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Behavioral Finance: Progress Makes Perfect

By Cora Pettipas, CFP, Canada

There have been many times I have questioned people’s sanity in their relationship with money. My most vivid memory of this was when I waddled into a Starbucks (I was eight months pregnant). On the way to the counter, I passed a young opulent-looking couple sipping lattes and saying to their toddler son, “you are never going to college, no you’re not, no you’re not!” This made me cringe and it took everything in me not to interrupt their family moment with an explanation on the universal child care benefit and how that can be pared with an RESP so as to save but not to infringe cash flow (maybe just some of their allocation of designer coffee spending). But it just wasn’t appropriate.

The Financial State of Canada

In a developed country like Canada, you can have anything you want, within reason. Note: I did not say everything you want, just anything. Why are people not reaching financial security and stability? In fact, according to the Canadian Payroll Association, it is estimated that 47% of Canadians live paycheck to paycheck. In addition, only 54% of Canadians polled stated that they have an emergency fund. It was not stated in the findings, but it would be interesting to see those numbers if people were using cash instead of credit to fund paycheck delays and unexpected expenses. It is well documented that stress over finances can increase incidences of anxiety, health issues, and even divorce. In fact proper budgeting is like exercise, it is so well documented to be good for you, why doesn’t everybody do it?

Simple. It is painful. It is not fun. You rarely see the benefit in the short term (unless you count viewing your bank statement). Here are some things I try to focus on when encouraging a client down the road of wealth building.

Remind them of the ‘Greater Good’

 In the discovery phase with your client, you learn what truly motivates clients – their greater good. Some people learn this technique just to sell a product. However, this sales strategy can be used to motivate clients to act in a manner to support their goals. When they tell you they need to renovate, or absolutely need that sports car today, you can remind them of what they expressed was most important to them. Whether it is little Jimmy going to university (instead of Starbucks) or the ability to retire on time and ‘free up the clock.’ Reminding them of the ‘greater good,’ is reminding them of what they communicated was most important to them in their lives. This will (most of the time) re-orientate them back to a more long term focus, as opposed to short term amusements that blow up the plan.

Deter the Perfection Ideal

I know a couple who keep telling me every time I see them that they are going to come see me when they have all their dept paid off for some financial advice. They started saying this about five or six years ago. When clients have an ideal of where they have to be before they commence with financial planning, they will procrastinate. Our job is not to get them to the ‘ideal’ place of millionaire status, from an (arguably also ideal) status of debt free. Our job is to help them make choices that will make their wealth incrementally better over time. Not perfect, just progress. This is not an all or nothing game, having some good habits is always better than none, just like with exercise.

Acknowledge their Accomplishments

When I started congratulating clients at their annual reviews for the progress they had made, I was not prepared for their reactions. Their reactions are emotional and very positive. Even if they do not reach all their stated goals and objectives, and do not go by the plan fully, congratulate them on what they have done well, and the things they are currently doing right. This will ensure they know you are on their side. It is nice to get kudos when you have done a good job. You are in the best position to give them praise, as you probably know the most about their finances!

In my experience, treating the client with respect and showing them unconditional positive regard is the best way to foster healthy financial habits in clients. I am not saying financial planners should not isolate negative financial habits and address them. I am also not stating that we should gloss over very negative consequences of those habits; which have destructive results that are exponential over time. Meetings should not be all cake and ice cream. What I am saying is that the vast majority of clients will not stick fully to the financial plan; and the vast majority will also blow up their budget at some point. However, when they do well, you should acknowledge it, and appreciate that it may not have been easy for them.

Because you work with your clients, they are better off than they would be without you. In general, the more you work with a client, the more they learn and internalize the strategies, and the more financial autonomy they will have. It will never be perfect; in their minds, or yours, but it will definitely be progress.

…and it takes progress to get to perfect.

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