Two Words No Financial Advisor Should Ever Utter

With coronavirus fears swirling, a financial psychologist has advice for advisors.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Brad Klontz first got interested in financial psychology when he made a stupid decision. Not long after he graduated as a clinical psychologist from Wright State University in 1999, he saw a friend of his make $100,000 on the stock market in one year. Klontz was $100,000 in student debt at the time. So he sold everything he owned and invested all his money in the stock market, expecting the same returns. Not long after, the dot-com bubble burst, and Klontz lost almost everything.

“I thought, ‘Why did I do that?’” Klontz says. He began searching academic literature to figure out what was driving his decision making. But he struggled to find anything. “I discovered that the field of psychology had mostly ignored money. Which is weird, because money is the number one stress in most people’s lives.”

Klontz’s father, Ted, owned the Onsite Workshops treatment center in Nashville at the time. The two men sat down and devised a program, “healing money issues,” with a financial planner. Klontz went on to become one of the leading experts on the emerging field of financial and behavioral psychology, writing five books on the subject, and creating a graduate certificate at Creighton University, the credits from which can be applied towards an MBA with a specialization in financial psychology and behavioral finance.

These days, as well as working as associate professor at Creighton University, Klontz is also the managing principal of Your Mental Wealth Advisors, an advisory firm headquartered in Burlingham, California, with $300 million in client assets.

American Psychological Association rules prohibit therapists from entering into business relationships with their clients, including financial planning. But Klontz is able to use the techniques from his training in his work as an advisor. This training has been particularly useful in the last week as advisors have worked to reassure clients about the stock market rout.

Klontz says it’s better to be upfront with clients. “What you want to avoid, as an advisor, is avoiding,” he says. “When things are scary and you feel nervous, you might feel the tendency to avoid it, but now is the moment that your clients need you, more than ever.” Take time to think about what you’re going to say, Klontz says, and use the following three psychological tools to address the situation.

First, tell clients that panic is a normal response. “Go ahead and panic, but don’t panic about panicking, because that is just what humans do,” Klontz says. “It’s instinctual for us. If you think back, most of our brain development happened in prehistoric societies, where if you get bitten by a snake, you’re going to avoid anything else that’s slithering on the ground. Your brain is designed not to let that happen to you again. Cognitively, we’re always looking for ways that we know we’re safe.”

In exposure therapy, a psychologist would treat a patient by exposing them to the thing that makes them afraid, Klontz says: “A psychologist would eventually want you to pet a snake, right? Because what typically happens is you realize that you’re not going to die, and then your brain calms down.”

Instead of exposure therapy, advisors can employ what Klontz calls a “worst case scenario” exercise. He asks the client what they are afraid of. If they say, “Losing all my money,” he asks them what would happen if they lost all their money. They might say they would have to keep working past retirement or that they might lose their house. So he asks what would happen next. If they say they would have to move in with their parents, he says: “What would that be like?”

“What you’re doing is getting people to realize that they might not want to live with their parents, or they might have to delay retirement by a couple of years – but it’s not a life or death situation,” Klontz says. “And that really helps because your brain is treating it like it is life or death.”

Klontz recommends that advisors help clients to see the present moment with a different frame of reference. Instead of looking at the performance of the stock market over a narrow time period, such as the past few months, ask clients to zoom out and stretch the chart to a year, three years, five years or even fifty years, Klontz says: “You really get the perspective that wow, this is just a normal dip. We’ve done this many times before.” Remind them that many of them survived similar circumstances in 2008.

A third technique to battle catastrophic thinking among investors, Klontz says, is a concept called “mental accounting.” This is a psychological phenomenon associated with Richard Thaler, the Nobel Prize-winner and former president of the American Economic Association, in which people think of value in relative rather than absolute terms.

To battle this tendency, Klontz encourages investors to put their assets into separate mental buckets: one for cash, one for stocks, one for bonds and so on. “When they see that the stock market is down 10 per cent, that doesn’t mean their own investments are down 10 per cent,” he says. “Stocks might be down 10 per cent, but bonds might only be down 4 per cent. It helps to put things in perspective: half of the portfolio is being hit hard right now, but the other half is doing fairly ok.”

Advisors must look after their own wellbeing as well as their clients’ wellbeing. In a study of financial planners after 2008, 90 per cent of those surveyed were showing moderate to severe symptoms of post-traumatic stress, including intense anxiety, fear, difficulty sleeping, and difficulty concentrating. In the paper, called “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress,” 40 percent of respondents reported symptoms that could be described as severe.

This time, Klontz says, it’s a double whammy. Advisors are dealing with clients facing two large causes of stress: “People are really anxious and stressed right now – it’s not just, ‘Oh no, my retirement money,’ but ‘Oh no, I might die.’”

Nonetheless, there are two words an advisor should never say: calm down. “It’s the most useless thing,” Klontz says. “It might even discredit you. Your client is outsourcing their worries about their portfolio to you. So don’t tell them nothing is happening, because obviously, something is happening.”

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