Unit 2 Flashcards
(109 cards)
1
Q
A
2
Q
What are the key learning objectives for chapter 2?
A
- Explain concepts and applications of counseling theory to financial planning practice
- Compare, contrast, and explain cognitive and emotional biases clients exhibit
- Discuss aspects of good planner-client communication
- Demonstrate relationship development of honesty and trust in client interaction
3
Q
What is the focus of developmental counseling?
A
Human development occurs in stages over time and disruptions at a stage lead to predictable problems
4
Q
How does a humanistic counselor define mental health?
A
Having congruent and aligned thoughts, feelings, and behavior
5
Q
What is the goal of treatment in humanistic counseling?
A
Establishing congruence and acceptance of personal responsibility
6
Q
What is the premise of cognitive-behavioral counseling?
A
Humans learn through principles established in animal research, focusing on evaluating reinforcers maintaining problematic self-talk
7
Q
True or False: The advisor in humanistic counseling believes humankind is basically bad.
A
False
8
Q
What are the core assumptions of traditional finance?
A
- Investors are rational
- Markets are efficient
- Investors seek highest return for lowest risk
- Risk determines return
9
Q
What does behavioral finance incorporate from psychology and sociology?
A
It acknowledges that investors are human and sometimes irrational, and markets are not efficient
10
Q
Who are the key figures credited with advancing behavioral finance?
A
- Daniel Kahneman
- Amos Tversky
- Richard Thaler
11
Q
What influences do investors face under uncertainty according to behavioral finance?
A
- Emotions
- Group dynamics
12
Q
Fill in the blank: Behavioral finance focuses on the ________ process of decision-making.
A
[cognitive]
13
Q
What is an exception to the premises of traditional finance?
A
Markets are inefficient
14
Q
Which statement is true regarding behavioral finance?
A
Behavioral finance does not abandon traditional finance, but some key assumptions are changed
15
Q
Fill in the blank: Behavioral finance retains some helpful notions and equations from ________ finance.
A
[traditional]
16
Q
What is the significance of the scientific method in behavioral finance?
A
It benefits behavioral finance through well-developed theories and studies refined over decades
17
Q
What does a financial planner help clients do in humanistic counseling?
A
Brainstorm and formulate goals about their future
18
Q
Identify potential sources of money conflict that a financial planner should discuss with clients.
A
Agreement on financial goals and objectives with spouse and/or family
19
Q
What strategies should a planner develop regarding a client’s risk tolerance?
A
- Assess risk tolerance
- Align recommendations with risk profile
- Adapt to changing risk preferences
20
Q
What does behavioral finance retain from traditional finance?
A
Helpful notions and equations
Behavioral finance adds factors to some of the equations from traditional finance.
21
Q
How does the scientific method benefit behavioral finance?
A
Through well-developed theories and studies refined over many decades.
22
Q
Is traditional finance considered mature or in its infancy?
A
Mature and well-developed.
23
Q
What is the current status of behavioral finance?
A
Not settled and still in its infancy.
24
Q
What should planners be aware of to be effective?
A
Their own and their clients’ cognitive and emotional biases.
25
What is anchoring in the context of cognitive biases?
Attaching one's thoughts to a reference point without legal relevance.
26
How can anchoring bias be mitigated?
By considering the relevance of the anchor and finding objective measures of value.
27
What is confirmation bias?
Looking for information that supports prior beliefs while ignoring disconfirming evidence.
28
How can confirmation bias be mitigated?
By actively seeking disconfirming evidence and surrounding oneself with diverse viewpoints.
29
What is herding in cognitive biases?
A person's desire to conform or be accepted by a group.
30
How can herding bias be mitigated?
By looking for people outside the herd and finding objective measures of value.
31
What is hindsight bias?
Looking back after the fact and believing one could have predicted outcomes.
32
How can hindsight bias be mitigated?
By keeping records and making small test runs of ideas before over-committing.
33
What does overconfidence bias entail?
Relying mostly on one's skills and abilities to make decisions.
34
How can overconfidence bias be mitigated?
By recalling failures, seeking objective measures, and keeping performance records.
35
What is overreaction in cognitive biases?
The tendency to react strongly to recent information or events.
36
How can overreaction bias be mitigated?
By being patient, seeking objective advice, and taking a broader viewpoint.
37
What is representativeness in cognitive biases?
Assessing the probability of an event based on superficial traits rather than fundamental analysis.
38
What is recency bias?
Giving too much weight to recent observations over long-term trends.
39
What is the illusion of control bias?
Overestimating one's ability to control outcomes.
40
What is outcome bias?
Judging a decision based on its outcome rather than the decision quality at the time.
41
What is self-attribution bias?
Attributing successful outcomes to one's actions and bad outcomes to external factors.
42
What is loss aversion?
The feeling that losses weigh more heavily than equivalent gains.
43
How does framing affect investment decisions?
The manner in which a decision is framed can influence risk tolerance.
44
What is mental accounting?
A thought process affecting how we choose to spend, save, and invest money.
45
What is Mental Accounting?
The tendency to treat money differently based on how we obtain it or what we intend to spend it on.
## Footnote
Examples include careful spending of paychecks versus careless spending of tax returns or inheritance.
46
What is the Disposition Effect?
The reluctance of investors to realize losses.
## Footnote
This effect is influenced by cognitive biases and emotions.
47
What causes 'faulty framing' in investing?
Investors not marking their stocks to market prices and creating mental accounts based on purchase prices.
## Footnote
They only release their anchor when they sell their stocks.
48
What question can mitigate the Disposition Effect?
"What would you be willing to buy this asset for today?" and "If you didn't own this asset today, would you buy it at all?"
49
What cognitive bias is exhibited by a client disappointed with a 7% return when expecting 12%?
Anchoring
## Footnote
The client anchored on the 12% expectation.
50
What bias is displayed by a client unwilling to sell a stock until the price returns to what she paid?
The Disposition Effect.
51
Which biases spur people to action, even irrationally?
* Overconfidence
* Herding
* Overreaction
## Footnote
The Disposition Effect tends to keep people from acting.
52
What two categories of skills are essential for a financial planner?
* Technical Skills
* Interpersonal Skills
53
What are some examples of Technical Skills for financial planners?
* Identify financial risks
* Analyze client data
* Understand financial products and investments
* Make technically sound recommendations
54
What are some examples of Interpersonal Skills for financial planners?
* Identify client goals and priorities
* Communicate effectively with clients
* Understand client emotions and capabilities
* Make recommendations clients will implement and stick with
55
True or False: Effective communication is solely about what we say.
False
## Footnote
It also involves tone, body language, and other non-verbal cues.
56
What is an important aspect of showing empathy in client communication?
"How are you feeling?"
## Footnote
This helps in acknowledging the client's emotional state.
57
What should planners do to enhance the planner-client relationship?
* Respect the client's time
* Be punctual
* Address the client formally
58
What are clarifying statements used for in client communication?
To ensure understanding, e.g., "Can you restate what you just said?"
59
What does active listening entail?
Fully concentrating on what is being said rather than just passively hearing the message.
60
What is the purpose of summarization in client communication?
To clarify a client goal and wishes.
61
What attributes are essential for establishing trust with a client?
* Honesty
* Openness
* Reliability
* Partnership
* Commitment to clients
62
What is a key component of building a long-lasting relationship with clients?
Time, effort, intentionality, and sincerity.
63
What should planners avoid saying to clients to build trust?
Comparative statements about other clients' struggles.
64
What is the main purpose of sharing prior experiences with clients?
To establish a trusting relationship with the client.
## Footnote
Sharing prior experiences helps clients feel more comfortable and understood.
65
What is crucial for financial planners to establish trust with clients?
Effective communication skills.
## Footnote
Effective communication includes active listening, showing empathy, and using verbal and non-verbal cues.
66
What are the components of active listening?
* Requires the listener’s undivided attention
* Concentration on what the speaker is saying
* Putting aside irrelevant thoughts
* Observing the speaker’s body language
## Footnote
Active listening contrasts with passive listening, which does not require full engagement.
67
What is the difference between open-ended and closed-ended questions?
Open-ended questions result in lengthy responses, while closed-ended questions seek specific, often one or two-word answers.
## Footnote
Examples of open-ended questions include 'How did you decide on that investment?' Closed-ended questions include 'Do you need a recommendation for an estate planning attorney?'
68
What are three main psychological needs to consider when determining client motivation?
* Competence
* Relatedness
* Autonomy
## Footnote
Understanding these needs helps align financial planning with client goals.
69
What does risk capacity refer to in financial planning?
The amount of risk investors can take based on their cash flow, assets, liabilities, and dependents.
## Footnote
Risk capacity is different from risk tolerance, which is about willingness rather than ability.
70
What is the role of 'why' questions in client data collection?
'Why' questions help planners understand clients' motives but may also put clients in a defensive position.
## Footnote
It's important to balance these questions to avoid making clients uncomfortable.
71
Fill in the blank: The financial planner's ability to design a planning experience that aligns with the client's motivations is _______.
[essential].
## Footnote
This alignment is crucial for client satisfaction and goal achievement.
72
True or False: Active listening allows interruptions and distractions.
False.
## Footnote
Active listening requires the listener's full attention without interruptions.
73
What is intrinsic motivation?
Motivation that comes from within, associated with satisfaction and enjoyment.
## Footnote
Intrinsic motivation can enhance engagement in the planning process.
74
What should planners avoid assuming about a client's risk tolerance?
Planners should not assume a client's risk tolerance without involving them in the process.
## Footnote
It's critical to use validated measures to assess risk tolerance accurately.
75
What is the investment planning process?
A systematic approach to managing investments by assessing factors such as employment history, age, demographic characteristics, income volatility, and asset allocation
76
What should planners NOT assume regarding clients?
A client's risk tolerance
77
Why is it critical to involve clients in the investment planning process?
Clients may not understand their own risk tolerance and could self-report incorrectly
78
What are validated measures in the context of risk tolerance?
Tools or questionnaires used to accurately assess a client's risk tolerance
79
What is PASS in investment planning?
Global Portfolio Allocation Scoring System for Individual Investors
80
Fill in the blank: A client’s annual income having varied substantially from year to year indicates a _______ risk tolerance.
higher
81
What does the Behavioral Asset Pricing Model predict?
Return based on market risk, market capitalization ratios, stock momentum, and investor emotions
82
What does the Capital Asset Pricing Model (CAPM) use as a baseline?
Market risk
83
Which lifestyle characteristic indicates a lower risk tolerance?
Maintaining a stable employment history
84
What is the impact of a client’s values on financial planning?
Values can influence goals and the financial planning process
85
What are the four broad categories of Money Scripts?
* Money Avoidance
* Money Worship
* Money Status
* Money Vigilance
86
What is Compulsive Buying Disorder?
A tendency to engage in compulsive shopping and spending, often in response to negative life events
87
What is Hoarding?
Difficulty in letting go of seemingly valueless possessions, leading to clutter and negative living impacts
88
What is the definition of Financial Dependence?
Occurs when one individual provides financial assistance that keeps others dependent
89
What is Financial Infidelity?
Engaging in significant financial transactions without the knowledge and support of a spouse or partner
90
List three sources of money conflict between spouses.
* Financial Infidelity
* Differences in saving goals
* Spending disagreements
91
What is Financial Enmeshment?
When parents involve their children in adult financial decisions and conflicts, potentially leading to unhealthy financial habits
92
True or False: Financial planners should treat money disorders.
False
93
What is Workaholism?
A compulsive disorder often associated with anxiety or depression, focusing excessively on work
94
What should clients and planners agree on to avoid money conflict?
Financial goals and objectives
95
What is the significance of gathering qualitative data in financial planning?
Understanding a client's beliefs, attitudes, and family dynamics is crucial
96
What can lead to the development of unhealthy financial habits?
Emotional and cognitive unpreparedness
## Footnote
Examples include hoarding, compulsive buying, gambling, workaholism, financial dependence, and financial enabling.
97
What is financial enabling?
Sacrificing one's own financial well-being to help others
## Footnote
This may include providing support to family members, friends, or charities.
98
What should clients establish to prevent financial enabling and dependence?
Boundaries and budget categories
## Footnote
Setting limits is essential for maintaining financial health.
99
What is a planned approach to helping clients weather market cycles?
A thorough evaluation of timing and execution of rebalancing
## Footnote
This evaluation may affect portfolios and generate tax consequences.
100
List three tactics for rebalancing a portfolio in a more tax-efficient way.
* Consider tax implications of asset sales
* Utilize tax-loss harvesting
* Rebalance using new contributions instead of selling assets
101
What are some potential solutions for clients facing unemployment?
* Filing for Unemployment Insurance
* Utilizing Family and Medical Leave
* Understanding Health and Retirement Benefits
102
What program can help meet food expenses?
Supplemental Nutrition Assistance Program (SNAP)
## Footnote
Commonly referred to as the 'Food Stamps' program.
103
How often can clients access their credit report for free?
Once a year
## Footnote
Clients can visit AnnualCreditReport.com to access their credit report.
104
What should clients do if they need help with financial issues?
Utilize federal resources available for assistance
## Footnote
These resources can help clients through emergencies and strengthen their financial health.
105
What type of assistance can clients seek regarding mortgages and housing?
Housing counseling
## Footnote
Clients can find counselors at https://www.consumerfinance.gov/find-a-housing-counselor/
106
What is credit counseling?
A service that provides guidance on managing debt and improving credit
## Footnote
More information can be found at https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
107
What resources are available for student loans?
Consumer tools for managing student loans
## Footnote
Clients can access these resources at HTTPS://WWW.CONSUMERFINANCE.GOV/CONSUMER-TOOLS/STUDENT-LOANS/
108
What types of utility bills can clients seek assistance for?
Water, gas/oil, and electricity
## Footnote
Assistance resources can be found at https://www.consumerfinance.gov/consumer-tools/disasters-and-emergencies/asking-for-help/
109
Fill in the blank: Clients have the right to access their _______ freely every year.
credit report
