Chapter 16: Financial Planning Practices Flashcards
(87 cards)
1
Q
What are the 2 systems of the brain?
A
System 1 - based on the limbic system (hippocampus and amygdala) part of the brain that is responsible for decisions based on immediate inputs.
System 2 - prefrontal cortex is responsible for longer-term, more complex decision-making.
2
Q
What happens with decisions made with system 1 of the brain?
A
These decisions are reactive, short-term based on survival needs using a limited sense of inputs. System 1 will default to the inputs that appear to be the most important and will recall the emotions from the last time a similar decision was required. When a decision is made, system 1 will encode the emotions associated with that decision on the brain as either a success or failure.
3
Q
What happens with decisions made with system 2 of the brain?
A
System 2 is responsible for longer-term, more complex decision-making. If system 2 is used to make a decision, then the decision-maker will weigh available options, process information, and then arrive at a decision (unlike system 1 where a decision will be intuitive).
4
Q
What are the 4 sub-levels of the 5th level of Maslow’s Hierarchy of Needs (self-actualization)?
A
- Cognitive needs (knowledge, meaning)
- Aesthetic needs (beauty, balance, form)
- Self-actualization (self-fulfillment, personal growth)
- Transcendence needs (helping others to achieve self-actualization)
5
Q
What are the 5 levels of Maslow’s Hierarchy of Needs?
A
- Biological/physiological
- Safety needs
- Love and belongingness
- Esteem
- Self-actualization
6
Q
When is financial coaching required instead of just financial planning?
A
If a client is experiencing financial stress or if financial planning does not result in achievement of financial objectives.
7
Q
What are the 8 attitudes towards money?
A
- Money worship
- Anti-rich
- Money is bad
- Money mistrust/lack of openness
- Frugality/fiscal responsibility
- Money anxiety
- Money status
- Money is unimportant
8
Q
What are some statements that could indicate an attitude towards money worship?
A
- More money will make me happier
- Rich people do more good
- Taxation is theft
- I deserve money
9
Q
What are some statements that could indicate an attitude towards being anti-rich?
A
- Rich people are evil
- That heir/heiress is spoiled
- The 1% are destroying the planet
10
Q
What are some statements that could indicate an attitude towards money mistrust/lack of openness?
A
- It’s rude to talk about money
- It’s time for our family meeting to review our budget
- I need a raise, I should be making $X salary
- I need a raise, but I won’t discuss how much
11
Q
What are some statements that could indicate an attitude towards money being “bad”?
A
- Banks are evil
- Life insurance will just spoil my family
- I don’t deserve money
12
Q
What are some statements that could indicate an attitude towards frugality?
A
- I pay my credit card bill in full as soon as I get it
- I am working hard to pay off my mortgage
- I will drive my car until it’s not practical to repair it
13
Q
What are some statements that could indicate an attitude towards money anxiety?
A
- I am concerned we won’t be able to afford Xmas this year
- What if I lose my job?
- What if interest rates go up?
14
Q
What are some statements that could indicate an attitude towards money status?
A
- Money is power
- Money can buy happiness
- Only somebody who was poor can really understand the value of a dollar
15
Q
What are some statements that could indicate an attitude towards money being unimportant?
A
- I only work so I can afford to travel
- Easy come, easy go
- If I get fired, I’ll just find another job
16
Q
What are money disorders?
A
When money scripts take on excessive characteristics, it can lead to money disorders. At this point, financial therapy from a medical professional is needed, not just financial coaching.
17
Q
What are some signs that may lead a financial planner to refer a client to a medical professional?
A
- Debilitating anxiety
- Depression
- Significant relationship dysfunction
- History of painful or traumatic financial experiences
- Addictive or compulsive behaviours
- Chronic inability to change
18
Q
What are the 4 main categories of money disorders?
A
- Money avoidance
- Money worship
- Money status
- Money vigilance
19
Q
What are some signs of money disorders related to excessive money avoidance?
A
- Compulsive buying with no regard to how much is being spent
- Hoarding
- Financial enabling (typically of children)
- Financial denial
- Workaholism (“as long as I work hard, there will be no problems”)
- Vow of poverty (direct or indirect, no drive to accumulate wealth, get a raise, etc. due to a belief that it doesn’t matter how much money somebody earns, those who help enough other people will be taken care of)
- Financial enmeshment (great deal of sharing about money with kids with a strong focus on negative emotions and financial constraints)
- Squandering financial windfalls (Sudden Wealth Syndrome)
- Poor financial decisions (heuristics can lead to poor outcomes)
20
Q
What are some signs of money disorders related to excessive money worship?
A
- Compulsive buying under the belief that the stuff/experiences will make other problems go away
- Hoarding money, sense of security related to bank account balances, unwillingness to take risk
- Workaholism, with a focus on rewards for excessive commitment to work and a focus on earning more income
- Financial dependence, can place the dependent person in a position of placing excessive importance on the relationship, avoiding interactions that could result in jeopardizing the source of income
- Financial enabling, rather than providing emotional or other support to kids or grandkids, the default may be to provide money as this is the thing the parents value most
- Financial denial
- Overspending, spending money is a sign of a sucess
- Underspending, desire to hoard money
21
Q
What are some signs of money disorders related to excessive money status?
A
Belief that money is the primary determinant of self-worth.
- Compulsive buying, to raise an individual’s self esteem
- Gambling disorder, for some, spending time in a casino can give the impression that the gambler is somehow privileged. (The same can happen watching YouTube videos that cater to high-risk investing, for example)
- Financial dependence, financial value of the realtionship may override any other concerns. Dependent person may identify with their status as a dependent and not be willing to act on their own
- Financial infidelity, a couple is not being honest with each other about their financial position out of a fear of being judged, or using positive financial behaviours as a lever to gain power
- Overspending
- Vow of poverty, with a sense of pride associated with the decision
- Financial enmeshment, using money as a weapon against another (example: “I would love to take the family to Hawaii, but your mom tells me we can’t afford it”)
- Squandering financial windfalls to maintain appearances
22
Q
What are some signs of money disorders related to excessive money vigilance?
A
Highly protective and secretive about money.
- Compulsive buying, highly secretive about it
- Gambling disorder, in secret
- Financial infidelity, perceived need to hide money from a spouse
- Underspending, if highly protective of their money
- Poor financial decisions due to a belief that money is something to be gathered, not a tool to be used
23
Q
What is financial enmeshment?
A
Also known as “Financial Incest”. Extraordinary or potentially unhealthy degree of discussion about money with kids, likely involving a great deal of sharing by the parents with a strong focus on negative emotions and financial constraints.
24
Q
What are some barriers to action that may prevent a client from implementing financial planning recommendations?
A
- Inability to budget
- Excessive need for instant gratification
- Financial paralysis
- Excessive risk taking
- Excessive risk aversion
- Grief
- Cognitive load
25
What should a financial planner do if a client who clearly needs a budget cannot implement one?
Their behaviour will not change by just looking at spreadsheets or projections of their financial future. Instead, they likely have ingrained money scripts or money disorders that need to be addressed. The planner should carefully consider whether these can be addressed or whether professional therapy is the better tool for this client.
26
What should a financial planner do with a client who has an excessive need for instant gratification?
This type of client is hooked on the feeling of gratification that can result from spending as it gives a greater short-term emotional payoff than the gratification that results from long-term financial planning behaviours. The planner must identify whether the client is likely to benefit from professional therapy, or whether the planner has the tools to help address the barrier.
27
What should a financial planner do about a client who is suffering from financial paralysis?
The financial planner should ensure that they are boiling down the client's choices to a smaller number of meaningful choices, which may make it easier for a client to act. The "paradox of choice" can arise and cause financial paralysis when a person has too many options.
28
What can a financial planner do when working with a client who is involved with excessive risk taking?
The challenge is to keep the client investing using tried-and-true, long-term investment strategies. One approach that may work is to give a person some permission to set up a self-directed brokerage account with some "play" money.
29
What can a financial planner do when working with a client who is involved with excessive risk aversion?
Slowly introduce the idea of risk. Start the client off with an investment based purely on GICs or accumulation annuities, where there is no possibility of a loss of principal. After a few years, explain that their investments underperformed against inflation and show them an investment that carries some risk. Based on an improved understanding of risk, the client may be willing to invest some of their money in riskier assets.
30
During which of the 5 stages of grief might a client be willing to listen to and accept financial planning recommendations?
During stage 5 - acceptance.
They may be willing to accept recommendations during stage 3 (bargaining), but the acceptance may be temporary.
31
What are some activities that can increase cognitive load?
- Managing pain, stress, and grief
- Directing attention (focusing on unfamiliar phenomena, such as visiting a planner whose office is in an unfamiliar location)
- Decision-making
- Resisting temptation
- Controlling emotional displays
- Forming new habits
- Everyday chores
- Learning
32
What are some signs of mental depletion?
- Amplified emotional reactions
- Confusion
- Hyper focus
- Rigid thinking
- Loss of good habits
- Increase of bad habits
33
What are people who are mentally depleted at a higher risk for?
- Diminished learning capacity
- Flawed decision-making
- Bowing to temptation
- Inability to adhere to recommendations and/or adjust to change
34
How can cognitive capacity be restored?
- Sleep
- Nutrition
- Exercise
- Social contact
- Mindfulness or meditation
35
How can a financial planner help a client who is suffering from mental depletion?
- Affirm the client, remind them of past successes or tell them about successes of others
- Remove stressors
- Simplify decision-making
- Prioritize decisions (even if a client needs 5 separate things, focus on 1 first)
36
What are heuristics? Why are they important?
The various tools we employ in making decisions.
Although they seem mostly negative, they are useful tools. Without them, every decision we make would be an exhaustive process.
37
What are some common elements of decision-making processes?
- Establishing goals
- Information gathering
- Weighing alternatives
- Group decision-making
- Simulation
- Deciding
- Taking action
- Post-mortem
38
Decision making is optimal when which factors are considered?
- Time
- Information
- Knowledge
- Motivation
- Physiology (physical factors)
- Resilience (limitations with regards to decision making)
- Cognitive load
- Environment
39
Decisions are more likely to be made and acted upon when they meet what criteria?
- Simple
- Focused on one topic
- Short-term commitment (start saving $500/month vs you need to save $500/month for the next 20 years)
- Immediate pain (address immediate concerns)
- Based on a limited set of choices
- Unambiguous
- High degree of support and supervision
40
Describe the 4 quadrants of the Eisenhower matrix...
Quadrant 1 - Urgent and Important (do these tasks first)
Quadrant 2 - Not Urgent but Important (plan for these tasks)
Quadrant 3 - Urgent but Unimportant (delegate these tasks)
Quadrant 4 - Not Urgent and Unimportant (eliminate these tasks)
41
What are the 6 components of financial planning?
1. Financial management
2. Investment planning
3. Insurance and risk management
4. Retirement planning
5. Tax planning
6. Estate planning and legal aspects
42
What does the Human Capital model describe?
It shows human capital (PV of earning potential) decreasing over time and financial capital (net worth) increasing over time. Total capital at any given age = human capital + financial capital.
43
What is meant by "human capital preservation"? What are some methods of human capital preservation.
Early on in a person's life, their entire amount of total capital is based on human capital. If this is not preserved, the client's overall total capital will be substantially reduced as financial assets will likely never considerably grow.
Methods of preserving human capital = life insurance, disability insurance, emergency funds.
44
What is meant by "human capital enhancement"? What are some methods of human capital enhancement?
Human capital can be increased through continuing education, as well as a willingness and ability to relocate as opportunities arise. Methods of human capital enhancement = education funding, contingency planning, starting a business.
45
What are some steps that should be considered when financial capital is low (typically early on in a client's life)?
- Home insurance
- Budgeting
- Debt and credit
- Investment risk
46
What are some factors that should be considered regarding financial capital preservation?
- Investment risk (taking on less risk to preserve financial assets)
- Estate needs (consider estate preservations of client has estate goals)
47
What are some factors that need to be considered during a client's later years when there's a lack of human capital?
Reliance on assets for income generation.
Adequate liquidity for unexpected events.
48
What are the typical phases of a person's lifecycle?
- Early working years
- Child-rearing years
- Pre-retirement years
- Early retirement years
- Late retirement years
49
What are examples of some significant changes in a client's life circumstances that can instigate a client to work with a financial planner?
- Separation
- Loss of a parent
- Death of a spouse
- Birth of a child
- Insurance settlement
- Inheritance
- Lottery win
- Career change
- Retirement
- Business succession
50
What is the concept of transactive memory?
Presents the theory that a couple in a long-term romantic relationship becomes a better team than most other pairings. This means that losing a loved one is more than just losing a partner, it's losing somebody who gave us abilities beyond what we would have had left to our own devices.
51
What are some ways a financial planner can help their client beyond helping them achieve their objectives?
- Reducing complexity
- Acting to solve a problem
- Saving time
- Receiving encouragement
- Making better trade-offs
- Perservering through adversity
52
What are some cues that could identify a client who is resistant to implementing financial planning recommendations?
- Agreeable, but not acting
- Ambivalence
- Argumentativeness
- Closed body language
- Denials
- Defensiveness
- Interrupting
- Ignoring the planner
- Negating the planner
- Reluctance
- Resignation ("I guess you're right")
- Rationalization
- Rebelliousness
53
What are some ways a financial planner can attempt to work through a problem when a client is resistant to implementing financial planning recommendations?
- Reschedule the appointment
- Revisit the client's motivation
- Confirm the client's objectives
- Shift the conversation to small talk
- Move to a different financial planning topic
- Break the topic at hand into more manageable chunks
54
What kind of changes are clients more likely to act on?
Changes that...
- Won't have an adverse effect on lifestyle
- Can be accomplished in a short time
- Focus on an immediate problem, rather than an intangible one
- Will have more immediate payoffs
- Require little willpower to implement
55
What are some methods a financial planner can use to ensure clients follow through with an action plan?
- Self-motivation (clients are more likely to follow through on strategies they came up with)
- Calendar reminders
- Behavioural finance/herd mentality (peer pressure)
- Incentives/gamification
- Disincentives (penalties)
- Public recognition (with client consent)
56
Under the "Stages of Change Model", what are the elements of change?
- Pre-contemplation
- Contemplation
- Preparation/planning/determination
- Action
- Maintenance
- Termination/relapse
57
Under the "Stages of Change Model", what are the tools to help with change?
- Setting goals
- Motivating to create change
- Tasks required for change
- Obstacles that may prevent change
- Measures of success (setting success indicators)
58
Under the "Stages of Change Model", what are the preconditions to change?
- Client perceives a need to change
- Client is motivated to change
- Client feels that they have the ability to change
59
What does it mean to maximize questions with regards to motivational interviewing?
Rather than immediately coming back with a solution when a client expresses a problem, it's preferential to ask the client questions and ask them to come back with their own answers, eventually ariving at a solution. This works with behavioural problems/questions, not technical ones.
60
What should a planner do if a client presents a technical problem, the planner presents a solution, then the client implements the solution and is unsuccessful?
The planner needs to identify the underlying behavioural problem that caused them to be unsuccessful.
61
What does it mean to minimize statements with regards to motivational interviewing?
The planner should ask more questions and make fewer statements as statements come across as preachy and are often an ineffective motivational tool.
62
How can a planner use reflection to validate what a client has said or help the client realize there is an alternative view to their position?
Example: client says "I can't see a budget changing things for me right now"
Using simple reflection, an advisor can paraphrase what a client has said to reaffirm that the planner has heard and understood the client.
Example: "You don't think putting a budget in place will improve your financial situation"
Using amplified reflection (avoiding a sarcastic tone), the planner overstate's the clients position to help them realize there is an alternative view to their position.
Example: "You're suggesting that putting a budget in place is not critical to the financial planning process"
63
What is simple reflection?
A tool to simply validate what a client has said. It doesn't have any other effect other than to reaffirm that the planner has heard and understood the client.
64
What is amplified reflection?
Overstating a client's position when paraphrasing a client's statement. Can be used to help the client realize there is an alternative view to their position.
65
What is double-sided reflection?
Taking information that the client has recently stated and combining it with statements from the client's past that may not match up exactly to the client's recent statements.
66
What is involved with "shifting focus"?
The planner can take a disagreement from a client and use that to move to another area of focus, possibly something earlier in the planning process.
Example: "I agree that, until we set some priorities, it's not a good idea to talk about a budget. Have you considered what's important to you?"
67
What does it mean by "agreement with a twist"?
Like shifting focus, the planner can use the client's phrasing to help them see the problem differently.
Example: "Having a budget probably won't make a difference for you right now. Have you thought about whether it would make a difference for your family?"
68
How can a planner use reframing to keep the client on track?
Help the client see a problem from a different perspective. For example, offering to help them with a "spending plan" instead of a "budget".
69
What are the 3 steps to take when expressing empathy with a client who is resistant to change?
1. Acknowledge the individual, validate their feelings.
2. Summarize and reflect.
3. Invite discussion towards change.
70
How can a planner be curious and non-judgemental when asking questions?
Ask open-ended questions with no implied judgement that keeps the conversation moving in the right direction.
71
What are ambivalent statements?
What is often true when clients express ambivalence to financial planning recommendations? What can you do to overcome this?
Statements such as "I know I should, but..." or "I get the concept, but I don't know if it's right for me".
These clients often have deeper-rooted concerns that they may have trouble expressing. By asking more questions and being curious, the planner can help the client get closer to an understanding of their own thought process.
72
How can a planner determine if a client is agreeing to a process simply to avoid an awkward conversation?
Ask questions to help draw out the client's ambivalence, such as:
- Ask why the client wishes to change.
- Ask what obstacles the client faces.
- Ask if the status quo is acceptable.
73
What may be true if a client is overly focused on either financial or other costs associated with a change?
It may be a sign that the client is not yet ready to change.
74
What are the 2 categories of motivational focuses?
How do you motivate clients who fall into each category?
1. Promotion focused - excited about achieving big things, never want to feel like they missed an opportunity.
- Motivate this client by focusing on what they can achieve and what they might miss if they don't take advantage of an opportunity.
2. Prevention focused - focus on what might go wrong.
- Motivate by encouraging them to take steps to protect their financial future.
75
What are some signs that a client is not ready for change?
Procrastination or avoidance activities like...
- Failure to seek advice
- Refusing encouragement
- Missing appointments
- Failing to return communications or complete paperwork
- Short attention span
- Closed language, superficial, or short responses to questions
- Failure to disclose information, omission of information
76
What are the 2 components of trust?
1. Character (perceive that someone is open and honest)
2. Capability (perceive that someone is capable and likely to do what they say they will)
77
How can a planner demonstrate good character?
- Demonstrate that you care (be well prepared for meetings, remember small details about clients)
- Be transparent
- Be open about their thought process
- Be honest and truthful
- Be fair
- Authenticity, consistent behaviour
78
What are the 3 learning styles?
1. Auditory - learns by listening
2. Kinesthetic - must do to learn
3. Visual - learns visually
79
What can you do when working with an auditory learner?
Conversations are useful, may respond well to podcasts or presentations. Use phrasing like "what do you think when you hear me present this concept?"
80
What can you do when working with a kinesthetic learner?
Role play may be useful, consider walking and talking, ask the client to illustrate concepts, make sure the client isn't sitting for too long, use phrasing like "what step will you take next?"
81
What can you do when working with a visual learner?
Use diagrams, lots of colour, phrasing like "what is your vision for retirement"?
82
What are the 4 communication styles?
1. Emotive
2. Directive
3. Reflective
4. Supportive
83
How do you identify an emotive communicator and what methods should you employ with them?
They will express feelings, use active body language, likely to initiate conversation.
Keep the topics casual, don't focus on details, build the relationship, support the client's ideas and opinions, listen well, maintain eye contact.
84
How do you identify a directive communicator and what methods should you employ with them?
Get right to the point, may not seem to be listening, serious attitude, maintains control.
Run an efficient meeting, focus on objectives, make good notes early on and refer to them deeper in the conversation.
85
How do you identify a reflective communicator and what methods should you employ with them?
Don't display much emotion, takes a balanced view, stiff and formal, unwilling to decide, overly interested in details.
Be on time, be well prepared, give the client time to decide, use specific questions with specific focus.
86
How do you identify a supportive communicator and what methods should you employ with them?
Good listener, humble mannerisms, wants more information and time to decide, agrees with everyone, unable to take a strong stand.
A social relationship is important, know them well, be gentle when disagreeing, be patient, listen well.
87
What is communication-style bias?
Insisting on only working with clients who communicate the same way they do.
