The CFP Board to Include the Psychology of Financial Planning in Its Certification Exam

The aim of expanding the training to include more people skills is to help advisers align more closely with their clients’ goals.


Beginning next March, the examination for the Certified Financial Planner (CFP) Board of Standards designation will include questions on the psychology of financial planning.

The change was made because the CFP Board updates its Principal Knowledge Topics every five years to “ensure the CFP certification requirements reflect current practices—i.e., what CFP professionals actually do,” says John Loper, the board’s managing director, professional practice (education, examination and experience). The update, the last one being in 2015, was the result of “a major research project,” Loper tells PLANADVISER. “We survey CFP professionals with different experience across the country to learn how important each of the principal knowledge topics are. Those results showed us that we needed to update our certification to give the psychology of financial planning—which was already part of principal knowledge topics under general principles—greater importance. If we were static, we would not be reflecting current CFP practices.”

To prepare those financial advisers who are currently studying for the CFP designation, Loper says, this past March, the CFP Board “announced the full principal topics across the domain to everyone,” including this change. “Registered programs need to know because they provide the education to CFP candidates,” Loper says.

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The CFP designation can be obtained through a four-year Bachelor of Arts (BA) degree, which is the route most CFPs take, or as a certificate, which typically takes 18 months to two years of study, Loper says.

The Value of the ‘Psychology of Financial Planning’

As many retirement plan advisers and general financial planning practitioners may already know, the work that a financial adviser does with a client is very personal and needs to address the person’s financial goals.

The CFP’s psychology of financial planning curriculum addresses “client and planner attitudes, as well as behavioral finance,” Loper says. For instance, “Clients who are socially conscious may not want their investments to be in tobacco or companies that are not environmentally conscious,” Loper says. Understanding these types of clients’ financial priorities and goals is important to a financial planner, he says. “There could be sources of money conflict arising from a divorce or crisis events with severe consequences.” Further, it’s important for CFPs to know how to “work with clients when there is a severe correction in the market,” Loper continues.

Advisers need to know how to address client worries during such events, he says. “One of the most obvious skills an adviser needs is effective communication. If you’re a poor communicator, you will have trouble giving advice to your clients. Many of our volunteers have shared with us that it’s exciting” to have the CFP designation updated to include more modules on the psychology of financial planning, Loper says. “These are critical skills, not ‘nice-to-have’ skills,” he says, adding that the CFP Board expects reaction to the new CFP requirements to be “very positive.”

“This should especially help new planners communicate better with their clients,” Loper says. For those who already have the CFP designation, they’ll have the option to take the psychology of financial planning classes in the 30 hours of continuing education (CE) they must undergo every two years, he says. “They can choose from any principal knowledge topic—but two credits must be associated with ethics.”

EY Personal Finance has long addressed the need for financial planners to understand the value of the psychology of financial planning, says Dan Eck, managing director of the firm.

“This is part of the conversations we have every day in our financial planning life,” Eck says.

In preparation for that work, EY Personal Finance puts its financial planners through a “softer-training boot camp,” Eck says. The update to the CFP Board of Standard’s certification “is exactly what we’re talking about—helping our planners build trust [and] empathy and learning the reasons behind a person’s stated goals and philosophy toward money. There is a lot behind saying you want to retire. You need to consider the spouse, or the significant other, and the motivation behind any goal. That’s a key part of the financial process. Learning about some of these motivations is easy and obvious, but whatever the motivation might be, learning about and understanding them is a critical part of financial planning.”

Examples of Psychology of Financial Planning in Use

When Eck first studied for the CFP in the late 1990s, one of his instructors asked the class what a financial planner should advise a client to do if approaching retirement with a mortgage. The instructor asked if it would be better for the client to pay off the mortgage before retiring.

“None of us came up with the right answer, which is [another] question: ‘What does the client want to do? Is their life goal to be debt free in retirement?’”

Another example of the psychology of financial planning in play is helping retirees decide on a budget, as many have difficulty spending and enjoying the money they worked so hard to save for three or four decades, Eck says.

Then there is the critical question of what to say to clients when the market fluctuates dramatically. It is important for planners to be prepare to “talk panicked investors off the ledge by helping them understand and focus on the long-term,” he says.

Eck even encountered people on the cusp of suicide during COVID-19 due to unforeseen financial difficulties the pandemic wrought.

EY Personal Finance planners coach workers who call “each and every day with the issues that come with the stress of finances.”

For example, when an EY Personal Finance planner first encounters a new caller asking about retirement, the planner “devotes the first hour to asking them about their picture of retirement. It has nothing to do with finances—but how they and their family are planning to live. It goes well beyond the numbers,” Eck says.

He notes that retirement planning advisers could well employ the psychology of financial planning in their one-on-one encounters with retirement plan participants. As he puts it, “The psychology of financial planning drives how and why we crunch the numbers.”

Talking Taxes, Inflation and Bucket Strategies

Reflecting on the common conversations they are having with their near-retiree clients, advisers say there is broad certainty that taxes will increase in the future, and also a lot of fear about a market correction.

As the founder and lead retirement planner at Rich Life Advisors, Beau Henderson’s advisory practice focuses almost exclusively on serving investors who are within a 10-year window of retirement.

Now in his 21st year as an adviser, Henderson says he has learned a lot in running his own independent firm, having first cut his teeth at a big insurance brokerage. For context, Rich Life Advisors was founded in 2007 with an exclusive focus on individual retirement planning, Social Security optimization and beneficiary liquidity planning.

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“We founded the firm based on the belief that there was a lack of truly holistic retirement planning advice available for people,” Henderson says. “That vision has served us well ever since, including during this challenging time of the pandemic. I hate to be critical, but honestly, the bar is still pretty low out there in terms of what the typical adviser can do to actually help an individual create an efficient retirement spending and estate strategy.”

Henderson says the advisory industry has for decades been more or less exclusively focused on the accumulation and maximization of wealth, and while the conversation about income planning has increased, the real capabilities of advisers and providers have not necessarily kept pace. What’s more, he believes near-retiree investors are catching onto this dynamic, and that they will vote with their feet when they feel their advisers aren’t meeting their needs.

“The job is pretty easy when you are only thinking about accumulating assets,” Henderson says. “The hard part of the job, and my favorite part of the job, is helping people actually envision, plan and then tackle their retirement. It doesn’t help the adviser that a lot of the providers out there are structed entirely around accumulation, too. So many of them still aren’t prepared, for example, to help people take distributions in the most tax efficient way possible.”

Henderson says he has had many new clients come in asking for help only after they failed to put a plan in place and are now facing an unnecessary six-figure required minimum distribution (RMD) that they don’t want or need to take.

“What does more effective retirement income advice look like?” he asks. “In my view, a lot of it has to do with creating tax diversification—that is, making sure people aren’t just hitting retirement with all their money stocked away in a traditional 401(k) plan. For the vast majority of people, using both Roth-style accounts and traditional tax-sheltered savings will be important.”

Beyond this, Henderson preaches the central importance of helping people actually envision what they want their life in retirement to look like.

“This vision is actually central to the job of pursuing the most tax-efficient investment and income strategies,” he says. “Only once we know what their lifestyle and goals are in the different parts of retirement can we decide how to best structure the portfolio and how to draw income.”

On this point and others, Henderson’s outlook mirrors another adviser who is outspoken about the importance of studying the tax-side of the retirement income conversation: Ed Slott, a CPA and IRA expert with Ed Slott and Co. who also offers adviser training courses in collaboration with the American College of Financial Services. Among the biggest issues he sees in the marketplace today is the tendency of (unadvised) investors to use the RMD age as the main proxy/input in deciding when to start drawing down their tax-advantaged savings.

“People need to remember that every year you wait for the RMD age, the more quickly that money will ultimately have to come out in the future, which means the annual distributions and the annual taxes are potentially going to be higher,” Slott says. “Advisers and accountants should look at this very carefully and help people to make the optimal decision. Perhaps a person should consider a Roth conversion, for example, rather than wait for the 72 RMD age.”

Henderson agrees, noting that many of his clients ultimately choose—thanks to his suggestions—to enact small-but-regular conversions of tax-sheltered assets into after-tax Roth accounts. Sometimes this strategy may result in a person paying more income tax in a given year than they otherwise would have, but in the long run, the strategy proves more effective than simply deferring taxes as long as possible.

Henderson and Slott are also both in the camp that believes it is more likely that income taxes will increase over the next decade or two—and there is especially little chance they will decrease after so much COVID-19 related stimulus. This outlook, which they say is shared by the vast majority of their clients, makes tax diversification even more important.

“This type of planning is challenging, but it adds a great deal of value to what we are doing for our clients,” Slott says.

In terms of stewarding clients’ assets while they are in retirement, Henderson says his firm is designing a lot of bucket strategies. This approach is, at least in part, so popular because many of his clients are anxious about a potential market correction. The bucket approach involves segregating a client’s assets into three pools, the first being totally liquid and meant for spending in the next year or two. The second bucket covers year two through 10 and may be invested in high quality fixed income or certificates of deposit. The final bucket is fully invested in equities and other accumulation vehicles, with a particular focus on beating inflation and meeting the clients’ legacy goals.   

“My personal view is that we’ve been in such a low inflationary environment for so long that we are poised for at least moderate inflation going forward,” Henderson says. “How fast or how significant that will be, I can’t say. What I am worried about is when I come across people with a half a million dollars meant to fund their retirement and it’s all in a cash savings account. We have a short cultural memory, so I think a lot of people have forgotten how bad the sting of inflation can really be.”

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