Goal-setting is filled with challenges both for advisers, who have a vested interest in keeping their clients on target, and their clients, who might not be able to tell the difference between goals they want, goals they need, and goals they can actually achieve.
Morningstar behavioral economist Sarah Newcomb, Ph.D., author of Loaded: Money, Psychology, and How to Get Ahead Without Leaving Your Values Behind, has researched the psychology of goal-setting, and she said advisers use it to craft realistic, meaningful, and achievable goals that benefit advisers and clients alike. “I do a lot of research into how the way that we think about time affects our financial decisions, and what I’m finding over and over again is that the further that someone thinks ahead, and the clearer their picture of the future is, the better decisions they make financially,” Newcomb said. “They have more saved for retirement, and they have more non-retirement savings. This long-term mindset alters the course of our financial lives in a large way.”
Destiny versus self-determination
Mentally picturing the future isn’t easy, and it can be particularly difficult to envision long-term goals when your clients don’t feel like they have any control of their financial future. Newcomb’s interviews with investors underlined the need for your clients to feel like they are really in charge of their money. “I asked people which statement they agreed with more: ‘I create my financial destiny,’ or ‘I have very little power in my financial life,’ “Newcomb said. “They had to choose one or the other. Then I looked at what they said they had in retirement savings. The people who believed they create their own financial destiny had about 2.7 times more money in retirement savings than those who didn’t believe that.”
Dispelling delusions
While empowering your clients is an essential part of goal-setting, it hinges on having goals that both you and your clients believe are achievable.
“If your clients really think a goal is in their power to do it, that’s a good goal,” Newcomb said. “If you don’t think that you can do it, then you won’t, and it actually becomes disempowering to think about it.” “The first thing advisers want to do is say, ‘Is this goal possible? Do these clients have the means, if they changed some of their behavior, to actually reach the goals they want?’ Then advisers can focus on helping clients through these little mental tricks to reach a mindset that’s more conducive to reaching their goals,” Newcomb said. “I hear stories from advisers about people who are wealthy now but eventually won’t be, because of their spending habits. Not only will they be unable to retire, they’ll probably not have enough assets to need a financial planner in 10 years, if they don’t cool it.
“They’re out of touch. They’re apathetic, avoiding the truth, or they just enjoy spending too much.” In this case, advisers need to talk about quality of life.
“They can tell these clients, ‘If you continue on this trend, let’s talk about your about quality of life in 10 years, or 20 years. Let’s look at what you can afford and what that life is going to look like,’ “Newcomb said. “By getting the clients to see some details, they may say, ‘Oh, I don’t want to live like that. What do I have to do now so that I can live better then?’”
From spreadsheets to stories
Taking your clients’ information and turning it into real-life scenarios is crucial, because showing them spreadsheets or a screen full of data won’t cut it in most cases.
“Clients will say, ‘Oh, I’ve got $5 million. I’m fine.’ Actually, when they retire in 25 years, that $5 million is going to be half as valuable. There’s a disconnect between a lump sum of money and what that lump sum translates into in terms of long-term income,” Newcomb said. “So, you have to do the math for them. What financial advisers need to understand is that for most people, numbers are far too abstract. You need to translate the numbers into a narrative, a story, about what the clients’ lives will look like. If that life is, ‘Right now you’re going to have about enough money to sit in front of a cable box for 10 years,’ then that’s the story you need to tell them, in a gentle way.”
“Take that lump sum and show your clients what that means in terms of monthly income, so they understand why their lump sum is actually not as big as it needs to be. People don’t do mental math very well, so turning that lump sum into actual monthly income amounts frames the discussion in a way your clients can see more easily,” Newcomb said. “Then, they can start translating that into what their lives would look like if that was their only income. Then, the connection between the short term and the long term starts forming.”
Tools for success: mental contrasting can be crucial
“When I tell people they likely need millions of dollars to be financially stable and not outlive their money in retirement, they say, ‘Oh, I can’t. It’s impossible. I can’t do that,’ and they just want to give up. Advisers have to be careful of that, because when people don’t feel powerful, they give up and they shut down,” Newcomb said. “You have to help clients understand that they can reach these seemingly unreachable amounts. They must start now and they have to plan well, but there are ways to do it. This is where really cool research on what’s called mental contrasting1 comes into play.
“First of all, get clients to think about the future that they want; think about how wonderful it will be to retire and spend all their time gardening and reading books,” she said. “Most people do that and stop. But it turns out that it’s powerful and effective for people to think about one obstacle that’s in their way, between here and that ideal future. Just one thing that they believe they can overcome. Maybe it’s a Friday night spending binge at the mall. Or maybe it’s a pricey dinner every week. Whatever it is, it has to make them say, ‘That’s the thing. I’m overspending in this area, and that’s one obstacle keeping me from really saving enough for retirement.’
“If it’s an obstacle that they don’t honestly believe they can change, it will backfire. But if it’s an obstacle that they believe is in their power to overcome, then their brains attach success to overcoming that obstacle,” Newcomb said. “The people who use mental contrasting tend to save more for retirement and be more successful at reaching their goals than people that just use positive fantasy as a motivator.”
A blueprint for realistic goal-setting
Newcomb outlined a way for advisers to put all of these steps into practice, running through a scenario that she’s heard from multiple advisers.
“Let’s say you have clients that are pretty affluent, but they’re not thinking far enough ahead, so they’re not saving enough to reach all their goals. They might be able to reach two out of their three high-priority goals, but the long-term picture doesn’t look good,” Newcomb said. “The first thing to do is try to move them toward financial health--get them to think a little further ahead. If they’re thinking five years ahead, get them to make a 10-year plan. Get them to picture their life 10 years from now, to really think about the life that they’re working toward, a life they can really dream about.
“If your clients are struggling in any way or feel powerless in their financial lives, you can draw their attention to the ways in which they do have autonomy and power. You can show these clients how their choices are powerful. By doing that, you might be able to move them to boost their savings rate and reach all of their goals in time.”
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