by Barbara O'Neill, Ph.D., CFP®, CRPC®
Understanding why some people adopt recommended financial practices and prosper, while others do not, is critical for effective financial planning. This article describes eight key factors that can serve as a blueprint for efforts to motivate clients to develop positive financial behaviors:
1. Readiness for behavior change
2. Behavioral finance concepts
3. Incentives to change financial behavior
4. Assistance with planning and goal-setting
6. Optimism, control, and other positive personal qualities
7. Addressing obstacles to the adoption of recommended behaviors
8. Personalization of financial information and delivery of services
The article includes practical applications for financial planners.
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. Thus, there is a need for financial professionals to understand the factors that motivate consumers—even high net worth clients—to change their financial behavior.
Experts warn of an impending financial crisis for individuals and the country as a whole if large numbers of Americans fail to manage their finances wisely.1 Poor financial decisions, such spending lump-sum pension distributions, can have long-term negative consequences. Therefore, understanding why some people adopt recommended financial practices, while others do not, is critical to the design of effective financial planning engagements, media interviews, and educational seminars.
Although some studies have linked higher levels of financial literacy with higher household income,2 earnings are not necessarily a determinant of financial success. At every income level, there are individuals who achieve their financial goals or make progress, and others who do not. This article describes eight key factors that can serve as a blueprint for efforts to motivate current and potential clients to develop positive financial behaviors.
Factor #1: Readiness for Change
The transtheoretical model of change (a.k.a. TTM or stages-of-change model) is a useful framework for understanding learners' readiness to adopt positive behaviors. It was developed in the 1970s and first applied to a variety of health-related behaviors, including smoking cessation, alcohol abuse, and weight control.3 More recently, the TTM has been discussed as a model for financial counseling4 and tested empirically with a sample of Cooperative Extension financial program participants.5
Empirical research with the TTM has shown that behavior change is a process, not a single event. People progress through five distinct stages:6
1. Precontemplation (no intention to change behavior)
2. Contemplation (awareness of a problem and serious thinking about overcoming it)
3. Preparation (commitment to take action within the next month)
4. Action (making specific behavior and/or environmental modifications to overcome a problem)
5. Maintenance (working to prevent relapse and consolidate gains attained during the action stage)
The TTM also identifies ten major processes of change:7
2. Social liberation
3. Dramatic relief
7. Stimulus control
8. Contingency management
9. Helping relationship
10. Environmental reevaluation
These processes facilitate movement through the stages of change. For example, consciousness-raising can help pre-contemplators become aware of a problem that requires a behavior change (for example, inadequate retirement savings) and helping relationships (such as family and friends) can provide those in the action stage with social support.
Table 1 describes the change processes and illustrates them with financial examples:
Financial planners can use the TTM to develop a variety of effective and appropriate interventions. For example, awareness activities are necessary for pre-contemplators and contemplators (read: potential clients) to convince them that a problem exists or that there is a better way to manage their finances. For those in the preparation and action stages, who have already been convinced of the need to change, "how to" information (such as how to read a mutual fund prospectus or request a credit report) and a description of a financial advisor's available services are more critical.
Empirically tested statements to indicate a person's readiness for change are available in the trade book Changing for Good (http://www.amazon.com/exec/obidos/ISBN=038072572X/iafpA) and in the academic studies cited previously. These statements are based on the number of months until a change is anticipated (for example, one month for people in the preparation stage) and can easily be adapted to financial topics for financial planners to assess clients' readiness to make behavioral changes.
Factor #2: Behavioral Finance Concepts
Financial planners need to understand behavioral finance concepts in order to counter irrational behaviors with solid financial planning principles. A good basic reference for clients on this topic is Why Smart People Make Big Money Mistakes and How to Correct Them (http://www.amazon.com/exec/obidos/ISBN=0684859386/iafpA) by Belsky and Gilovich, which discusses common irrational behaviors:8
- Heuristics, which are mental guidelines, or shortcuts, that are used to simplify decision-making. A common financial heuristic is the 1/n heuristic, where n is the number of investment options in an employer retirement savings plan. Plan participants simply split their money evenly among the available options, which are used as a de facto asset allocation formula.
- Mental accounting is the tendency to treat some sources of money differently from others. An example is earning 2 percent on funds in a passbook account instead of using the money to repay an 18 percent credit card because the two accounts are viewed separately.
- Overconfidence is an overestimation of one's skills, abilities, and knowledge. Research indicates that people often put too much stock in what they know (or think they know). For example, if they work for an employer or buy a certain company's products, people automatically assume they know enough about it to make an informed investment decision.
Behavioral finance errors can be reduced through increased awareness and by planned counteracting behaviors. Below are some recommendations, suggested by Belsky and Gilovich:
- To avoid the mental accounting error of carelessly spending windfalls, such as bonuses and tax refunds, park "found" money in a money market fund for three to six months. Clients (widows, for example) experiencing emotional distress, should especially avoid making any quick decisions.
- To take advantage of the positive aspects of mental accounting, sign up for direct deposit and automatic savings plans. Money saved will then be accounted for mentally as "savings" instead of "spending," and be less likely to be spent.
- To earn average investment returns, instead of overestimating odds of beating the market, select a broadly diversified index fund such as the S&P 500.
Factor #3: Incentives to Change Financial Behavior
A variety of incentives exist to encourage people to adopt positive financial behaviors. Financial planners can help consumers become aware of them. Examples include income tax deductions and credits and state (and now a federal) law that mandates free credit reports upon request. Unfortunately, evidence also exists that many incentives to improve financial well-being go begging. For example, only a small percentage of taxpayers put the maximum allowed into 401(k) plans, which is $14,000 in 2005, plus an additional $4,000 for those age 50 and older. A 2003 study found that one of the major methods of uncovering identity theft, checking a credit report annually, was the least frequently performed practice on an online self-assessment tool.9
Financial planners should consider all possible avenues for providing ongoing client support (a.k.a. "adding value). Examples include Web site calculators, Microsoft Excel templates, "financial tip of the day" e-mail messages, periodic print newsletters or e-zines, seminars, and "concierge" services such as assistance with major purchasing decisions. In other words, make clients and potential clients say "Wow" because your practice provides exceptional support services and stands out from the rest.
Factor #4: Planning and Goal Setting
Evidence exists that many people spend little or no time setting goals and planning. For example, the Retirement Confidence Survey findings indicate that, while two-thirds of workers report saving something for retirement, many are saving blindly because they haven't calculated how much money they will need by the time they retire.10 A study of financial practices by www.Bankrate.com found that Americans score higher on basic, routine practices than financial tasks that don't have dire consequences or don't have to be done frequently, such as adjusting W-4 payroll tax withholding allowances, calculating net worth, and checking credit reports.11 O'Neill and Xiao studied a convenience sample of 1,007 respondents to an online financial behavior quiz and found that having written financial goals, with a date and dollar cost, was the second least frequently performed financial task (after drafting a current will).12
Perhaps, as in the case of incentives, discussed above, goal setting is best performed with accompanying support services. These could include group motivational programs sponsored by financial planners or brief consultations for initial goal setting and periodic progress reviews. Increasing numbers of financial planners are also charging hourly rates of $125–$240 for middle-income clients to receive advice on an as-needed basis.13
Factor #5: Simplicity
Personal finance is not an easy topic to understand. Instead, it is usually high maintenance. Many people are starved for leisure time and don't have, or don't want to take, the time to perform all but the most necessary financial activities, such as paying bills. They often put off, sometimes indefinitely, more complex tasks that require analysis and comparison.14 In addition, there are dozens of arcane acronyms and terms (IRA, 401(k), SEP, 12b-1 fee) to learn, as well as constantly changing tax laws.
"Less is more" (the K.I.S.S., or "keep it simple, stupid," principle) is a good motto to follow when motivating clients to improve their finances. This means figuring out ways to "filter" massive amounts of information into simple financial tips or action steps and reducing the amount of choices available. Research indicates that the more choices people have in life, such as 401(k) plan options, the more likely they are to delay an action or take no action at all.15 An example is employer flexible spending accounts, which allow workers to set aside pretax dollars to pay for everyday expenses such as health care, transportation, and dependent care. Only 18 percent of eligible workers signed up for health care accounts in 2002 and just 7 percent for a dependent care account.16
Putting as many financial behaviors on automatic pilot as possible is a simple way to prompt positive changes. For example, a program called Save More Tomorrow, developed by economists Richard Thaler and Shlomo Bernartzi, avoids the behavioral finance problem of status quo bias (procrastination, in other words). Working through employer payroll deductions, Save More Tomorrow enables employees to divert a portion of future salary increases to retirement savings plans.17 Another twist on the automatic savings theme is an "opt-out" retirement plan where employees are automatically enrolled in a retirement savings plan unless they specifically decline to participate.
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 scheduled services to assess how many of a client's financial practices are currently automated or could be. Another value-added service would be to complete the actual paperwork required for automated systems so that clients are less likely to procrastinate.
Factor #6 Responsibility, Discipline, and Other Personal Qualities
Research indicates that certain personal qualities are associated with positive financial behaviors. Camp, Bagwell, and Joo studied 1999 Retirement Confidence Survey data and concluded that respondents who were most optimistic about retirement exhibited financial behaviors most consistent with expert recommendations.18 This suggests a need for discussions with some clients and, perhaps, "homework" activities (that is, small tasks where clients can experience success) to foster a more optimistic perspective. 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.19
O'Neill, et al. studied 520 MONEY 2000™ program (a 1990s Cooperative Extension program where participants set a savings or debt reduction goal and periodically reported progress) participants.20 They found that the most frequently cited resource for making financial progress, noted by over a third of respondents, was personal qualities such as discipline, will power, focus, determination, and positive thinking. Having a goal or plan and seeing progress or results were two additional personal resources. Chatsky wrote about a proprietary MONEY magazine study of financial satisfaction and concluded that there is a very strong relationship between feeling in control of, and feeling happy about, one's finances.21
The above findings suggest a need for financial planners to pay particular attention to clients' personality traits and general outlook on life. Clients who are not optimistic, disciplined, and focused may require "special handling" with motivational strategies especially designed to foster successful outcomes and positive thinking.
Factor #7: Target Obstacles to Financial Progress
Parallels to behavior change in personal finance can be found in the health field. Gordon studied why people adopt or reject recommended health behaviors.22 She observed four key factors: perception of risks, perception of self, environmental conditions, and perception of costs and benefits of recommendations. She concluded that messages should contain features that relate appropriate levels of risk, bolster consumers' beliefs that they are capable of adopting recommended changes, and contain features that promote benefits and minimize costs.
Financial planners need to discover clients' obstacles to taking action to improve their financial well-being. These barriers may be financial, social/emotional, or logistical. For example, take a new client who does not have a will and expresses resistance about drafting one. Reasons could include a perceived high cost (financial), not knowing whom to name as executor/guardian (social/emotional), or not knowing whom to select as an attorney (logistical). Probing questions that can be asked include "What has stopped you from doing [a particular action] before?" and "Do you anticipate any obstacles or challenges in achieving this goal?' This will help open up dialogue with clients about their real or perceived barriers.
Factor #8: Personalized Information and Advice
Everyone has "hot buttons" that prompt positive action. Hot buttons, like "teachable moments" in an educational setting, are very individual and personal, and may be discovered through some gentle probing in a financial planning session with questions like "Where do you want to be in three to five years?" "What worries you about money?" and "What makes you happy?"
One way to personalize financial information is to use print and online self-assessment tools (such as knowledge or behavior quizzes, checklists, debt-ratio calculations) and statistics about the financial practices of U.S. households so that clients can compare themselves with others or to an objective standard. Another 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 chart or graph format.
Financial planners should also consider providing relatively inexpensive professional financial check-up diagnostic services, akin to an annual medical check up, to perform important routine tasks (such as net worth calculation, goal-setting progress review, credit-report request, asset-allocation rebalancing analysis) that are performed infrequently by consumers themselves.
This article described eight factors that can motivate your clients to develop positive financial behaviors. There are key implications for financial planners:
- Assess clients' readiness for change and provide appropriate change stage-related messages.
- Take steps to counteract behavioral finance errors that result in poor financial decisions.
- Provide structure and support, incentives, and assistance with financial goal-setting.
- Keep financial advice simple with action steps that prompt subsequent behavior change.
- Provide messages and activities that foster personal responsibility and self-control.
- Address obstacles to financial progress and provide personalized self-assessment information.
Barbara O'Neill, Ph.D., CFP®, CRPC®, is a professor and Cooperative Extension specialist at Rutgers University in New Brunswick, New Jersey. She is the author of three trade books and over 100 articles in professional journals and publications.
- Financial Literacy in America: Individual Choices, National Consequences (Englewood, CO: National Endowment For Financial Education, October 2002).
- Financial Literacy in America (North Palm Beach, FL: Bankrate.com), www.bankrate.com/brm/news/financial-literacy/financial-literacy-home.asp (accessed June 1, 2003); J. M. Hogarth and M. A. Hilgert, "Financial Knowledge, Experience and Learning Preferences: Preliminary Results from a New Survey on Financial Literacy," Consumer Interests Annual, American Council on Consumer Interests, 48 (2002), www.consumerinterests.org/public/articles/index.html?cat=258.
- J. O. Prochaska and W. F. Velicer, "The Transtheoretical Model of Health Behavior Change," American Journal of Health Promotion, 12, 1 (1997): 38–48; J. O. Prochaska, C. C. DiClemente, and J. C. Norcross, "In Search of How People Change: Applications to Addictive Behaviors," American Psychologist, 47, 9 (1992): 1102–1114.
- B. C. Kerkman, "Motivation and Stages of Change in Financial Counseling: An Application of a Transtheoretical Model from Counseling Psychology," Financial Counseling and Planning, 9, 1 (1998): 13–20.
- J. J. Xiao, B. O'Neill, J. M. Prochaska, C. Kerbel, P. Brennan, and B. J. Bristow, "A Consumer Education Programme Based on the Transtheoretical Model of Change," International Journal of Consumer Studies, January 2004: 55–65; J. J. Xiao, B. O'Neill, J. M. Prochaska, B. J. Bristow, P. Brennan, and C. Kerbel, "Application of the Transtheoretical Model of Change to Financial Behavior," Consumer Interests Annual, American Council on Consumer Interests, 47 (2001), www.consumerinterests.org/public/articles/index.html?cat=251.
- J. O. Prochaska, C. C. DiClemente, and J. C. Norcross, "In Search of How People Change: Applications to Addictive Behaviors" American Psychologist, 47, 9 (1992): 1102–1114.
- J. O. Prochaska, J. C. Norcross, and C. C. DiClemente, Changing for Good: A Revolutionary Six-Stage Program for Overcoming Bad Habits and Moving Your Life Positively Forward (New York: Avon Books, 1994).
- G. Belsky and T. Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them (New York: Fireside Books, 1999).
- B. O'Neill and J. J. Xiao, "Identity Theft Risk Assessment Factors: An Exploratory Study," Consumer Interests Annual, American Council on Consumer Interests, 50 (2004), www.consumerinterests.org/public/articles/index.html?cat=270.
- The 2004 Retirement Confidence Survey Summary of Findings (Washington, DC: Employee Benefit Research Institute, 2004).
- Financial Literacy in America (North Palm Beach, FL: Bankrate.com), www.bankrate.com/brm/news/financial-literacy/financial-literacy-home.asp (accessed June 1, 2003).
- B. O'Neill and J. J. Xiao, "Financial Fitness Quiz: A Tool for Analyzing Financial Behavior," Consumer Interests Annual, American Council on Consumer Interests, 49 (2003), www.consumerinterests.org/public/articles/index.html?cat=264.
- T. Longo, "Profits in the Middle-Income Market" Financial Advisor, 33, 10 (October 2003): 58–62.
- See note 11.
- G. Belsky and T. Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them (New York: Fireside Books, 1999); "A Simpler Recipe for Retirement," Kiplinger's Personal Finance, 57, 11 (November 2003): 23–24.
- R. Lieber, "Take Two Aspirin—and Deduct Them," The Wall Street Journal, October 8, 2003, D1, D2.
- J. E. Hilsenrath, "Economics Professor's Retirement Project Puts Future Pay Raises in Savings Plan," The Wall Street Journal, January 11, 2002: A2.
- P. L. Camp, D. C. Bagwell, and S. Joo, "Optimism as a Predictor of Financial Management Behavior: Implications for Retirement Planning," Proceedings of the Eastern Family Economics/Resource Management Association, M. J. Alhabeeb, ed. (2002): 68–79.
- T. Neff and J. Citrin, "Uncommon Traits," Personal Excellence, May 2000: 7.
- B. O'Neill, J. Xiao, B. Bristow, P. Brennan, and C. Kerbel, "Successful Financial Goal Attainment: Perceived Resources and Obstacles," Financial Counseling and Planning, 11, 1 (2000): 1–12.
- J. Chatsky, "The 10 Commandments of Financial Happiness," MONEY, 32, 11 (October 2003): 113–120.
- J. C. Gordon, "Beyond Knowledge: Guidelines for Effective Health Promotion Messages," Journal of Extension, 40, 6 (December 2002), www.joe.org/joe/2002december/a7.shtml (accessed December 28, 2002).
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