Three Keys to a Meaningful Conversation About Money and Emotions

by Dr. Rob A. Ronin, Licensed Clinical Psychologist, Registered Financial Consultant

Okay, let’s start with a basic premise: every financial decision has an emotional component and a practical one. Want an example? If you’re not driving a stripped-down white Ford Focus, you probably bought your car because you wanted it to make some kind of statement about who you are. Are you sporty, sensible, sexy (anybody else into alliteration?), you get the idea.

The problem is that the emotional component is the part that usually makes us do something “stupid” or something we might possibly regret. I have personal history with financial stupidity. The first big check I ever received went toward the purchase of a 1988 Mercedes 420SEL that I bought off the showroom floor. If I’d dumped the money into an S&P 500 index fund instead, it would be worth about a half million dollars today, even with all the market gyrations. I drove the Mercedes for about ten years (out of spite more than anything else) and then traded it for a more practical Toyota. 

I could use that half a million, too, let me tell you.

So what’s the deal with money and emotions and financial advisors?

Interestingly, most advisors are well aware that emotions affect financial decisions, but many are clueless regarding what to do about it. You can’t blame them, really. They self-select to go into the financial industry. If they were interested in dealing with “emotional stuff” they would have become social workers or soap opera writers. I know, I know, there are some very psychologically-minded financial folks in the business. They’re often extremely successful because they get the emotional stuff so well.  However, I know many financial professionals who just want their clients to take their advice, refer new clients to them, and leave them alone the rest of the time. Who can blame them? It’s a busy life.

Why should financial advisors make the effort to figure out how to talk to clients about the emotional component of financial decisions?

We all know that clients can be their own worst enemies. Nobody ever comes right out and says it, but we all know it’s true. So, if you can help them avoid doing something “stupid” or careless they will have better financial outcomes. This is great for them, and it will give you more of their capital to manage, and— they will invite you to their holiday parties!! 

I’m going to give you another reason to help them with the emotional stuff, and it may or may not appeal to you. It helps you to more quickly establish a rapport with them. How? The best way to talk to people about emotions is to make an emotional connection to them. The experience of being emotionally connected to someone––in a professional way, of course––makes them more comfortable with talking about their emotional reactions to things in general. Hence, establishing good rapport is the secret to helping clients learn to avoid emotion-based mistakes in financial situations.

Here’s another reason: Connecting to people emotionally can be a very satisfying experience. It allows you to become an important part of their lives and they end up being an important part of yours. Go figure, but it really works. When you connect emotionally with your clients they will like you more, you will like them more, and you’ll end up doing a lot more business with them because people want to work with folks whom they like and trust. But most importantly, you’ll have more fun and receive more satisfaction from your work. We can all use more of that.

Here’s a way for financial professionals to have a meaningful conversation with clients about the way that emotions impact financial choices.

First of all, when I say ‘meaningful,’ I’m talking about a conversation that’s solution-focused. Here are the three keys to a meaningful conversation about money and emotions:

• Identify and discuss the context in which emotions impact financial choices. Specifically, recognize that every financial role has its own set of emotional vulnerabilities. Since you are working with investors, familiarize yourself with the kinds of emotional mistakes that are most likely to affect investors in various types of situations.
• Let your clients know that emotion-based financial mistakes occur in patterns (which have been identified by behavioral finance, neuroeconomics, cognitive psychology—but that’s a conversation for another day), and familiarize clients with those patterns so that they can recognize the mistakes before “stupidity” or irrationality sets in.
• Have a plan for helping clients substitute rational thinking for emotion-based thinking. A plan impresses the heck out of people and creates the confidence that things are going to work out all right.

How do you do all that stuff? Thought you’d never ask. Various fields of research offer pieces of the puzzle and you can put them together (or use my training to do it for you). Some of the fields include behavioral finance, neuroeconomics, and social and clinical psychology. I also think that 12-step programs such as Debtors Anonymous and Gamblers Anonymous provide valuable information that describes many of the ways that people sabotage themselves financially. 

You want an example of a financial mistake that affects almost everyone? Researchers in behavioral finance have identified ‘myopic loss aversion’ as a phenomenon that causes people to invest too conservatively because of focusing too much on short-term losses while overlooking the prospect of long-term gains. Knowing that this pattern exists and discussing it with clients can help them increase risk tolerance and make you look good. I’ve pulled over 75 of these patterns of automatic mental mistakes from various fields of research and I’ll talk about them in future articles.

How about an example of how to help clients substitute rational thinking for emotion-based thinking? Well, cognitive behavioral therapy (CBT) is designed to do just that. Drs. Aaron Beck and David Burns (among others) have written extensively about CBT.  A lot of my work involves teaching people to apply cognitive behavioral techniques to empower them to avoid emotion-based financial mistakes.

So, get yourself organized and familiarize yourself with the patterns of financial mistakes that occur in various financial roles and then build your skills to help clients substitute rational thinking for emotion-based thinking, so that they don’t buy a Mercedes that will haunt them long after the thrill is gone. 

Wrapping it up

For what it’s worth, I make my living helping people lead more contented and satisfying lives by avoiding the impact of emotions on financial decisions, and I help financial professionals gain the skills to save clients from their own stupidity, irrationality, or carelessness. It’s a dirty job but someone has to do it.

© Rob Ronin

Dr. Rob Ronin is a licensed clinical psychologist (SC#835) and a Registered Financial Consultant (#2706).  He has authored more than 30 books and training manuals to help decision-makers––and the financial professionals who work with them––reduce the impact of emotions on financial choices. You can find out more about Dr. Rob at www.MoneyAndEmotions.com. Dr. Rob can be reached at DrRob@MoneyAndEmotions.com or (864) 275-6539.