How to recognize and eliminate poor financial behaviors
Despite the widespread availability of financial advisors, many consumers choose to go it alone and manage, or mismanage, their finances without professional assistance. Even those who do consult a financial planner may not follow the advice provided to them. This is why there is a need for financial professionals who understand the factors that motivate people-even high net worth clients-to change their financial behavior. Poor financial decisions can have long term negative consequences. Experts warn of an impending financial crisis for the country as a whole if large numbers of Americans fail to manage their finances wisely. Therefore, understanding why some people adopt recommended financial practices, while others do not, is critical to the design of effective financial planning.
The trans-theoretical model of change (TTM) is useful to understand the readiness to adopt positive behaviors. TTM was developed in the 1970's and first applied to a variety of health related behaviors, but recently has been discussed as a model for financial counseling. The trans-theoretical model of change identifies ten major processes of change:
1. Consciousness-raising
2. Social liberation
3. Dramatic relief
4. Self re-evaluation
5. Self liberation
6. Counter conditioning
7. Stimulus control
8. Contingency management
9. Helping relationship
10. Environmental re-evaluation
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Financial planners can use these processes to develop a variety of effective and appropriate interventions.
Financial planners need to understand behavioral finance concepts in order to counter irrational behaviors with solid financial planning principles. Some common irrational behavior may include:
- Mental accounting, which is the tendency to treat some sources of money differently than others.
- Overconfidence occurs when an individual overestimates his skills, abilities, and knowledge.
Behavioral finance errors can be reduced through increased awareness and by planned counteracting behaviors.
A variety of incentives exist to encourage clients to adopt positive financial behaviors. Financial planners should consider all possible methods for providing ongoing client support. Some examples are: website calculators, Microsoft Excel templates, periodic print newsletters, seminars and even daily email messages with a financial tip for the day. Providing exceptional support services that stand out from the rest may help keep clients and to gain potential clients. Set financial goals with clients, goal setting is best performed with support services. These services could include group motivational programs sponsored by financial planners for initial goal setting and periodic progress reviews.
Putting as many financial behaviors on automatic pilot as possible is a simple way to promote positive changes. Automation is a key to financial success because the automated system works without the need for continuous thought and discipline. Financial planners should consider adding an "automation inventory" to their services. These services would assess how many of a client's financial practices are currently automated and how many of these practices could be. Completing the actual paperwork required for automated systems so that clients are less likely to procrastinate is another added service that would be valuable.
Financial planners may need to pay attention to clients' personality traits and general outlook on life. A common trait among successful people is their positive attitude. They look at challenges as opportunities, learn from their mistakes, and make the best of difficult situations. Clients who are not optimistic, disciplined and focused may require special motivational strategies designed especially to foster successful outcomes and positive thinking.
Financial planners should personalize information and advice. One way to personalize information is to help clients track their progress over time, comparing key pieces of financial data such as net worth and debt-to-income ratios in a graph format or by using a chart. Providing inexpensive professional financial check-up services or progress reviews should be considered by financial planners. To be a successful financial planner, you must offer a wide range of services that motivate client's to exhibit good financial behavior.
