Shot of a young male teacher giving a lesson to his students on the lecture hall

Content provided by Kostya Etus, CFA, CLS Portfolio Manager

Psychology and human behavior are some of the most interesting and challenging aspects of financial management. Understanding the motivations behind a client’s behavior and how to effectively encourage him or her to develop healthy financial habits can mean the difference between success and failure for our clients — and ourselves.

Recently, I attended a wealth management conference and picked up a few tips on financial psychology. While most of these deal with client and financial advisor interactions, they can be used in other situations. I have actually tested some out on my wife in our conversations about finances (which in the past have not ended well), and they work!

  • Create a relaxed atmosphere.

A desk between you and a client creates stress, so use a living-room-type setting for a better conversation. Also, scrolling tickers (such as those on CNBC or ticker boards) create anxiety, so turn them off.

  • Develop an open rapport.

This can be facilitated through body language: an open posture, smiling, eye contact, mirroring (do what they do, talk like they talk). Basically, do what you would do while flirting at a bar (well, not exactly what you would do).

  • Remember, people don’t change.

Those who are married know this pretty well. Don’t try and force people to change their spending and saving habits. Telling someone they spend too much is discouraging. And, they probably already know they spend too much, which is why they are talking to you. Help them adapt, and guide them to want to do it themselves (e.g. help them visualize something to save for).

  • Don’t pepper people with questions.

Questions can sound like accusations (“Why did you spend so much last month?”) and create more stress and resistance. Use “tell me more” statements to decrease resistance. For example, if someone says, “I spend too much, and I don’t think I save enough for the future” (the two most common client concerns), you respond with: “Tell me…

  • …what happened to make you feel things need to change.”
  • …about a time when you have successfully faced a challenge like this.”
  • …what you are ready to do now.”

These statements help convey a sense of importance, confidence, and readiness.

  • Other best practices:
    • Wear glasses: They make you look smarter and build confidence.
    • Lower your voice tone: A higher tone is perceived as aggressive.
    • Give a drink and take a drink (water, of course): It helps people relax.
    • Show and tell: Use pictures and graphs (preferably ones that start at the bottom left and end at the top right), use stacks of coins or dollars to represent growth, and use real numbers to show outcomes (exact dollar amounts that need to be saved and at what age).
    • Visualization: Help the client visualize an ideal retirement that is personalized to him or her (the dream is not a drink with an umbrella on a beach for everyone). Effective visualization can lead to more saving.

The conference had loads of other useful insights. Here are a few of the most helpful:

  • Count your cash.

People feel better when they are counting how much money they have (give it a shot, take out your cash and count it) but worse when counting expenses. A useful application here might be: Don’t try to figure out how to reduce expenses by counting up credit card transactions.

  • “Save more” might make us spend more.

Marketing slogans and signs that highlight saving actually promote spending. For example, Walmart’s “Save Money. Live Better.” slogan encourages customers to spend more because they believe they have saved. So simply telling clients to “save more” is not going to be very effective.

  • Don’t trust your primal brain.

99% of brain function is automatic; it works off primal instincts. For example, when people go to conferences, they typically sit as far to the back as possible. That is a subconscious decision, which has been engraved in our DNA over thousands of years: we want to be closest to the exit in case a predator appears. But when handling money, we shouldn’t rely on our instincts. We should use the logical portion of our brains. Well, the logical portion of our brains shuts down when we are stressed. So, don’t discuss finances after a hard day.

  • Watch out for the tribal effect.

The follow-the-herd mentality can be a powerful urge. Our primal instincts tell us if we are away from the herd too long, we will die. So if investors see their friends making money on a hot stock or by flipping houses, they might think they should be doing the same thing — another example of when it’s not a good idea to trust our instincts (especially when dealing with investments).

  • Be your own person.

Most people manage money the way their parents did. For example, if someone lived through the Great Depression and lost all their money in the bank, they would have a strong aversion to putting money in the bank, and that could be passed down to their children. As times change, we all need to be open to new ideas and not tied down by old beliefs.

  • Cash decreases spending.

Credit card companies have gone above and beyond to ensure that nobody uses cash anymore. When you have cash, it is something physical that you can use up; credit cards (or mobile phone transactions) make you feel like you have no limit. That said, the decrease in the use of cash seems to have contributed to a decrease in crime over the last two decades.

I hope you found this useful and can utilize some of these tips and tricks in your personal and professional lives. Thanks for reading.