Financial Psychology Assessments: Holding Up The Mirror

“My neighbor is driving me crazy. She always says she’s the most frugal person she knows, but she’s spending every dime on *&#$* at Target. It’s not frugal. It’s stupid.”

A friend recently shared this sentiment with me, and it is an excellent example of the fact that some of us aren’t great at evaluating our own personal characteristics. Some of us lack self-awareness when it comes to specific attributes about ourselves.

Frugality is undoubtedly one of those areas. A lot of us think that if we find a bargain, something that was discounted at 75% off the original retail price, making such a purchase puts us in the frugal camp. Others think that because we don’t drive a luxury car or send our kids to private schools that we are, by definition, utilizing our resources well. Still, others compare their economic choices to those of their neighbors, friends, and family: if I drive a Honda while my neighbors all have new Teslas, I might begin to believe that I’m a thrifty shopper all the time.

What we know is that one decision doesn’t make a millionaire or place an individual squarely and indisputably in the category of “frugal.” Instead, it is our persistent pattern of choices and behaviors, along with our underlying characteristics, that typically define our personality. One of the benefits of taking a valid and reliable assessment of our characteristics is the fact that it provides a more accurate picture of who we really are. If economic success is a goal, then understanding our financial psychology–including our attitudes, behaviors, and personality–is the first step toward ensuring that we’re on the right path from a behavioral perspective. And having an objective view of our money-related characteristics and patterns of behaviors can jolt us out of complacency. In other words, by holding up an objective and unbiased mirror to ourselves, we can begin not only to understand ourselves better, but also start to improve in areas where we may have previously thought we were excelling.

Advisers who are confident and comfortable talking to their clients about their money-related choices and behaviors aren’t afraid for their clients to take an assessment that might indicate there’s an area to improve. They welcome the opportunity to guide their clients in those areas where they might fall short–or, to put it more diplomatically–be acting in a way that is inconsistent with their long-term objectives. Tens of thousands of individuals have taken the DataPoints assessments, and the advisors who work with us use the results to shape initial conversations, identify areas to improve and coach their clients to help them reach their financial goals. Assessment results allow advisors to assist clients in ways that go beyond the mechanics of financial planning and investment management.

The “holding up a mirror” piece seems to be one of the reasons that more financial planners, advisors, and investment managers are reluctant to use assessments. What if the evaluation tells my client something they don’t want to hear? What if they end up being low in an area where they thought they were high? What if the results don’t match up to how my client views himself when it comes to spending (or investing, or anything else)? I’m afraid to tell my client anything that isn’t positive.

In response to this concern, we often advise advisors to put themselves in the role of a consumer of financial services for a moment–that is, in the “shoes” of their client. Would you want to work with an advisor that was unwilling or unable to tell you that your financial behaviors are leading you to have to work longer than you want or to likely come up short in having the resources to pay for your kids’ college tuition?

Advisors who are reluctant to tread into conversations about lifestyle and other important-but-difficult topics often have a (potentially sub-conscious) goal of ensuring that their client is perpetually dependent upon their guidance. While this approach can be successful in the short-run, it is likely to be exposed eventually, and thus result in an angry (and alas, former) client in the long-run. As the financial services industry (slowly but surely) moves away from selling high-priced financial products based on feel-good promises and hollow assurances, new service areas will need to be incorporated into financial advice to support client value propositions. We believe that scientifically valid behavioral assessment and development will be a necessary component of that expanded service offering.

For a quantitative argument in support of the clear value of behavioral assessment and development as it relates to savings rate, see this post on 7% versus 17% savings rate.

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