Skeptics: A 10% Happier How-to Book.