Author Archives: Angela Myers

13 traits that influence personal finance

13 Psychology Traits That Impact Money Decisions

Money decisions might seem objective on the surface and some are. Don’t spend more than you make, save for retirement, and consider saving up for a home are generally good pieces of financial advice but to truly understand why someone makes the decisions they do–good or bad–you have to understand how they approach their finances. 

In order to understand this, you must learn more about their financial psychology. Financial Psychology is an interdisciplinary field that studies how principles from psychology impact our financial decisions. 13 financial personality traits in particular influence many of our money decisions.

13 traits


This trait measures how involved a client likes to be in their money management. The more control they want over their money, the closer their score will be to 100. If one of your clients likes is constantly checking their stock portfolio and emailing you, they probably have a high level of involvement. 


This trait measures how proud a client is of their money management skills. The closer their score is to 100, the more pride they have in their money management skills. If a client constantly criticizes their ability to manage money, they have a lower level of pride. 


The more guided their decisions are by emotions, the closer they’ll be to 100 while the less guided they are by emotions, the further their score is from 100. A client who’s an emotional spender would score higher for this trait.  


If a client believes others are financially generous, their score will be closer to 100. In contrast, someone who thinks everyone is greedy and conniving in financial transactions would have a lower score. 


Confidence reflects how comfortable a client is with their money management skills. The greater their comfort level for managing their own money, the closer their score will be to 100. Someone who feels they are doing a good job managing their money and is comfortable talking about finances with a financial advisor would score higher for this trait. 


Power measures a client’s interest in using their money for public recognition. The more your client wants to use money for public notoriety, the closer their score will be to 100. Someone who invests their money in running for a local political office would highly value power. 

Work Ethic

Work ethic encompasses how likely a client is to believe hard work will bring success. The closer they are to 100, the more they believe in hard work. Someone who believes corruption and luck, not hard work, brings about success would have a lower score for this trait. 


The happier they are with their money situation, the closer their score will be to 100. A client who is miserable and always complaining about how they wished they had more money would score lower. 


The level of risk a client is comfortable with when it comes to investments is one of the most used financial psychology traits by financial advisors. A client who is eager to invest in new startups or in crypto currencies with high risk and reward will fall closer to 100 while a client who is scared to invest in safer mutual funds will be closer to 0. 


If a client feels their own actions determine their wealth, their score will be closer to 100. If they feel luck plays a bigger role in their money situation, their score will be closer to 0. 


Spending encompasses if a client enjoys spending or saving money. A score closer to 100 means they enjoy spending money more than saving while a client who is frugal and hardly ever spends money would be closer to 0.


Reflectivity refers to how reflective and analytical a client is in their money decisions. The more reflective a client is, the closer their score is to 100. 


If a client’s level of trust in the integrity of others’ dealings with money, their score will be closer to 100. Those who have less trust ion how others deal with money will have a score closer to 0. 

Often, it can take confidence, time, and the right questions to discover where a client falls for these 13 financial traits. 

But not with the Moneymax quiz. This tool measures where your clients fall on a scale of 1-100 for 13 characteristics in less than fifteen minutes. Based on their results for those 13 characteristics. If you’re interested in trying out the Moneymax quiz at a special discounted rate, consider subscribing to our newsletter. When you subscribe, we’ll send you a free gift and a discount code. 

People, financial papers, and coffee

How to Separate Money and Emotions For Better Wealth Management

To know and understand the motivating forces behind investing, to know and understand why one investor becomes tense about losses, why one becomes greedy about profits, and why one either overreacts or fails to react is, perhaps, more than half the investment battle. Money and emotions aren’t always an ideal pairing. If your emotions are managing your wealth, you may not be setting yourself up for success.

There is a high price to pay for the kind of innocence many investors bring to their investments and the way they interact with their investment advisors. Unfortunately, in many cases, to help maximize your financial returns, you must first help yourself master your emotions.

Often, bull markets are like blinders. Investors begin to believe in the fantasy that their stocks will always take good care of them and never disappoint them. But, when reality hits and the bull market turns bear, investors can be faced with challenging decisions and their gut emotions may take over.

There are certain important relationships which we must understand before we may be able to achieve a consistent degree of success in the world of investing and in the marketplace.

The first and foremost of these is that the majority of losses in the marketplace result not from poor trading decisions but rather from emotional and attitudinal causes. Investing by its very nature is an emotional business.

Few investors have the self-knowledge, emotional stamina or self-control to make rational, intelligent and profitable decisions, particularly in times of stress. So often, investors react wildly to bad news, frequently selling shares of perfectly good stocks–reacting with their emotional money minds rather than their rational ones.

Why is it that some investors may tend to make rational decisions, stick with their choices and strategies while others seem to act out their emotions and make investment decisions that may not lead to profit?

The field of behavioral finance has given insight into some mental miscues investors make that might sabotage and crimp their returns:

Fear of Losing Money

Psychologically, people give greater weight to a past loss than they do to a future gain. In fact, some individuals find losing money so distasteful that they talk themselves out of investing altogether. Some investors don’t make reasonable trade-offs because the drive to avoid loss sabotages any future gains or opportunities.

But when you make decisions out of fear instead of rationality, your decisions are seldom ever good. A 2019 study on entrepreneurship found entrepreneurs who made fear based decisions instead of rational ones were less successful financially.

Determine ahead of time exactly how much you can “emotionally” afford to lose as well as “financially”. They are often very different.

Worrying About the Wrong Risks

Investors are held captive by events that could be conceived as unpredictable or frightening events. People are traumatized by dramatic events. They can’t tolerate the anxiety that accompanies them.

This can be seen in a modern day context where, for the past 3 years or so, even successful business leaders have been predicting an economic collapse worse than the great depression. While there have been adverse negative effects due to COVID-19, it has not been on the scale of more dramatic predictions.

Investors often become blind and deaf to others’ advice in these times and tune out advice from others, including their financial professionals. They exaggerate current crises.

What’s worse is that they forget the wisdom of lessons from the past. They overlook the fact that people who stayed fully invested during previous crashes recouped their losses.

Help yourself base your decisions on what you can control, not on those factors you can’t control. Review the rationale for your current strategy and ask yourself and your financial professional if it still makes sense. If it does, review why the strategy still makes sense from time to time so you can help regulate any impulsive and emotional reactions that may bring you off course.

Educate Yourself

Smiling woman holding money

Knowing thyself isn’t just for characters in Shakespeare’s plays. It’s also a great way to better manage your finances. Since emotions play such a big role in financial decisions, it’s important to educate yourself on psychology as well as investing in financial education.

If you are a financial advisor, you most likely have strong financial literacy and have studied personal finance for quite some time. However, you might not have studied the psychology behind it.

Oftentimes when we look at just the finance side of wealth management, we can get confused by our clients actions or ideas. However, if we studied the psychology of finance, we would better understand our clients.

One of the best ways to educate yourself on financial psychology is with the Moneymax assessment. This assessment not only allows you to know your clients’ and potential clients’ personality types, it also reveals where they fall on a scale for 13 financial characteristics.

If you understand the psychology of your clients as well as the principles of personal finance, you are better able to manage wealth.


As you evaluate your investment strategies and individual situations, whether with your financial professional or on your own, consider these points:

Investors are more prone to make or lose money as a function of their emotions and attitudes than on the basis of their stock selection or trading system.

The best system can be rendered a losing proposition by inappropriate implementation due to emotional and behavioral limitations.

Appropriate or successful investor behavior can be learned to a large extent. Education is essential to helping investors stay in control and continue to grow, particularly in learning self-regulation and self-control.

Acknowledging and understanding your emotions is an important step in staying on track with your long-term financial plans when challenging economies become the everyday reality.

Likewise, learning to control your emotions even when the market turns upwards is equally important.

Finally, remember, if you find yourself questioning your decisions, talk to your financial professional, they are there to help you when you have to make the tough decisions.

Setting yourself apart as a financial advisor

Getting Clients as a Financial Advisor By Setting Yourself Apart

If you’re trying to distinguish yourself as a financial advisor, you need to set yourself apart from the rest. Every financial advisor has access to similar asset allocation tools, calculators, and risk assessments, but even with the same tools, some financial advisors get more clients than others because they’ve learned how to distinguish themselves from the competition. 

One of the best ways to distinguish yourself from your competitors is by offering a more comprehensive, holistic service that achieves the personal financial goals of your clients and attracts new clients because they feel like you really get them. 

While it can be tricky to offer more holistic financial advising services, it doesn’t have to be. One financial advising tool can offer you the perspective you need to stand apart from your competitors in fifteen minutes or less!

Offering a Holistic Perspective

Financial advisors often focus only on the money and not on the money manager. While it might make sense to us to offer objective advice, money can be a very emotional topic for many people.

It’s not enough to only understand how the financial side of advising works, you should try to understand what influences your clients’ money decisions and what they value financially. Do they want to invest more in travel or in starting a family? Are they optimistic or pessimistic about their money situation? Knowing details like these gives you a more holistic view of what sort of financial advice they need. You need to know your clients’ financial psychology.

Financial advisors talking to 2 clients

When you hear this term you might say, “Psychology? I’m not interested in becoming a therapist!” And that’s not exactly what it is. Financial psychology simply lets you know more about why your clients and prospective clients make certain financial decisions. It takes the guesswork out for you and makes your clients and prospects feel understood.

However, learning about your clients’ financial psychology can be time intensive and some of it can be difficult to learn just from asking questions. While there are some tools out there that help you understand parts of your clients’ financial psychology, such as risk assessment tools, you need a more holistic approach to understanding your clients. 

What is Moneymax? 

But what is this secret tool that can set you apart? Moneymax!

Moneymax helps you stand out because it’s unlike any other financial advising tool on the market and it adds empathy and personality to your advising. 

Studies show empathy drives better client relationships and better portfolio performance. This tool not only lets you learn more about your clients, it also shows your clients that you, as their financial advisor, really understand them. Maybe better than they understood themselves! 

Moneymax puts you in a position of more trust and strengthens your ability to lead a client more effectively to their financial goals. The Moneymax tool allows you to:

  • Truly “get” your clients
  • Increase your prospective client conversion rate
  • Develop better relationships with your clients 
  • Have less sales-y interactions and more meaningful ones

No matter what type someone gets, the Moneymax quiz makes your clients feel like you truly “get” them and transforms sales-y calls into more authentic conversations. If you’re ready to take your financial advising practice to the next level, it’s time to invest in Moneymax!

How the Moneymax Tool Was Created

This Moneymax quiz was formulated as a part of a research study in the 1990s. It’s been retested two times since then and had the same results, making it a timeless quiz you can use for years to come. It measures where your clients fall on a scale of 1-100 for 13 characteristics. Based on their results for those 13 characteristics, they will be assigned one of nine personality types. 

Moneymax is a personality assessment based on research by Dr. Kathleen Gurney. It gives you insight into your client’s money personality and money management preferences. 

The assessment takes clients’ only minutes to complete and provides a meaningful report about their money personality. With Moneymax, you can provide your clients:

  • More appropriate asset allocation
  • Greater satisfaction with the process
  • More confidence and peace of mind
  • More efficient communication

Whether you use Moneymax or not, it’s important to approach your clients with a more holistic view of their financial psychology. Understanding the full picture will set you apart from competitors and will lead to a long-term, mutually beneficial relationship.

That being said, Moneymax is the easiest and most effective way to understand your clients’ financial psychology and how to guide them towards the best financial decisions. Don’t believe us? Subscribe to our newsletter for an exclusive deal to try Moneymax’s profiling tool at a discounted price. 

Stack of credit cards

How To Mindfully Manage Your Credit Card

Credit cards can offer peace of mind, but more often than not, they create undue stress. We talked to credit experts and mental health professionals, who say you can bring tranquility into your financial life by following these five strategies to mindfully manage your credit card.

1. Clear away credit card clutter

Have you ever stood at a cash register, shuffling frantically through a stack of plastic to find a specific retailer’s card? Trying to keep track of and manage too many cards can be overwhelming. So, if you have more than a few cards, experts recommend that you pare down your collection.

“You need to lighten your load,” says Catherine Williams, Vice President of Financial Literacy for Money Management International, a credit counseling firm with offices in 22 states. She recommends keeping two multi-use cards.

One should be a rewards card to use instead of cash — to buy items such as groceries, gas and monthly yoga classes — that will make it easy to track spending and prevent worrying about cash getting lost or stolen. Never carry a balance on a rewards card, because they have high interest rates.

The second card, Williams says, should be a very low-interest credit card for unexpected big-ticket purchases — such as a new household appliance or car repair — that you might have to pay off over a few months.

If you have too many retail credit cards from clothing, electronics and home improvement stores, Williams recommends paying down your balances and closing one or two cards every three to four months. “It’s a slow and steady way of changing a habit,” Williams says.

2. Use plastic for self knowledge

The maxim “know yourself” applies to finances as well as other areas of life — and a credit card can serve as a valuable tool for gaining self-knowledge and clarity, experts say.

“I love the idea of using a credit card to understand your budget — you can get a lot of peace of mind from it,” says Kit Yarrow, a consumer psychologist at Golden Gate University in San Francisco, who recommends learning about yourself by putting all your purchases on one credit card for a month. “You can come up with real data and new insights about how you’re managing your money,” Yarrow says.

Hard numbers can be useful, Yarrow says, because consumers tend to underestimate the amount they spend on routine purchases — which can blur together in the mind.

“A lot of people have no idea how it adds up when they spend on gas, tolls, coffee, cookies or that organic arugula they decided to throw in the cart at the grocery store,” Yarrow says.

And, consumers sometimes fool themselves on luxury purchases — such as new designer shoes — to convince themselves it’s OK to splurge. Yarrow says: “They might tell themselves, ‘Oh, I haven’t bought any shoes lately,’ when, in fact, they bought three pairs this month.”

3. Clarify your financial priorities

One key to financial peace of mind, experts say, is figuring out how to use credit cards in harmony with your values and priorities. “We often get caught up in routine and fill our lives with the small things and then there’s no room left over for the big things,” says Elisha Goldstein, a psychologist and co-author of “A Mindfulness-Based Stress Reduction Workbook.”

He recommends taking time alone to reflect on your priorities, then thinking about how they relate to your finances.Woman with credit card, phone, and coffee

Once you’re clear on priorities, you can sit down at the beginning of each month and decide how you will spend and use your credit cards in a way that reflects what’s important to you.

When you’re trying to cut down on credit card spending, it’s also important to take small steps. For example, you can decide not to put anything on your card for 30 days to cut down on spending. Making small, specific commitments to yourself provides peace of mind and better control over your behavior.

4. Practice mindfulness with money

If you’re trying to change your credit card habits — especially if you’re caught up in a cycle of spending now and regretting it later — mindfulness can help, experts say, by helping to make you aware of habits that longer work for you.

“You might normally walk by a window and see a sweater and, before you know it, you’re walking out of the store with the sweater and have thrown it on the credit card,” Goldstein says. So, if you wanted to practice mindfulness rather than just reacting impulsively, you would take deep breaths, pause and become aware of your body, your emotions and your thoughts, Goldstein says.

“The foundation of mindfulness is being intentional, paying attention to what’s happening in the moment,” Goldstein says. “And when we pay attention to cravings, we realize these are just thoughts and not things we need to necessarily act on.”

5. Accept your financial reality

A downside to credit cards, experts say, is that they allow you to pretend you have more money than you actually do — so it’s important to practice acceptance of your actual financial reality.

One of the biggest stresses you can create in your life is not understanding or admitting what you can actually afford. Not knowing your financial reality causes stress in your wallet and emotionally.

Knowing — and accepting — what you can actually afford isn’t just a matter of hard numbers. It involves your priorities, your wishes and your emotions, too.

For example, maybe some friends want to go to a pricey restaurant — and technically you could afford it, but you know you’d be eating ramen for the rest of the week. If you go, you won’t enjoy it as much as if you could afford it or budgeted for it. That sense of regret will create an emotional price when the check comes as well as a monetary one. By being honest with yourself and your friends about what you can afford, you will have greater peace of mind.

If you practice these healthy habits, you can expect to feel calmer, more in control and more balanced about your credit cards — and the rest of your financial life.

Man looking at stock market on computer

How to Get Over the Fear of Investing in a Nervous Market

If you listen to the news, you’re probably aware that many people are predicting the stock market might take a dip soon. Warren Buffett, for example, has been warning of a stock market crash since 2018. But that doesn’t mean you shouldn’t invest. Eliminate the fear of investing in a nervous market with these tips.

Often bull markets, like the one we have now, are like blinders. Investors begin to believe in the fantasy that the market and our equity investments will always take good care of us and never disappoint. Yet time and time again, bull markets collapse with the most extreme and famous example being the collapse of the bull market in 1929.

Since the recession of 2008, the market has reinforced such fantasies. It has been a bull market for the past ten years with few exceptions, even during the pandemic. But that doesn’t mean the unprecedented stock market growth will last forever.

What’s an investor to do to remain calm, avoid knee-jerk reactions, and prevent emotions from potentially sabotaging all the gains realized in good times by prematurely pulling out of the market when it may not make sense?

Manage Your Emotions

There are certain important relationships which we must understand before we can achieve a consistent degree of success in the world of investing and in the marketplace. The first and foremost of these is that most losses in the marketplace result not from poor trading decisions but rather from emotional and attitudinal causes.

Investing by its very nature is an emotional business. Few investors have the self-knowledge, emotional stamina or self-control to make rational, intelligent and profitable decisions, particularly in times of anxiety and stress.

We can become better and smarter investors by looking at history and developing a sense of perspective. Economic conditions have always fluctuated at previous times of national and global crises, but the underlying strength of the American financial system has always shone through in the long run. Any hardships caused by recent events will not last forever.

Managing anxiety well during volatile times is a competency of successful investors. We all must be reminded from time to time that not making dramatic financial changes during these nervous market times can be a sign of patience and prudence, not cowardice.

Helping your clients get a current sense of control and clarity is not a bad idea. Helping them step back and see what they can realistically, financially and emotionally afford and then make decisions based on thoughtful reflection vs. impulse. In the long-term they will remember your prudent advice and help during such volatile times.

Don’t Believe Everything You See Online

Younger clients in particular are inundated with financial advice on TikTok, Youtube, and other social media outlets. This influx of information has led to questionable financial advice.

Many financial influencers online create their wealth through scamming their followers. They’ll predict to their followers that a certain stock (which they have purchased a lot of) will do good. Their followers will invest in that stock and then the influencer will pull out their own investment, making a generous return at the expense of their followers.

It’s best to steer financial advising clients away from online financial gurus who try to encourage this sort of trading, often with emotional and convincing content.

But it’s not just influencers promoting this idea. Earlier this year, Reddit users teamed together to invest in GameStop and other unprofitable companies as a joke. This messed with the market and artificially drove up stocks which weren’t valuable.

If clients do tend to get financial advice online, remind them to check the advice with a credible source instead of acting on the emotional pleas of influencers.

Overcome Your Fear of the Stock Market

Depending on a client’s Moneymax type, they may fear investing in the stock market. To some people, the stock market is an ambiguous and confusing financial institution and they have no clue where to start.Woman looking at stock market on computer

However, with money mindset work and the counsel of a financial advisor, even the most nervous and fearful clients can invest.

The first step to overcoming these fears is being able to identify your clients’ fears. One way to discover this is to run the Moneymax assessment on all your clients. Moneymax gives you a holistic view of a client’s money personality including traits such as how trustworthy they are with their money, how eager they are to invest, their risk level, and more.

Once you use Moneymax and have your client’s or potential client’s profile, you are able to address their fears about the stock market and create a customized plan to help them get over those fears.

Hold Your Investments

Another modern investing trend is day trading. With the rise of the app Robin Hood and similar companies, anyone can day trade. It’s as easy as playing a game on your phone.

However, trading stocks on a day-to-day basis hardly ever leads to long-term financial success, especially for those without a finance background.

A good rule of thumb to share with clients is that they shouldn’t move their investments for at least a year. Holding investments leads to long term financial success.

If one is constantly acting out of fear and changing their investments whenever a certain stock dips, they will not make a profit. Investing in the stock market is not the place to act out of fear. It’s the place to plan ahead and hold onto your investments even through the natural dips.

Of course, some people might like the risk of trading stocks more frequently. If this is the case with your clients, you could make a plan to help them do this while also allocating other funds for longer term investments.

While we don’t know what the future of the stock market holds and many short-term predictions are ominous, clients can still find success in investing. Managing investments, overcoming stock market fears, only listening to sound advice, and holding your investments are four ways to be a successful investor even in a nervous market.

Signing a new client

How to Get More Financial Advising Clients in 2022

If you’re looking to grow your financial advising practice in 2022, you need a tactical plan to get more clients. Getting more clients should depend on one thing: creating authentic connections with prospects

In order to do this, you most likely need a marketing strategy and need to use financial psychology. Neither has to be complicated. Here are five easy ways to get more financial advising clients in 2022. 

People, financial papers, and coffee

1. Utilize your LinkedIn 

Social media marketing is all the buzz and all professional service providers should have a presence online. However, that doesn’t mean you have to start making TikTok where you dance and give financial advice. 

One of the best platforms for professional service providers is LinkedIn. LinkedIn allows you to connect with your current professional network and use their search tools in order to expand it. It also offers the opportunity to directly message people, comment on people’s professional accomplishments, and more.

Two of the most important tasks to do on LinkedIn for 2022 is to optimize your profile so those searching for a financial advisor can find you and to consider having a LinkedIn services page. A service page is especially good if you’re self employed and in the early stages of your business.

To optimize your LinkedIn profile, make it clear what you do and who you help in the tagline, cover photo, and bio. A common mistake many people make is trying to showcase their accomplishments in a way that makes them look good on LinkedIn. Instead, frame your accomplishments so they show the benefits of working with you to prospective clients. 

2. Create a referral offer for current clients

Despite all the advancements in the world of digital marketing, one of the best marketing tactics has been around long before Instagram, LinkedIn, or even MySpace: the best marketing is a happy client

If you want to get more clients, ask current clients if they know anyone who might need your services. Feel free to even describe who your ideal client is. However, it’s also important to keep in mind that almost everyone is busy today. 

In order to motivate current clients to give referrals, create some sort of incentive. This could be a $5 Starbucks gift card or a discount on one of your services. It doesn’t have to be big; even small incentives can go a long way. 

After you have your incentive and list of clients to reach out to, craft a templated email you can send asking for referrals. 

3. Develop a marketing strategy

Along with referrals and LinkedIn marketing, there are many other marketing tactics you can utilize. Which ones work best for you depend on your ideal demographics, resources and money available to invest, and personal preferences.

For example, if you’re targeting young professionals, digital marketing should play a big role in your marketing strategy with an emphasis on video content and newer platforms like Instagram and TikTok. 

If you want to reach more seasoned professionals who want to improve their retirement plan, you might be better off with print advertisements or going to networking events in your local community. 

There are so many marketing options available today. To figure out what works best for you, define your ideal client and create a plan to reach them where they hang out online or in person. 

4. Pitch the story of your business to local media

While this one is a long game, being featured in the media can add credibility to your business and might bring in potential clients. You also don’t have to try to be featured in the New York Times or Washington Post for this to be effective. 

In fact, being featured in local media may be even more beneficial as it’s only people within your community reading it. 

To get started, write down your business’ story. Try to make it as interesting and insightful to the public as possible. You could also think of ways you could pitch a story which offers financial advice to the readers or watchers of local media. 

After that, make a list of any local news channels, newspapers, or other media outlets which might be interested in your story. Try to find the media contacts who cover financial news or other similar types of stories. After that, craft an email pitching your story and see how they respond!

5. Create a better process for recruiting potential clients

While increasing the reach of your marketing efforts is great, you also want to increase your impact on potential clients who come across your brand. The best way to do this is to have a streamlined pitching and onboarding process. One of the most important parts of the pitching process is selling authentically. It’s also one of the most difficult. 

We’ve all been on the receiving end of a sales pitch that sounds, well, sales-y. And if we’re being honest, those pitches make us want to flee instead of buy whatever the pitch is selling. 

One of the best ways to avoid sounding sales-y is to create a genuine connection with prospective clients and make them feel like you get them. Luckily, there’s a fast, accurate way to get to know them before they even step into your office or onto a Zoom call: Moneymax.

Moneymax is a personality profiling tool that let’s you know where a client or prospective client falls on a scale for 13 different financial psychology characteristics. It gives you a holistic view of how they view money across a variety of facets, from investing to asking for a raise at work. Understanding the full picture of how a prospective client views money allows you to turn a sales pitch into a conversation where you’re working together to discuss the client’s financial future. 

Since we believe so much in the power of Moneymax, we’re offering 10 free profiles to anyone who tries out the tool and posts about it on their social media. Subscribe to our email list for free to learn more details. 

Risk written out

The Psychology of Risk in Financial Decisions

Whereas some bulls might describe this market as a stock buyer’s dream, the advisers I have spoken with are describing it as a nightmare for many of their clients.

Modern Portfolio Theory has given us an abundance of literature on objective measures and definitions of risk, and supposedly, the most effective methods for financially managing them.

Risk as a subjectively experienced emotional state, however, has received much less attention, even though most investors and advisors acknowledge that how they respond psychologically to making decisions under conditions of uncertainty can have a dramatic influence on their financial success.

Definition of Risk

Risk is a subjectively or personally experienced emotional state influenced by the ability to make decisions under conditions of uncertainty.

Risk, by definition, contains important subjective elements not typically considered or evaluated by the investment community. It is the subjective risk of investors which will determine perceptions, reactions, satisfaction, suitability and perhaps even success.

If investors’ subjective definitions of risk don’t enable them to sustain their strategies when they make rational sense, then they will create their own financial loss in selling impulsively.

Any attempt to categorize investments according to an objective risk profile can be misinterpreted by investors because of their internal or psychological risk profile which ultimately predicts their reactions and perceptions of their investments and the satisfaction they reap from them. They have their own subjective realities and definitions of risk which prevent them from understanding the objective definitions of risk.

To truly understand your own risk and your clients, you should look at the psychology of risk. A great way to do that is to use the Moneymax assessment. The unique benefit of this assessment is that while it looks at risk, it also looks at 12 other factors which influence our financial decisions.

This gives you a more complete picture of your clients’ and your own money personalities. Risk is just one factor in a much larger picture–and you need to understand the full picture to better suit your clients’ risk levels.

Lowering The Chance of Objective Risk Is Not Lowering Subjective Risk

As investment advisers, you can employ a variety of well known techniques to lower the “chance” of loss: dollar cost averaging, diversification, careful asset allocation, and buy and sell disciplines. However, even though you may choose to emphasize and lower objective risk, you must still deal with the subjective reality of investors’ emotional responses to risk.

It is the psychological impact of the “consequence” of a financial loss on investors’ decision-making that makes the impact on how investors conceptualize risk. Their subjective realities are their objective realities and don’t necessarily make rational sense.

Loan management on computer screen

For most investors, risk is a concept related to loss, which is subjectively vs. objectively defined. It is based on feelings vs. facts. Because risk and loss are intimately connected, particularly the consequences of loss, how an individual has experienced and adapted to loss throughout life becomes a significant issue in one’s approach to risk.

All individuals experience both real loss and emotional loss. If one has not resolved former real or emotional losses, there is a tendency toward blindly eliminating losing situations in the face of downside loss and/or volatility. They experience an almost panic-like psychological urge to divest themselves of the psychological and paper position of loss without first understanding whether the fundamentals warrant such actions.

If resolved, they’ll be able to experience real vs. emotional reactions to loss and be able to feel ok and come through it. They would have more flexibility and adaptability to handle future uncertainty and would not shy away from future experiences.

Giving investors an opportunity to reflect on their real vs. emotional losses through interviewing and integrating that knowledge into their current investing style not only alleviates much unnecessary panic; it also prevents significant denial of loss. They need to ease back into investing. They’ll eventually adapt.

Managing Subjective Risk

Since objective risk doesn’t always equal the subjective risk level in your client’s mind, it’s important to learn to manage their subjective risk level. If you understand how risky a client perceives an investment or financial action to be, you can better serve them.

A key to this is the ability to empathize and understand where your client is coming from. So often, wealth advisors care only about the investments and not about how clients perceive the investments. But if you want to better serve your clients, you should take the time to better assess and understand their perception of risk.

Let’s look at an objective low-risk action: investing through a mutual fund. For some clients, this might be perceived as low risk because their parents did the same and had success. But if a client saw their parents lose money through poor investments, their subjective reality might be that any investment is a risk.

Once you understand the personal history and psychology behind why a client perceives something to be a risk, you can better empathize and rationally explain why a certain action benefits them.

However, you didn’t become a financial advisor to be a therapist. You don’t need to know a client’s entire backstory to better serve them, just their money personality. One of the best ways to discover their money personality and how psychology influences their financial decisions is with a quiz that has been well-researched and proven to work time and time again. One such assessment is Moneymax.

With an assessment like Moneymax, you can better understand where a client is coming from and the best ways to manage their wealth after the client takes one short quiz! If you run this quiz on potential clients, you can go into the first conversation truly “getting them” because you understand the psychology behind how they view risk and make financial decisions.

While financial risk can be objective, it often feels subjective to our clients. To better understand where they’re coming from and the psychology of risk, invest in learning more about them beyond the money and assets in their wealth portfolio.