Advisor’s guide to the psychology
behind goal setting

Rob Richardson

Rob Richardson, CIMA®
Senior Vice President
Practice Management Spokesperson

LOCATION: San Mateo, California, USA
TENURE: 1995

As more advisors adopt goals-based investing into their practice, the amount of client interactions naturally increases as advisors seek to define (and refine) the full scope of their client’s goals. There is growing sentiment that this approach leads clients to have deeper relationships with their advisor as well as greater motivation and satisfaction with a financial plan that is dialed in to their personal goals.

In the past, we may have asked a series of questions to arrive at data points such as risk tolerance, expected retirement date or current assets. Today, goals-based investing requires advisors to be skillful communicators with a strong grasp on how people think about money and goals. We need to understand human tendencies, both conscious and unconscious, in the goal-setting process and hone our strategies for working with them.

The big, round dollar amount

Articulating financial goals can be challenging for clients. Just as clients need our help to navigate the complex maze between goal setting and goal achievement, they often need guidance on defining goals. Most people aren’t intuitively aware of the range and variations of financial goals. Therefore, many people start by throwing out a large, round dollar amount as their goal. But, when pressed for how they arrived at that amount, it’s usually that “it sounds like a lot of money” but isn’t rooted in deeper rationale. Although it can be a helpful starting point for discussion, it illustrates that most people don’t know what is possible or realistic until they begin the planning process.

At this point in the process, the best thing you can do is employ your active listening skills. Active listening is the technique of mindfully hearing, comprehending and responding to others in a way that can bolster trust and elicit in-depth information. Ask them to tell you more and listen carefully for clues as to the emotions or thoughts that may have informed the initial goal or dollar number stated. Underlying uncertainties or ideas about money can help you begin to understand what matters to them.

Our future self looks just like our current one

Another possible reason people struggle with creating long-term financial goals is that the reward is often in the future. According to psychologists, people have a difficult time envisioning what our future selves will be like. End-of-history illusion is a psychological illusion in which individuals—of all ages—believe they have experienced significant personal growth and changes in taste up to the present moment, but will not substantially grow or change in the future. In other words, we can acknowledge we’ve changed a lot in the past, but don’t predict that trend to continue. End-of-history illusion reinforces the belief that the present is a watershed moment, the point in which we finally become the person we’ll be for the rest of their lives.

This mindset can make us reluctant to think about a future that looks markedly different from the present. People believe they know themselves well and potential future changes feel threatening. This line of thinking limits our ability to think about various scenarios or what might matter to us if our circumstances change. Maybe the kids will move out, maybe they move back in, there could be new jobs, relationships evolve and health conditions may, unfortunately, deteriorate—the variance in life is great and unpredictable. If our natural inclination is to essentially deny that fact (even if it’s never stated out loud) financial goals can get stuck in stasis and, when the inevitable changes happen, it challenges our worldview and threatens our security.

Clients need our help to understand that goals are not static because, like in life, they will change and grow based on a number of factors, both in and out of our control. By taking the time to explain these psychological concepts with clients, you give them an opportunity to examine their relationship with the present perceptions of time and rethink their current perspective on their future self.

The hunt for unconscious biases

Behavioral finance teaches that there are a variety of social, emotional and cognitive factors that influence our financial decision-making, often to our detriment. These unconscious tendencies, also called biases, can also influence a client’s goals. For example, clients returning from a tropical vacation might say buying a beach cottage is their top financial goal because they had a wonderful trip that’s still top of mind. The added specificity of the goal is good but research from Morningstar would caution that what people initially self-report may not be what actually matters most to them later.

The Morningstar researchers wanted to look at the role bias plays in how clients identify and prioritize their goals. First, they asked people to list and rank their top three financial goals. Later, participants were shown a master list of common financial goals (which included their self-reported goals and others) and asked to rank them in order of importance. Surprisingly, 73% changed at least one of their original goals with one from the master list and 26% changed their number one goal. The results indicate that identifying and prioritizing financial goals requires multiple conversations with a skilled advisor to help clients focus and refocus on clear, detailed plans.

A master list of common financial goals can be helpful to support those conversations with clients. It can provide different ideas that they may or may not have thought up, prompting them to reflect on their motivations, desires and emotions. That reflection creates a distinct emotional connection with the determined goals, which feel personally chosen and tailored.

True goals-based investing forces clients to think about what matters most. Not just think about it--verbalize, refine, refocus, prioritize and reevaluate a future that the human brain struggles to vividly picture. They need you to be their guide--watching for blind spots, gently prodding for detail and connecting the dots. This opportunity will only grow and success seems ripe for the picking by advisors who are students of the client’s perspective.

The views expressed in this article are only those of Rob Richardson and are not necessarily the views of Franklin Templeton and should not be considered investment advice or recommendations to invest in any security or adopt any investment strategy.

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