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CFP Board Adds Psychology of Financial Planning to Exam Topics

Prospective certified financial planners need to understand psychology and behavioral finance.

The Certified Financial Planner Board of Standards (CFP Board) recently added a new category titled “Psychology of Financial Planning” to the list of topics that prospective certified financial planner certificants will need to know to pass the CFP exam.

The updated topic, which will require knowledge of client and planner attitudes, values, and biases; behavioral finance; sources of money conflict; principles of counseling; general principles of effective communication; and crisis events with severe consequences, will be integrated in the education requirements for CFP certification and assessed on the CFP exam starting in March 2022.

According to a news release, CFP Board updated its “principal knowledge” topics list based on findings from its latest Practice Analysis Study.

That study “is an essential part of CFP Board's work to maintain the relevance of CFP certification and ensure that it reflects the current practice of financial planning," Kevin Keller, the CEO of CFP Board, said in a statement.

The other major change in CFP Board’s 2021 principal knowledge topics list includes the consolidation of the prior education planning category and underlying topics within the general financial planning principles category. Here’s a side-by-side comparison of the 2015 and 2021 principal knowledge topics.

According to a news release, CFP Board's latest Practice Analysis Study also included the development of the first financial planning competency framework, which outlines the attributes and behaviors CFP professionals need to serve today's financial planning clients and remain competitive.

What do behavioral finance experts have to say about the changes?

“I was very gratified to see the change in the CFP board curriculum requirements,” said Sarah Newcomb, director of behavioral science at Morningstar.

“Financial advisers are trained quite extensively in methods for making a client’s numbers ‘work’, but they are left to their own devices when it comes to the emotional reasoning so many of us employ in critical financial decisions,” she said. “I often say that, ‘Yes, the numbers have to work, but your life has to work, too.’”

Newcomb noted that many financial decisions have important emotional ramifications, and to ignore the emotional tradeoffs as “irrational” will lead to advice that is off the mark. “Yes, we need to be sure that we don’t overweigh emotions, but to ignore them is also a mistake.”

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Other experts share this point of view. “This is a good step by CFP Board,” said Meir Statman, a professor at Santa Clara University and author of Behavioral Finance: The Second Generation and Finance for Normal People: How Investors and Markets Behave. “Financial advisers already know that knowledge of behavioral finance is immensely useful in guiding their clients toward life wellbeing, beyond financial wellbeing. It is good that this knowledge is now incorporated into the CFP curriculum.”

For his part, Brian Portnoy, founder of Shaping Wealth and author of The Geometry of Wealth, said his first reaction to the addition of the psychology of financial planning was this: "It's about time."

The industry, he said, has been quickly moving upstream toward more comprehensive planning and at the same time the investment piece of advice has become largely commoditized. “It's a good sign that the CFP is helping to validate and maybe even accelerate this shift by codifying applied behavioral finance in its programming,” said Portnoy.

Others also praised CFP Board’s new topic. “This is a wonderful decision since this will educate future financial planners about the various biases their clients suffer from,” said Victor Ricciardi, a visiting finance professor at Washington and Lee University and co-editor of the books Investor Behavior and Financial Behavior.

“This will hopefully assist planners in providing better financial advice and improve the decision-making process of their clients. Many financial planners are already applying the knowledge of behavioral finance topics and tools in their daily routine; this news helps to formally structure the process and recognizes planners play many important roles such as personal finance educator and financial coach,” he said.

The financial planning profession recognizes the importance of behavioral finance more than any other financial or investment profession, said Ricciardi. “Unfortunately, many financial academics and professionals still do not recognize the value of behavioral finance and are proponents of the idea individuals make rational decisions,” he said. “The rational school (also known as standard finance) does not realize they suffer from “status quo bias” in which they are unwilling to accept or change their belief system that individuals exhibit a host of biases and many times this results in bad financial decisions.”

To be fair, this isn’t CFP Board’s first effort to recognize the importance of the topic. For instance, CFP Board recently launched a Client Psychology course in partnership with the Aresty Institute of Executive Education at the Wharton School of the University of Pennsylvania, as well as a book, Client Psychology.

To be even fairer still, it’s worth noting that CFP Board isn’t the first to recognize that the topic -- the psychology of financial planning – should be required education and knowledge for financial planners. The Investments and Wealth Institute’s Applied Behavioral program is designed to give advisers the tools to understand and properly navigate their clients' roller coaster of emotions and unspoken biases toward investing; the Financial Therapy Association, which was founded in 2009, provides education and training that learners can use to apply research and evidence-based therapeutic techniques to help clients; and Morgan Housel recently popularized the topic with his book The Psychology of Money.

As for the subtopics that will be addressed in CFP Board’s new knowledge topic, Newcomb thinks the curriculum covers a lot of ground. “If it’s missing anything, I would point to sudden wealth and the challenges that having money brings to people not used to dealing with it,” she said. “There is a major psychological shift that happens, and being trained to help people through that shift has a lot of value.”

The particulars of CFP Board’s psychology of financial planning coursework and its practical applications remain to be seen, said Newcomb. “But it’s at least an acknowledgment that financial decisions involve more than numbers, and advisers’ training should do the same,” she said.