As almost all financial advisors have experienced, instilling behavior change in clients can be a tough task. Though we can easily see ways in which clients could improve their behavior for the better (which are often known by clients as well), the reality is that merely telling clients about how they can improve their behavior is rarely enough to actually get them to do so. While there are many reasons why this could be the case, one common barrier to behavior change is that if the client isn’t self-confident in his/her own ability to successfully make the change in the first place – lacking the “self-efficacy” to be successful – then the change simply doesn’t happen.
In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – examines the concept of financial self-efficacy (i.e., one’s confidence in their ability to complete a financial task), and looks at how research might suggest that financial advisors can help their clients build greater levels of confidence in their own ability to actually engage in (and therefore adopt) better financial behaviors.
Though it is not a term that is as popular outside of academic circles, “self-efficacy” is a broader concept which refers to one’s confidence in their ability to engage in a particular behavior. Growing out of research related to positive psychology (the study of what makes people flourish), self-efficacy has been found to be an important concept related to promoting good behavior in many areas of life. Though research specifically within a financial planning context is still limited, some early findings suggest that promoting the practice tenets of positive psychology captured within the PERMA framework – which posits that Positive emotions, deep Engagement in activities, worthwhile Relationships, finding Meaning in one’s life, and Achieving a sense of accomplishment – may be ways in which financial advisors can help clients improve their financial self-efficacy.
Additional research on self-efficacy more generally suggests that performance accomplishments (e.g., helping our clients develop skills that they need to be confident in taking action), vicarious experience (e.g., serving as a good financial role model for our clients), verbal persuasion (e.g., providing encouragement when our clients need some financial coaching), and emotional arousal (e.g., encouraging/discouraging financial decision making when clients are in ideal/non-ideal levels of emotional activation) may all be effective ways that financial planners can help their clients build financial self-efficacy. As a result, financial planners who wish to help their clients implement better financial behaviors should not ignore the potential power of promoting financial self-efficacy. When it comes to helping clients make good decisions, helping clients believe they can accomplish the financial behavior in the first place is crucial!
source https://www.kitces.com/blog/financial-self-efficacy-bandura-positive-psychology-planning-perma/?utm_source=rss&utm_medium=rss&utm_campaign=financial-self-efficacy-bandura-positive-psychology-planning-perma
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