Dr. Charles Chaffin’s work bridges psychology and financial planning. He is co-founder of MRI™, the Money & Risk inventory™, a suite of products for advisors and firms that uses innovative approaches to risk assessment and financial psychology to develop actionable insights to help advisors develop deeper client relationships. Dr. Chaffin is also co-founder of the Psychology of Financial Planning instructional programs, designed to help practitioners better understand the biases, behaviors, and perceptions of their clients.
The program has been used by firms on six continents. The program has also been incorporated into the curriculum of over 100 colleges and universities with over 3,000 students enrolled. He is also an executive coach for advisors across business models, helping them with everything from client relationship challenges to practice management and personal and professional goal-setting. He is author of nine books. His newest book, The Goal Standard: The Psychology of Defining, Pursuing, and Achieving What Matters, focuses on all of the factors that go into setting and achieving purposeful goals for clients. He is also co-author of The Psychology of Financial Planning: Practitioner’s Guide to Money & Behavior with the second edition will publishing in April 2026. He is Professor of Practice in the College of Human Sciences at Iowa State University.
Ben Felix and Braden Warwick are joined by Dr. Charles Chaffin, a leading voice in financial psychology, to explore why investors so often act against their own best interests—and how better tools and frameworks can help bridge the gap between rational plans and real human behavior. The conversation blends behavioral finance, goal setting, and risk profiling, while also introducing a new evidence-based risk tolerance questionnaire now being made publicly available to listeners. The episode digs into why humans are wired for short-term survival rather than long-term optimization, how biases and environment shape financial decisions, and why coaching—not transactions—is becoming the advisor’s most important role. Charles explains concepts like money scripts, financial flashpoints, identity-based goals, and financial self-efficacy, tying them directly to investing behavior and client outcomes. The discussion also goes deep on financial risk tolerance: what it really is, why people consistently misjudge it, and why psychometric tools outperform traditional questionnaires.
Key Points From This Episode:
(0:00:04) Introduction to Episode 395 and guest Dr. Charles Chaffin
(0:01:15) Charles’ background in financial planning psychology and authorship
(0:02:30) Why PWL wanted to move beyond the Grable–Lytton Risk Tolerance Scale
(0:03:40) Introduction to the Money and Risk Inventory (MRI) and full disclosure
(0:04:55) Announcement: Public access to a psychometric risk tolerance questionnaire
(0:05:10) Risk tolerance vs. risk capacity—and how PWL combines both
(0:06:43) Why firms must map risk scores to asset allocations themselves
(0:08:35) The role of psychology in financial planning beyond technical advice
(0:10:17) The Klontz–Chaffin model of financial psychology
(0:12:05) Why humans are “bad with money”: survival brains and emotions
(0:13:30) How heuristics and biases derail long-term planning
(0:15:42) Tools for overcoming bias: automation, pre-commitment, and friction
(0:21:29) How environment and social context shape financial behavior
(0:26:38) Financial flashpoints and their lasting impact on risk tolerance
(0:29:35) Financial self-efficacy and why low confidence leads to avoidance
(0:36:01) Money scripts: avoidant, worship, status, and vigilant
(0:40:07) Why understanding your own money scripts matters
(0:41:19) Common behaviors that lead to poor financial outcomes
(0:42:59) Practical strategies for recognizing and mitigating bad behaviors
(0:48:22) The role of identity in goal setting
(0:50:07) Why goals matter for motivation and behavior alignment
(0:52:56) Intrinsic vs. extrinsic goals and self-determination theory
(0:58:26) When quitting a goal is the right decision
(1:00:26) What financial risk tolerance really is
(1:02:16) Why people consistently misjudge their own risk tolerance
(1:03:31) How stable risk tolerance is over time—and what changes it
(1:05:12) Why reassessing risk tolerance regularly improves outcomes
(1:06:05) Handling couples with mismatched risk profiles
(1:07:37) Psychometric vs. revealed-preference risk questionnaires
(1:09:30) Evidence showing psychometric tools better explain real risk-taking
(1:10:39) Where traditional risk tolerance questionnaires fall short
Read The Transcript:
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix, Chief Investment Officer, and Braden Warwick Financial Planning Product Architect at PWL Capital. Welcome to episode 395.
We're joined in this episode by Dr. Charles Chaffin, a really interesting guest, and there is a bit of a backstory. I'll introduce who Charles is first, and then we'll talk a little bit about the backstory. And we have a, I don't know what I'd call it, is it an announcement?
Is it a gift for listeners? I don't know. But it's something cool that people are going to like.
So Charles' work bridges psychology and financial planning. He's written a book on the psychology of financial planning. He's written a bunch of books, nine books in total.
Most recent one was on goals, the Psychology of Defining, Pursuing, and Achieving What Matters, which we did talk about. And then his sort of big meaty book on the psychology of financial planning is The Psychology of Financial Planning: The Practitioners Guide to Money and Behavior.
There is a new edition of that book coming out in April 2026. I read the 2023 version, I believe, to think of the questions to ask. So he's got this big body of books on financial planning, psychology, and related topics.
He also creates instructional programs for financial planners. He is a professor of practice in the College of Human Sciences at Iowa State University. He has a very broad knowledge set in financial planning psychology.
So that's the setup for who Charles is. The story here, though, is that we have been using the risk tolerance scale that was developed by John Grable in 1999. That's the Grable-Lytton Risk Tolerance Scale.
We had built our own tool using that scale a couple of years ago. We've been using it for a while to do risk profiling for our clients here at PWL Capital, and we wanted to sort of update it. It felt a little bit dated.
I mean, it's from 1999. We wanted to improve it, maybe cover a little bit more ground than what was in that risk tolerance scale. So I reached out to John Grable and asked him if he'd be open to consulting with PWL to help us create our own risk tolerance scale, which I thought would be a really cool project, and he replied basically, no, but good timing because I just launched a commercial product with some co-founders for exactly this purpose, like to do risk tolerance profiling.
So we dig into the tool, we learn about it, we go through the risk questionnaire, we read literature about how they developed it. It's really cool. It's a seven question risk tolerance questionnaire, but it also has a whole bunch of questions on financial psychology more generally.
And we talk a lot about that with Charles in this episode and why that's important. Anyway, so Charles is John Grable's co-founder in this company, which they've called Money and Risk Inventory. So full disclosure, PWL has a business relationship with Charles and with Money and Risk Inventory.
We are using their product for our clients, all new clients, once the tool is rolled out, which is happening at the beginning of February, will go through this risk tolerance questionnaire and psychological profile. We are paying Money and Risk Inventory to use their product, to use their intellectual property. Braden actually built the product that we're using, but we're using their intellectual property. They did not pay us to come on the podcast.
They did not give us a discount to come on the podcast, nothing like that. We're a customer of theirs, and we thought that the underlying thinking behind what they've built with Money and Risk Inventory would be useful information for listeners. The other thing that we thought would be useful for listeners is if we made a version of the Money and Risk Inventory questionnaire available to anybody.
So Braden did that. He's been working hard on creating a public-facing version of this questionnaire, and assuming all has gone well, people listening right now should be able to click on a link that we'll put in the episode description, where they can access the Money and Risk Inventory questionnaire and get back their risk tolerance score by going through the questionnaire. So hopefully people think that's cool.
There aren't a whole lot of great risk tolerance questionnaires out there for anybody to use, and I'm pretty sure this is going to be the only, I hope I'm not making stuff up here, but I don't know of other risk tolerance questionnaires that are psychometric, and based on the type of research that John has done on risk profiling. There are other ones out there that are a lot more like casual, I guess I would call it, like they seem like they're just kind of thrown together. You can find some of those online, but this one's like a solid evidence-based, valid and reliable questionnaire that we are making available to whoever is interested.
Braden Warwick: Yeah, it's pretty cool. I can give a little bit more context and talk about what the tool does and how it works, just so if you're listening and you're clicking on the link, you have some idea what you're looking at. But basically, there's two dimensions of risk profiling.
There's tolerance and there's also capacity. So the focus of our conversation with Charles is on tolerance and also the psychometric and behavioral stuff that go along with that to try and better understand our client's relationship with money. But in terms of the profiling aspect, the tolerance gets evaluated based on the answer to those seven questions that Ben mentioned, and then that also gets combined with risk capacity.
And I think it's important to note that we created the risk capacity questions ourselves based on the outline of risk capacity from the CFA Institute guidelines. But we also got Charles and John Grable to review our capacity questions as a part of this overall product. So they've reviewed it and said that they're great to move forward with.
So once you've answered both the tolerance and the capacity questions, those two scores combine together to form your overall risk profile. And both dimensions are combined together, which is a little bit above and beyond the regulatory requirements, which is just to use the minimum of the two scores. We combine them together.
And then that generates an overall score, which is then used to inform the suggested asset mix. And that's how the tool works. And if you use the tool go through the questionnaires, it'll pop up a suggested asset mix based on the same portfolio mappings that we use with our clients.
Ben Felix: And that's again, something that's worth just disclosing is those mappings do not come from MRI. They give you a risk tolerance score. The firm has to map those risk tolerance scores to an asset allocation or to a range of asset allocations.
So that's something that PWL did. A different firm might do different mappings. We think that the mappings we've done make a lot of sense. John and Charles have seen those as well and kind of given them the green light.
That is PWL's discretion. And again, like a different firm might use different mappings based on the risk tolerance scores that come out of a tool. This is a company and a couple of professionals, both PhDs, Charles and John, they've got another co-founder as well, who I've known about John, in particular's, research for a long time, which led me to their risk profiling process which then led us to this product that we're now rolling out for our clients.
And we thought it would be a great opportunity to highlight their research, not just on risk profiling, but on financial planning psychology more generally. And we also thought it'd be a great opportunity for us to share a version of what we're using for clients with listeners so they can see what we're doing. Oh, and this is Braden's first time co-hosting.
You've been on as a guest on the panel. You've been on as a co-host with just me, where we've talked through the engineering approach to financial planning, but this is your first time co-hosting with a guest. So welcome.
Braden Warwick: Thanks. It's pretty cool. It's pretty cool just to be right there and to hear those answers firsthand and to chip in my two cents where necessary.
Ben Felix: All right. I hope people enjoy the episode and give us feedback if you're able to check out the risk profiling tool that we'll make available to you in the show description. Dr. Charles Chaffin, welcome to the Rational Reminder podcast.
Charles Chaffin: Thanks for having me.
Ben Felix: Very excited to be talking to you. We have lots of cool ground to cover. To start us off, can you talk about what role psychology plays in the financial planning process?
Charles Chaffin: Yeah, it plays a big role, right? I mean, it really, really explains why and how clients behave the way they do when it comes to money and everything from their decision-making or follow through when it comes to goals. And from an advisor's perspective, client engagement, why clients engage as much as they do, why they don't engage, why they ghost their advisor, why they are money avoided and whatnot.
And really, it's bridging that gap between what is the technical advice of planning and what is real world behavior, right? And the specific elements of that. So if you think about the idea of knowledge or information, information is not really worth as much now as it was decades ago.
Decades ago, you had a professional, whether it was a financial advisor or any other professional. They were the sage that you went to and they imparted knowledge on the individual and the individual listened. Maybe they took notes relative to that and they went on their merry way.
Well, now you can get information anywhere. And that's certainly the case when it comes to financial planning. Now, some information is better than others.
Some information is more relevant to some clients than others and whatnot. But the reality is where we see psychology playing a role here is going beyond just that information and looking at the biases, the experiences, the emotions of the individual, and how that impacts their decision making and ultimately their overall financial well-being.
Braden Warwick: So how does the Klontz-Chaffin model of financial psychology describe the factors that impact money behaviors?
Charles Chaffin: Well, we see it broadly. There's a lot of other approaches before and lots of good work has been done in the area before. They focus on, you know, our heuristics and biases or maybe some element of individual's history with money and whatnot.
But we look at it more broadly. Certainly heuristics and biases are important. But we think about it relative to individuals, their biology, their personal history, for example, how they maybe they had a history of fraud or maybe even something more basic that they grew up poor, which could create a scarcity mindset.
So family history, they're learning how much information do they know when it comes to things like financial literacy and their environment. So if we have a better understanding of how individuals are wired, their biology and their history and putting all those factors together, we can not only help individuals when it comes to them reaching their goals, but help advisors take on that more coaching relationship, that it's not the transactional side of planning, but more along the lines of I'm going to help you reach these goals. And here's three hurdles that everyone has.
And maybe there's three hurdles that you specifically have because you're money avoidant or whatever it might be that are going to get in the way. And so we see it as a broad view of all the elements that go into an individual psychology that ultimately impact the client advisor relationship.
Ben Felix: We're going to touch on some of those elements. And we will, for people are watching, we will have an image of the model, just so people can get a visual representation of what you're describing.
Charles Chaffin: It's a very fancy looking image, very fancy with circles and squares.
Ben Felix: It's helpful. For me, anyway, looking at it on the page and thinking about all the different elements, I did find it to be helpful. So we will have that up on the video for anybody that's interested. Can you talk about why humans are, generally speaking, bad with money?
Charles Chaffin: Our brains are really designed for survival. They're not really designed for long-term financial optimization or actually any long-term optimization and emotions really override logic, especially when you add in elements of uncertainty or you add in elements of stress. So my analogy always is that money is like fire and our brains are like toddlers.
And fire is really, really great, right? It helps us cook. It helps us, you know, light our way.
It helps us stay warm and whatnot. But it can also burn your house down. And toddlers are more curious, they're impulsive and certainly not thinking about anything when it comes to long-term planning, they're thinking about short-term rewards, thinking that immediate gratification and whatnot.
And so when you put those two elements together, then you have this toddler with fire. And so we can over identify some of those biases and really, really overcome them. But last night, my iPhone got an update, and probably the third update this year, our brain hasn't had an update in 100,000 years.
We're still thinking about hunting and gathering. So that notion of saving and investing is really contrary to how we're wired in general.
Braden Warwick: So how do cognitive biases and heuristics affect financial decision making?
Charles Chaffin: Cognitive biases and specifically heuristics - I mean, they're helpful to us. They're really helpful to kind of make quick decisions. We're basically wired to be lazy.
So we get the fast shortcuts to make decisions. The problem with them is that they create these biases, these systematic errors, whether it's something like overconfidence or loss aversion or confirmation bias to kind of get in the way of rational thinking. So we tend to see what happens with clients is you become more susceptible to things like market noise or you become more susceptible to FOMO because you hear someone talking about a gain and suddenly you're going to throw out not only your goals, but maybe even upend your risk tolerance because you see something that's in front of you that's, oh my gosh, this is a gain.
I'm going to take it. When in reality, rationality would tell us, well, people are only posting about their gains on some cryptocurrency or whatever it might be. And so they affect us because they really get in the way of us thinking about our long-term planning.
We suddenly are thinking about short-term rewards or we're changing the type of information that we follow, particularly in the information age, where we become more susceptible to that. So overcoming those biases can be a real challenge, but if we just recognize them on the front end, it's a major step forward. It's a long-evolving list of biases.
I think we're in our book, we recognized 47 of them. Sometimes you'll read those that say there are like 80 of them or whatnot, but there's tons of them. But in reality, they're just kind of shortcuts. They really get in the way of rational thinking.
Ben Felix: I like the way you describe the interaction between FOMO and risk tolerance, where somebody rationally assessing their risk tolerance would think of the full distribution of outcomes, and they would base the risk tolerance on that. But someone affected by FOMO is only looking at the right hand side of the distribution and they're thinking, oh, yeah, I can take lots of risk.
Charles Chaffin: Right, because what's happening there is they start chasing. Right now you're chasing, which is total change of posture in every way. No matter what your risk tolerance is, when you go from that point where you're settled and you have a plan, and now you're chasing something, that's when you can be in real trouble.
Ben Felix: What are some of the tools or techniques for overcoming biases in financial decisions?
Charles Chaffin: Yeah, I mean, you could think about a couple of different things. So we think about decision frameworks or automation. We work with advisors a lot to get into what we call pre-commitment strategies.
So structured decision frameworks are really, really great. So for example, if you find that you're someone who you have an incredible amount of optimism, or even an incredible amount of overconfidence, then you can come up with, okay, let's take a scenario and let's decide that that scenario, the outcome of that scenario is going to be 7, keep it very, very basic. Well, instead of using just the 7, let's develop a high and medium and low.
The 7 could be your medium, but let's go low and let's go high. What is the worst case scenario relative to that? If everything doesn't go well, everything goes badly, what's that number going to be?
Well, it might be a 4. Well, what if everything goes great? Well, the 7 was everything goes great.
So now, okay, let's put a 5 in the middle. So that can help us if we come up with kind of three outcomes relative to something if we're overconfident or whatnot. Now, automation is really, really helpful in a lot of spaces in financial planning, and it's built on this idea of status quo bias.
We are, again, we're inherently lazy, and that's part of our wiring. A hundred thousand years ago, if we were sitting in a cave and there wasn't a large animal coming after us, we didn't move. It was a good thing to do.
Just stay put. So what we find now, especially in the information age and in technology, status quo bias can be used to the advantage of the client and the advisor by saying, you know what, we're going to set aside a certain amount of money. We're going to automate that every month relative to investing or even relative to saving, and I'm going to make that decision one time.
And then I'm not going to think about it again. It's going to happen at the first of the month, and it's done. And more often than not, that has huge advantages for the client and the advisor.
I think, slowing decisions down can always be helpful. If we take time to kind of think and reflect about what it is that we're going to do and not have that impulse, we can cut down on impulse spending. We might even cut down on the toxic things we post on X.
So we're taking a little bit of time to think about, do we really want to do this? And we work with advisors and asking clients, is this really consistent with where you want to be in three years, five years, whatever the time horizon is? Is this behavior consistent with that?
And you know, as an important aside to that, it isn't about judgment of the client. It's about helping align the behaviors of the client that are consistent with their goals, not the advisor's goals, but the client's goals. And so asking that question and always going back to, is this consistent with where you want to be is really, really helpful?
And what tends to happen with any human is that push, that nudge is better than a push, not a push, but that nudge, because you're basically keeping them in power. The client is in charge here. You tell me if that's where you want to be.
And if they say, it is consistent, then that's without the advisor's opportunity to say, maybe we need to think about the goals. Maybe we need to revisit them. Should we revisit them?
And even a lot of those cases, clients will say, Oh, no, no, no, no, no, right at that very last point. But again, if we can help that client align those behaviors with the goals, we're going to be far better off. And then finally, the element of accountability is really, really helpful.
Anytime you say, this is my goal, this is what I want to do. Whether it's within your social network or even within your advisor, that's also going to help align behavior too, because now you're bringing in elements of identity, which is really important when it comes to goals. And you're also basically saying, this is where I want to be.
And I want you to help me get there. And obviously, finally, the advisor's role is that coach really is kind of that external perspective. It's bringing that rationality into all of it.
So it's important to know when we think about heuristics and biases, we can really use some of them to the advantage of the client through things like automation. And at the same time, it really is where the coaching element comes in to kind of help align those behaviors with the long-term goals of the client.
Braden Warwick: I think that's really well said. And I think that as technology evolves even further, it really cements the advisor's role as that behavioral coach to try to get to the root of what the client's goals are and how to make the biggest impact on the client's life.
Charles Chaffin: Well, beyond that, if you take that element out and talk about bias, I mean, I have a bias working in financial psychology. So of course, I've got to say it's highly important. With that being said, without that coaching element, what else is left?
The transactional piece is gone. Nobody needs a sage on the stage anymore. Nobody needs to be told.
I mean, I live in Midtown, Manhattan. If I went outside and asked 100 people, regardless of their income and advising experiences, should you buy high or low? Should you sell high or sell low?
99% of the people are going to get it right. They know that, but it's all the other elements. It's our biases and irrational behaviors, our past with money that get in the way of what is otherwise a very straightforward decision.
So if we're not bringing that coaching element to the transactional piece, then our relevance as a profession is, at minimum diminished, maybe even worse than that.
Braden Warwick: How does our environment shape our financial psychology?
Charles Chaffin: I mean, environment is really, really important. So B. F. Skinner. was a psychologist, a behaviorist back in the 1900s and probably the most influential.
He once famously said that our environment, we don't make any decisions on our own. Our environment makes them for us. Now, some of that has been disputed and even a little bit debunked, but there is a lot of reality to that.
There's a lot of truth to that. So you think about our environment relative to, let's talk about eating for a second. So if we want to eat better, we want to stop eating cookies.
Well, the best way to stop eating cookies is to not have them available. So I still might eat cookies, but if I don't have them in my home and I make sure that they're not in my home, I've created friction. I've altered my environment.
So now I have friction in between me and the cookies. And this is a very personal experience, when it comes to cookies. All of this is actually true.
So I have to go here. I have to go across the street to a bodega. It's 20 degrees Fahrenheit in New York right now.
That makes it tougher for me to get the cookies. If I have three packs of Oreos here, my likelihood of eating them goes way up. At the same time, I want to eliminate friction for the things that I do want to do that are consistent with my goals.
So if I have exercise as a goal, then I might put my running shoes close to the door. I'm not going to join a gym that's five miles away. I'm going to join one closer.
And we have data that show that people who live closer to parks and gyms go to the gym more. It's that basic element of eliminating friction. So our environment's a real critical part of that, right? Now, our environment also is not just friction and what's around us when it comes to material things.
It's also our environment when it comes to the people that who are around us. So who we're around when it comes to social norms, relative to spending and saving and investing is critical to our family, how our family talks about money, how our family thinks about money. If we're around friends who are really money status people, they're more expensive people in our lives.
I tell people all the time, partially joking that if you go to a bar and you're looking to meet someone and they have a really fancy handbag run away because there's a high likelihood that their money status people, they're going to cost you a fortune. Now, there's plenty of people that have nice bags that are, you know, someone's listening to your podcast is going to get mad at me. But in reality, money status people are more expensive.
And if we're around money status people, there's a higher likelihood that they're going to be more expensive for us. So the people that are around us are important. The information that we engage relative to our environment is really important too.
We think about media and market narratives because if we're in that element where we're on social media and we're seeing going back to FOMO and we're hearing about these gains, that could also create some emotional responses. And that could absolutely get in the way of how we're thinking about our behaviors and spending and whatnot. And then finally, I kind of think about that element of choice.
We think about choice architecture. So we work with advisors a lot on this, which is like, okay, there's 30 options here and younger advisors want to share all of them, right? Because younger advisors want to say, show how intelligent they are.
So they talk way too much and 60% of what they say is not relevant to the client that's in front of them. Let's winnow these choices down from 30 to 3. And we know we have data, if your listeners are interested, the famous jam studies out there that it shows that fewer options actually leads to more people making decisions and pulling the trigger.
So if we say, okay, in transparency to a client, yeah, there are 30 options that we could go with here. But I presented the best three here. And most clients in your situation pick this one.
Now, if you want to see all the other 27, happy to talk about that. But that's an element of choice architecture where we kind of help manage that cognitive load, basically not being overwhelmed, and they can make a choice and move on. Because if we overwhelm clients, we only have so much attention. And if we overwhelm them fast, they're going to ghost us.
Ben Felix: That's really interesting. It's like, if you don't want to be gambling, you shouldn't be on the Wall Street bets subreddit.
Charles Chaffin: Well, that's right. It's a really important point that it really isn't about willpower and discipline. That's a really antiquated element.
There's some elements to it that are true. So I don't want your listeners to think that I'm saying that there's no such thing. But it's about our environment.
And if people understand, if advisors can help clients and clients and even consumers and individuals could say, I can be in charge of my environment, I can make my environment work for me, the people that I'm around relative to what's important to me, financial and otherwise, I can create friction for things that I don't want to do anymore. And I can eliminate friction for the things that I do want to do. That are going to lead me to where I want to go. I'm in charge of that. That is 75% of the battle.
Ben Felix: What are financial flashpoints?
Charles Chaffin: Financial flashpoints are basically our past experiences or our kind of unresolved beliefs based upon something that really impacts, gives us some sort of emotional reaction to money. So you could think about something like grandparents that lived through the depression, right? That was a flashpoint for them in terms of they tend to be more savers, right?
You go through an experience like that, it changes who you are as part of your history. If you were, you know, as part of MRI, we ask a question that has been our, I would say probably surprisingly, if I picked all the elements that are part of MRI, I wouldn't have picked this one to be as important to firms as it is. And that is, what's the history of your family when it comes to fraud?
I knew it was important. We have data that suggests it, but it's really important because if you've gone through that, especially if it's significant, it impacts your risk tolerance, it impacts everything. It impacts how you, the trust level of how you are with your advisor.
It's a big part of that. So that history, especially something that's so significant, has an impact for the rest of your life in a lot of cases with these big events, whether they're at a macro level, like the depression of the Great Recession, or something on the individual level, like fraud.
Braden Warwick: Past experiences can play such an important role in our beliefs with money, but are there any other areas that influence people's beliefs about money?
Charles Chaffin: Going back to, we've talked about environment a few minutes ago, who you're around has a huge impact. If you are around people who are distrustful of rich people, and you've heard that for 20 years, and we have lots of data on this, that people who have heard for 20 years that rich people should not be trusted. And then suddenly, let's say they're an athlete and suddenly their bank account went from $6 to $60 million.
They are so much more susceptible to financial enablement and fraud and all kinds of different things for lots of reasons. But for one of those reasons is because now they're on the other side. They're what has been talked about for 20 years.
And I don't want to oversimplify that because there's lots of reasons in financial literacy and some of these other things that we're talking about today. But when it comes to our past history, you started to become something that people have talked about for 20 years. It can have a huge impact on your behaviors going forward.
So if that circle of who you're with is important, and I guess I'd also mention too, if you, past successes and failures can be critical too. So if you started a business and it failed miserably, it can have a huge impact on how you see money going forward. And actually, one extreme or the other, quite frankly, but our financial history when it comes to success and failure can also play a role.
Ben Felix: Can you talk about how the beliefs that people form about money affect their financial decision making in the future?
Charles Chaffin: Yeah, I mean, it could make you lots of different things, right? It could make you money avoidant. It could impact how you see your risk.
Again, one extreme or the other. One thing we haven't talked about is your financial self-efficacy, right? So your confidence when it comes to money.
So going back to an example, someone who had a business failure, they could be at that level of really low financial self-efficacy feeling like, I just can't do this. Or that they have this external, what we call external locus of control, meaning it's not coming from within, it's coming from beyond. I'm not meant to have money.
My business failed. It's just not for me. I'm not going to get there.
Well, that has a huge impact on your financial confidence. Now, you're not prone to saving and investing. And by the way, those individuals that have that low level of financial confidence, the lowest level of financial self-efficacy, those are the people that in a lot of cases, advisors never even see.
In some cases, in the states here, we have these data that show that in some cases, 70% or more of widows fire the financial advisor that the husband was working with. Now, there's lots of reasons for that. But one of them is financial self-efficacy.
It's confidence, because you have somebody who says, I can't do this. I've never done this. I'm 75 years old.
And I'm not cut out for this. They do the opposite of what you would think a human would do. When I say they, I mean, us as humans, this is how we're all prone to do this.
You would think people who have that low confidence are seeking as much information as they can to get better. They don't. It's the perfect storm.
Those people with that low financial confidence, they're avoidant. And that's one of the reasons why they fire an advisor, and it creates all kinds of problems there. So we can fix that.
And the best way to fix that is I have a new book out on goals. And people always want to talk about thinking big. Thinking big is not the recipe for success.
Think small. And so think about shorter time horizons. And think about when you have a client that has that low financial confidence, you have that widow or widower who's in your office at maybe the worst point of their lives.
And they think they can't do this. They need wins. And that win might be a budget for the week.
Or a budget for the month or some basic element in investing. And we can build confidence in people through wins. So when we think about that, we want to try to establish horizons that are much more manageable.
And again, it goes back to that coaching mindset. And I coach advisors individually. And we talk about that all the time.
You need to have shorter horizons, get them a win, and celebrate that win. Casinos are really good at that. Casinos are so...
I mean, they're just brilliant about everything. There's a reason why you go into casinos and they all look so nice is because they have so much of our money. But they do a couple of things that are really good.
The first thing they do when you walk into a casino, more often than not, you'll see pictures of people who have won. Like all over the casino, right? And this is probably not nice to say.
But most of the time, when you see those pictures, is somebody wearing like a t-shirt, it's like all wrinkly. Maybe they got like a little barbecue sauce on the side. I mean, they don't look very good.
Now, that's not because they couldn't find a better shirt or that they couldn't schedule a picture later. It's done by design. That's done so that somebody on vacation who's wearing flip-flops walks into the casino and they see those pictures, right?
And they say, that can be me. That can be me. I'm going to play because I want to be that person holding that ridiculously large check in that picture with the barbecue sauce on their t-shirt.
The second thing they do, casinos do a really good job of, and this goes back to getting wins, is you run a slot machine and you put a quarter in or whatever, penny slots even, right? And you win a nickel. And all the lights go off as if you've won a million dollars. That's by design, right?
That's by design because, oh, I got to win. I got to keep playing. I got to keep playing.
It keeps you engaged. So we can build that element of confidence by celebrating wins like the casino does with the slot machine. And we can also, we don't need to have barbecue sauce on our clients' t-shirts, but we can have that picture of success say, that can be you. You can get there in building people's confidence.
Braden Warwick: Yeah, it's so interesting, the point you made about confidence and on first thought, it seemed counterintuitive that the widow would avoid financial advice. You'd think that they would be the perfect candidate to speak with an advisor because, especially in the case where the spouse did a lot of that financial work and then they're left kind of uncertain about how to handle things. But actually, it makes a lot of sense when you think about it.
And I draw the parallel to going to the gym, for example, it's usually the people that have the most confidence that are there all the time, but the people that may need it the most kind of end up avoiding the gym. And I think there's, yeah, it's just really interesting when you unpack that.
Charles Chaffin: It's the case in everything. And it's certainly the case when it comes to financial planning. It's that case in fitness that you're talking about.
It's that case in education. There's a huge community college in South Florida. And they have this amazing retention rate of students who are coming in needing extensive remediation.
And the reason why they're so successful is they basically tell their incoming students and their current students, we will get you there. We will get you to success. We may have to remediate like crazy, but you can get there.
And here's the path to do it. And so as we think about our relationship with clients, that's what needs to happen. That's what coaching is.
It really is that partnership between the client and the advisor to overcome some of these biases, build that confidence so that individuals can say, yes, I can do this.
Braden Warwick: So what are money scripts?
Charles Chaffin: Yeah. So my business partner, Brad Klontz, developed all these things. You know, they got the Klontz money script inventory. There are unconscious beliefs about money, right?
So they tend to form early in our lives, through our culture, through our family and our experiences, our life experiences, are part of that. And they have a huge impact on everything that we've been talking about here, whether it's our behaviors or our decisions. He boils this down into kind of four things.
We could have people who are money avoidant. These are people who, for whatever reason, for some of the reasons we were talking about, right? They see money as bad or evil or they see people as greedy or immoral or they just, they don't feel like they can really be successful in that space.
You have people who are kind of money worship that money will solve their problems. There's never enough, right? And their self-worth is really aligned to money.
Money status people have kind of already talked about them, right? Your net worth is kind of your self-worth and money is really that measure of who you are in success. And then the vigilant people are basically people that are monitoring their money constantly.
They're that client, right? Who's checking their accounts all the time? They may be that client that even any remote little changes in elements of market volatility, they're emailing or questioning their plan all the time, you know, could lead to some neurotic behavior on their part.
So if we understand kind of where they're coming from, it's not about changing people. Again, it kind of goes back to what we've been talking about throughout this conversation, but we can help them identify here are potential barriers that may get in the way of whatever goal you're trying to develop in the plan. And we know we have tons of data that shows if we develop a plan and we have a sense of these clients where they fit relative to these money scripts and we work on this in MRI, we ask them basically find out what they are relative to the inventory without judgment, by the way.
There's nothing about any of this as about judgment, right? So identifying who we are and helping individuals move forward. But if we can identify factors like this and say, okay, here's the plan.
Here's the goal where we want to go. And let's identify three obstacles that are going to get in the way at some point on this journey.
And there are clients that say, well, impulse spending is an issue for me. This is an issue for me. That's an issue for me.
Okay. So we identify that and maybe we adjust the plan a little bit to accommodate that. But more importantly, when those things come up, we don't do what a lot of people do.
And that is ditch the plan. It goes back to that external locus of control, right? Where we say, I'm not cut out for this.
I can't do this. I'm not meant to have money. I'm not meant to retire.
I can't do this. Instead it's like, I knew this was coming. It's fine.
Many of my coaching clients, the advisors are great using the analogy of the plane and turbulence, right? It's the best example. The pilot comes on ahead of time.
We're flying to L.A. And I just had this on an overnight flight last night. Pilot said we're going to have some turbulence about halfway through the flight. It's going to be a little shaky.
I'll put the fasten seatbelt sign on, whatever. Okay. So we get in the plane, we're halfway through and it gets bumpy, right?
What's the first thing you think about? Here it is. Your likelihood of panicking goes way down because you saw it coming.
Now, I still, my first instinct is to look at the flight attendant if they're not panicking then we're good, right? But the reality is, I knew this was coming. So we're good.
We've got the plane. We've accommodated that. We can move forward.
Understanding those factors about who the client is and how those can manifest themselves into some hurdle or turbulence along the way can be critical for them and going forward.
Ben Felix: That makes a ton of sense for the client-advisor relationship. Should people try and understand their own money scripts as well?
Charles Chaffin: Yes. If you can understand who you are, when it comes to anything, it can be helpful, right? It could just help you understand.
And it's not easy to do. Okay. So just knowing it, I don't think Klontzo would get upset with me saying that people could go take his inventory.
It's great. It's not a be-all end-all, but it does help immensely, right? To know, okay, well, I tend to be more money status.
I don't know that I want to be money status. I see how that's gotten in the way of X, Y, and Z. Okay.
So it can be immensely helpful. Kind of bringing in some rationality. And maybe for some people, it can say, you know, whether it's a client or an advisor saying, you know what, I'm going to put a cushion on when I'm going to pull the trigger here.
I'm going to wait a day. And then the next day, oh, no, I don't want this anymore. It can be helpful, absolutely.
Ben Felix: You mentioned the inventory just to be clear for listeners. How can people go and understand their own money scripts? Like, what is the inventory, I guess, is the question?
Charles Chaffin: It's a series of questions. I should know more about his inventory since he's my business partner, but if you Google "Klontz's money script inventory," you can find it and take it. You can get your results back in minutes. Yeah, it's easy to find on the web.
Braden Warwick: What are some of the common financial behaviors that can lead to bad outcomes?
Charles Chaffin: Bad spending, bad investing. When I say bad. Bad is anything that's inconsistent with helping somebody reach their goals. And that goes back to what we talked about a while ago that we're not in the business of identifying good and bad, whether it's what we do with MRI or what advisors do with clients. We're basically saying this either aligns or it doesn't.
I mean, common things are obviously impulse spending. Anytime we bring emotion into investing, we've got a problem. If we're avoidant of certain issues, that's never going to be good.
Problems don't just go away magically. I think going back to that element of chasing, what we talked about when it comes to FOMO, that could be an issue. So for the consumers that are listening to this, what boils down to this is thinking about, okay, what's your goal?
And everything that you do, every behavior following that goal either aligns with it or not. And if you could categorize that, if you need to have a little cushion in there because you want to have a little impulse spending or whatever it is, then factor for that. But aligning that, this is consistent with what I want, this isn't.
And then on the investing side, I think it really does get into that element, particularly people that are on active investing, people that are doing it on the day trading. Again, not good or bad, but understanding what is emotionally driven there and what's not is really, really important.
Ben Felix: Those behaviors are bad, detrimental for what I think are pretty obvious reasons. But we've also talked about biases and heuristics and beliefs and preconceptions or flashpoints. Presumably people don't always realize when they're making these mistakes. What can people do to recognize and mitigate them?
Charles Chaffin: I think it's probably a few things. I think first of all, we kind of talked about this is be aware of your emotional triggers. So going back to the analogy, the cookies in my place here.
What are the cookies that are getting in the way of your nutrition? So know what your emotional triggers are right there. We talk a lot in goal setting about if then statements, if this happens, then do this.
It can be really, really critical. We have a plan for what we're going to do relative to that. Some of that is habit driven and it's impulse driven.
In a lot of cases, too, it's tied to other behaviors. So for example, if you have a problem, I'll go back to snacking. If you have a problem with snacking and you do most of your snacking watching television, maybe you need to think about watching less television because you're coupling those behaviors, those habits into two different things, which can be critical.
We already talked earlier about being in charge of your environment. What in your environment is consistent with your goals. What in your environment is getting in the way of your goals?
And that could be anything from maybe on Amazon, you don't have your credit card stored. That's a best example of frictionless behavior. So I'm going to make a commitment that I have too much impulse spending.
So I'm going to take my credit card number out of all of these websites today. I'm going to do that. I'm going to make it harder for me to purchase things.
So being in charge of your environment, which I think is really, really critical, we talked already identifying those hurdles ahead of time can be really, really critical. And the last piece I'll just reinforce that we already mentioned, you know, there's some people who for lots of different reasons feel like they are just at that level of no financial self-efficacy or even when it comes to nutrition or health. And I would reinforce to those folks this idea of maybe we don't need a time horizon to get a win for a month.
Maybe we need to win today. And sometimes those changes evolve into making your bed when you get up in the morning, getting a win and building on that win and thinking, so I think those things at a general level can help people kind of mitigate those behaviors that again aren't good or bad, but they're just getting in the way where people want to go.
Ben Felix: Something that jumped out of me as you were talking through that, and we're always super careful not to push the role of advisors because a lot of people who listen are do-it-yourself investors, I'm sure they're doing a great job. But a lot of those areas or places where getting an outside perspective, which you mentioned earlier, seems like it could be really valuable.
Charles Chaffin: Absolutely. It's exactly right. I mean, there are lots of people that are listening that are active investors and are very successful at it.
But having that element of that external person that helps mitigate our rationality or irrationality can be really, really helpful. And having that is no different than when it comes to relationships, you have that friend that gives that advice. They're the rational party relative that they can provide that advice saying, is this makes sense and whatnot.
And by the way, that friend that gives that relationship advice, their relationship life could be a mess. But they give the best advice. Usually the reason why that is is because they have the irrationality when it comes to their own behavior, right?
They have all the impulses and all the other things that they're bringing to it. They understand at a basic level elements of a relationship so they can give that good advice. Not that this is a relationship advice podcast, but the outside source could be helpful to bring rationality to what otherwise could be irrational.
Ben Felix: I started working with a personal trainer over the last few months. I've been an athlete my whole life and I know how to go to the gym. But I've found it really helpful to have a program designed for me and to have that accountability layer.
Something I found really interesting talking to this guy who's also a lifelong athlete, but he's very well credentialed in weight training. He has someone else design his programs for him. And his comment to me was that if I do my own programs, I'm only going to put exercises that I like into the program.
But when someone else does it for me, they'll put in the exercises that are best for me achieving my goals, not just what I'm going to enjoy the most. I thought that was a really interesting perspective from a totally different discipline.
Charles Chaffin: It's totally true. I mean, and that's the case in lots of different areas, whether it's training, you know, musicians are like that. There's great studies that look at musicians who are professional musicians or studying to be professional musicians.
And if they allocate five hours in a practice room trying to become a better singer or piano player or whatever it might be, they tend to practice the things that they're already good at. They're impressing themselves. It's easier.
They're not pushing their range or dexterity or whatever it might be to that point, right? And so having that outside person say, let's identify that. And by the way, that gets into goal setting where, okay, that's where you want to be.
You want to be at 10, whatever that might be, or say you want to be at 100 pounds, deadlifting or whatever it might be. Okay. And right now you're at 70, then the real focus is the delta of 30 pounds.
And that's what an outside perspective could help you on. I don't need to think about 100. You should not be picking up 100 pounds if you're picking up 70.
Maybe you need to pick up 75, but it's all about that delta, the space between where you are and where you want to be.
Braden Warwick: So what role does identity play in goal setting?
Charles Chaffin: A lot. I mean, so we are far more successful and goals are more sustainable. And we see a goal as part of our identity.
And our identity shapes really meaning. So it shapes what we see as meaningful as opposed to what's expected. You think about a lot of people that climb a lot of ladders, corporate ladders that they climb that ladder because it's the next rung up.
And maybe there's some extrinsic motivation, right, more money, more status. And that's great. But it's actually coming from outside as opposed to what's meaningful to them.
So if we have goals that are outside of our identity, then we become kind of disengaged. We put them off, we say, well, I don't need to do that. Or we just quit them all together.
So we could be far more motivated and resilient if we see something tied to our identity. If we want to go into something new, then that's where we get into shorter time horizons and some of those other things. But our identity is really, really important.
So if you have a client who sees themselves as a provider or a mentor, then goals that are kind of framed in that way, right, they're framed as providing security and guidance, then they're going to be like, okay, I want to do that as opposed to like maximizing a return. I have that mindset as a provider. I need to make sure my goals align.
That's what I want to be. I want to be that provider for my family. I'm not thinking about maximizing.
I'm going to align my behaviors towards being that provider and providing security. So identity is a critical part of that. And our environment, of course, plays a huge part in that too.
Ben Felix: It may be self-evident from the conversation so far. And you have mentioned goals a few times, but can you talk about why setting goals is important?
Charles Chaffin: Setting goals, it aligns our behaviors. Where do we want to go is the first step relative to any one facet of our lives. So if we say this is where our endpoint needs to be, every behavior after that, if we're committed to that, if we're committed to being at that point at the end of the path, then every step we take either is again, going back to what we've been talking about here is either consistent with that or inconsistent with that.
And there's only so many resources that we have to dedicate it to. Otherwise, we're kind of shifting mindlessly. We're not really focusing.
We're kind of that boat that's just adrift in the ocean. And then the winds are kind of taking us where we want to go. So our goals help align our behaviors.
It doesn't motivate us in the sense of that element of progress is a huge motivator in and of itself for us. So if we have an endpoint in mind, we're now motivated to kind of achieve that. We're wired actually neurologically to do that. So it is really behavior alignment and motivation that are essential when it comes to goals.
Braden Warwick: You know, it's funny because I come from an engineering background and we have a different reason for why goals are important. But I just think that the combination of both the technical aspects of solving goals and setting your objectives and also the behavioral side of things just really emphasizes why setting goals is so important.
Charles Chaffin: We're not really wired for, so in this new book I have out we talked about, I beat up pretty hard on retirement. One of the reasons why is because the retirement data, our health, whether it's physical health or mental health, just goes off a cliff when we retire. Well, why is that?
Well, the reason why, and it's apples to apples comparison of people's age, similar health background and whatnot, that people who retire tend to have this huge decline. And a lot of that really ties into this idea of how we're neurologically wired. We're wired for progress.
We get that shot of dopamine when we get closer to achieving a goal. When we get closer to what we want, we made a major step today, yes; we don't get that dopamine when we're sitting back thinking about what we did a year ago. Now we can be proud of it.
We can look at our trophy case so we can look at the plaques on our wall or look at our bank account. And I'm not dismissing those things, but that's not what gives us purpose. What gives us purpose and what gives us that shot of dopamine is really progress, and so if we can do anything for clients or even ourselves that gives us the opportunity for progress, we're going to be far happier, far more fulfilled in what we're doing.
Braden Warwick: So goal setting is super important. How can people think through setting goals that align with their values and their long-term vision?
Charles Chaffin: I would think about a couple of different ways. So we can look at goals separating, let's separate two different types of goals. Let's look at extrinsic goals that I already talked about, and intrinsic goals.
Extrinsic goals are money and things, the material elements. Intrinsic goals are a good rule of thumb for an intrinsic goal or the things you do when nobody else is looking. You do them for the sake of doing, you want to do them, right?
You do them for the love of doing them. Neither is good or bad necessarily, but we do need to have a cocktail of both when it comes to goals, particularly have for an advisor working with a client. But even for consumers out there, we know that financial plans that have intrinsic goals mixed in are far more sticky than those that are not.
We know that clients are engaging their advisors more, having more plans developed, achieving progress on those plans when they have both of those things. And that could be as basic as renaming an account that could say education account and changing the name of it to the name of the child. So whose education it is.
Now I'm saving money for Naomi as opposed to just "education". But that intrinsic element is really, really important. And we can be far more perseverant when we have both of those things.
Again, it kind of goes back to how we're wired and what we're really looking for as individuals. And we basically have three things that as human beings, we all really, really crave. And that is we want to be competent.
We want to be able to do the things that we need to do to sustain. We want to be autonomous. We want to be able to make decisions over our well-being, in many cases, our environment.
And we want to be connected. So we want to be part of something bigger than ourselves. And that could be any number of things and not necessarily just a romantic relationship.
Be part of our community, part of a church synagogue or mosque or something like that. Having all three of those things is really critical. And for your listeners out there, what I'm talking about is something called self-determination theory.
Those things are what drives us. If we have those three things, we're good. And some of those are extrinsic and material because we got paid for these things, capitalism.
And then a lot of those things are intrinsic. They don't come with money. When those are out of whack, that's when we get into, not only do we get into elements of individuals' resolve towards achieving goals, we become much more susceptible to things like FOMO.
There's a huge connection between FOMO and this self-determination theory that I'm talking about. That if we're not aligned in these three areas, we tend to be on social media more, seeing what other people were doing and say, okay, why isn't that me? And now we're chasing.
We're chasing returns. We're chasing extrinsic rewards like likes on Instagram or Facebook or whatever it might be. So having that cocktail of things is really, really critical.
Now for advisors, that's hard to get to when it comes to talking with a client. MRI helps with that. We asked about financial FOMO.
We asked about general FOMO. We called general FOMO, basically good life FOMO. But it really comes down to for an advisor beyond MRI is specificity.
So being specific with someone about what makes them tick is going to get you the answer that you want as opposed to something that's general, but it's not going to get a client sizzling hot about their plan, which is what you want to do. You want to get them sizzling hot, say, this is the tool that's going to get me to the goals that I want as a human being. And so one thing relative to that is specificity is thinking about retirement.
So lots of advisors say to clients, what do you want your retirement to look like? And people say, well, they've seen a bunch of commercials with people with gray hair walking on the beach, these vineyards that they all have. I don't know how many people could all have these vineyards, but they always seem to have a vineyard and they're smiling and happy.
So they kind of regurgitate that. In a lot of cases they've regurgitated because they hadn't thought about it themselves. So you don't get a good answer.
You get a good answer when you say, so your retirement, talk to me about Tuesday morning at 10 o'clock during your retirement. What are you going to be doing? What do you want to be doing? Who's going to be with you? Where's it at? And what kind of impact are you looking for?
Now we're getting somewhere, right? Now we're thinking about things that maybe we hadn't thought about. Still hard questions, but there's specificity to it.
And now as an advisor, I'm now bringing in the extrinsic because I got to pay for it wherever if their goal is to have that vineyard, it's going to cost money. But I'm bringing in the intrinsic too. And now I'm saying, that's what I want. Let's build a plan that's going to get that client there.
Ben Felix: How do you know, either as an individual or maybe as an advisor working with a client, too? How do you know when it's time to quit on a goal?
Charles Chaffin: Yeah, we don't talk enough. I wrote about quitting. And it's amazing.
In the book, I have more people talking about quitting that chapter on quitting. It kind of surprises me. I think the biggest element, there's really two pieces to it.
So the first element is, is the goal that you have still aligned with what your identity is? And that's a hard question for some people to answer. It takes some time to get there.
But is this really what it is that you want to be doing? I think the second piece is probably the more prevalent element is some cost fallacy, talking about biases, right? I mean, basically say, well, you know, I'm doing this because I've been doing it for three years.
If I quit now, if I put three years into this, well, okay, but that's not a reason to continue on. I do goal setting for organizations. And this is what they talk about all the time.
It is like poison, right? We get into this. Well, we put all this energy into this.
And in reality, you know what, it was time to walk away. If it's not getting anywhere, it's not aligned with your identity, or it's just an outdated goal and you're holding on to it because of some costs. And by the way, relationships are the worst for that.
Talking about making this a relationship podcast with people. I mean, we've been together for four years and I've been putting up with their garbage for four years. I can't walk away now.
What are you talking about? You're basing it on some cost as opposed to what it is going forward. So if you feel like that is driving your persistence is what you've put into it in the past, it is probably at least worth revisiting putting that goal.
Braden Warwick: So far, we've talked a lot about financial planning psychology and goal setting. Two areas, that you have a ton of expertise in, but you also have the MRI product. And that's dealing with risk profiling.
So I'd like to get into that a little bit more. What is financial risk tolerance?
Charles Chaffin: Financial risk tolerance is our emotional behavioral response to uncertainty is kind of boiling it down to a basic level. And you know, how willing are we to endure some element of volatility or even short-term loss for a potential longer term gain, right? It's not just that, you know, in a lot of cases, a score is important and we have a score that MRI and lots of products do, but it's really, really beyond that, right?
It's really getting into our past, for example, if we want to know how somebody reacts to something, how they're going to react to something in the future, the best thing to do is ask, well, how do they react to it before in the same circumstance? That's usually a good predictor. But at the basic level it's thinking about for your listeners out there that are consumers, you know, it really is our willingness to take on loss and how we deal with uncertainty.
And in a lot of cases, uncertainty is more challenging than taking on loss.
Ben Felix: How does risk tolerance relate to setting and achieving long-term financial goals?
Charles Chaffin: If we have a misalignment when it comes to our financial plan and our investment portfolio, it's going to cause a lot of stress. The client may just abandon the plan altogether, right? And so we know kind of what we were talking about before.
If we have proper alignment, then during that volatility, that's where that goes back to the, we're talking about turbulence, right? We plan for this. We knew this was coming, we're fine.
We're set based upon your risk tolerance. We've got the portfolio exactly as it needs to be for you. There's no reason to panic we're fine going forward.
And so if we've got somebody who's conservative, but they're in something a little bit more volatile, it's a mismatch in their behaviors. They're going to either walk away or they're going to ghost their advisor.
Braden Warwick: How well do people tend to understand their own risk tolerance?
Charles Chaffin: It's kind of like race car driving and sex. I mean, everyone says that they're good at it, but we don't really know that that's true. You've got to ask someone else if that's really true, but everyone thinks that they're good at it.
So everyone thinks that they overestimate their tolerance, particularly if the market's doing well. So we overestimate that in the same time during downturns, although in some cases, a lot of people find their true tolerance in downturns. We tend to have that willingness to take on more risk than we should when the market's up.
And advisors everywhere talk about that right? Oh, this is going to go on forever. And they get to tie in biases. It's a recency bias. And that goes back to the full circle conversation here.
That's where the advisor is just so critical. And not only being that rationality element of saying, well, remember that the market goes through these corrections, or five out of six years or whatever the data people want to talk about as far as growth does, there's going to be changes. So let's not get too confident here.
So people tend to exaggerate them, but more often than not, when the market is really doing well, they think it's going to go on forever.
Ben Felix: Assuming that someone has established their appropriate risk tolerance, how stable is that trade over time?
Charles Chaffin: It's relatively stable as we think about this idea of an attitude versus an emotion. So an attitude is much more stable and emotion is not, you know, emotion happened quickly. And then they're very ephemeral and they kind of disappear, right?
So the biggest element to change is a life of that, right? I would say that's probably the biggest personal life event. So for example, if you have your first child, now you're going back to that idea of a provider.
I gave that example earlier. Well, now your risk tolerance may change. Well, I'm responsible now.
We're a family. It's not just me. I can't just be taking on, I don't want to take on as much risk because I have a different life situation.
Obviously, when it comes to the market too, that can change people's risk tolerance. If you've been burned, then you're going to have a change in that element of risk tolerance too. So really life events play a critical part.
So that's why we advise firms, it's when it comes to MRI. And even doing an RTQ, it should be given out with risk profile every six months, if you can. And it's a great opportunity to just reengage.
It's a great precipitator of dialogue because what we do with MRI, talking about MRI, but we give the score, but we provide lots of the advisor can look at this and say, okay, there's other things relative to them just being conservative that are opportunities for conversation and maybe opportunities for more investment, higher wallet share, but just a deeper relationship. It's a great excuse to really reengage. But it is important because life events and macro events do change people's risk comfort with risk.
Ben Felix: That's really interesting. Braden, I'm taking notes here. We should be doing the seven question risk tolerance questionnaire every six months.
And then we'll have like a time series of risk profile for each client. We could even overlay that on other stuff that's happening in the world or what's happening in the world at the time. That's a really cool idea.
Charles Chaffin: Yeah. And even like firms that we have firms that we work with that do either the prudent processing between October and December. Oh, okay.
There you go. Give it out. And most people want to see their score and it's a great opportunity to talk through it with it.
It just makes all the sense in the world.
Braden Warwick: When we were developing our own risk profiling tool before we partnered with MRI, one of the biggest challenges for us was figuring out how do we combine risk scores of a couple that have materially different profiles. So what are your thoughts on that? What's the best way to handle a scenario when a couple has two different risk profiles.
Charles Chaffin: We've developed some things for specific firms that look at that. They can get the scores of both. But I mean, it's a challenge, right?
Because you've got tension. If there's differences in the risk tolerance and two individuals, more often than not. I mean, that kind of gets in the side that gets into can get in some real power struggles or even some avoidance of one member of the couple.
So I think the biggest thing of that beyond using MRI is dialogue. So there needs to be communication and some real shared frameworks regarding steps going forward. If there is a huge delta between the risk tolerances in the couple, but having those conversations can be absolutely critical and even kind of walking through when they make that idea of if then, right?
Okay. Well, if there is a downturn, here's what we're looking at there. And sometimes that, making that abstract concrete can be really, really helpful.
If the advisor is able to make some sort of, let's say resolution to that in terms of going forward, even when there's a huge delta in risk tolerances, when there is that turbulence, there's a lesser likelihood of a power struggle or a problem because it's already been out in the open. It's already been discussed. There's a higher likelihood they're going to move forward even with that difference in risk tolerance.
Ben Felix: So we were talking about risk tolerance and risk tolerance questionnaires. There are different ways to evaluate this. Can you talk with the differences between psychometric, which is what MRI is, and revealed preference risk questionnaires?
Charles Chaffin: So we look at it from and not saying anything about our competitors, but we really look at integration of many of those elements that are part of the financial psychology that we have data and that we've worked on it brings in the beliefs and emotions and behaviors of an individual beyond just looking at what individuals have stated as a revealed preference, right? And knowing exactly, okay, we want to give that score so that we can map a portfolio and we do that. As I mentioned earlier, we want to be able to find out, okay, well, in similar situations, how did you respond?
Because that's going to be the ultimate predictor. But just basically what people say, people say lots of things. And that's all of us.
I say lots of things. I mean, that's just how we're wired as humans. So if we can really tie in the behavioral element, then now we've got a much higher likelihood of getting a score and a mapping that's going to be far more accurate and consistent for the client to stay engaged.
Braden Warwick: So of those two types, the psychometric and the revealed preference risk questionnaire, how do we know which one is better?
Charles Chaffin: Well, so psychometric tools, they're assessing like the attitudes and the beliefs, kind of that emotional element, right? Revealed preference, it infers tolerance from past were more often than not hypothetical behaviors. So psychometrically, we're looking at kind of how risk, I guess you could say, how risk feels and revealed preference would be kind of how risk is acted upon, if that makes sense.
But if you don't have a combination and bring in all the behavioral pieces, then from our perspective, anyway, it's not exactly complete in terms of giving an accurate picture of what is that not just risk tolerance, but that comfort with the risk that ties in, you know, what an individual is able to and what they're comfortable with taking on relative to risk.
Ben Felix: I will give a shout out. Your MRI co-founder, John Grable, who does have a 2019 paper where they designed a test to determine which of revealed preference and psychometric actually explains people's like households risk taking behavior better. And they find in that study that psychometric does a much better job.
It's highly correlated with actual actual equity ownership of the people in the sample and the revealed preference scores were unrelated to equity ownership. So it's not just an opinion you're sharing. It's a real evidence based thing that this type of questionnaire is in fact better, at least in that study it was.
Charles Chaffin: And that's his work that's part of MRI and critical bringing that into this space. And MRI has been running for we've been running for like a year now, and we're just thrilled with the response so far because of his work and bringing it making it so strong.
Ben Felix: Both your work, right? It's John's work on that on the RTQ piece and the risk tolerance questionnaire piece. But you combine that with the psychology as we've been talking about it, and it really creates this full picture, which is why we're excited about using it.
I don't want you to throw your competitors under the bus. You already mentioned not wanting to do that. But you've obviously built this tool because you thought there was a gap in the market.
Can you talk about where common risk tolerance assessments fall short?
Charles Chaffin: What we hear from firms is it's an exercise that ends up in a file on, you know, a client's file and it's not really revisited. It's not the best use of everyone's time. It's something you gotta you have to check that box from a regulatory perspective.
And it doesn't provide the opportunities that we were just talking about to have that deeper relationship with a client and understand the client better. And yes, check the box of a regulatory perspective. I think that some RTQs are seem to be overly simplistic and are decontextualized.
Do you get into these hypotheticals? Again, it's not really relevant. And perhaps more than that, bringing in the side of the street and the work that I do, it ignores the emotions and the beliefs and the narrative that is absolutely critical in knowing your client and that element of assuming that stability doesn't even exist in some cases.
So I think that, you know, our approach has been to think about comfort with risk holistically like we are with a lot of elements of psychology. And Grable is the person that brings that into the risk space and then provides, you know, in our feedback, which you all have seen is we basically develop it so that an advisor can look at that for 90 seconds before a meeting and say, I got it. Here's the score.
Here's the yellows, reds and greens. Here's the things to think about. Here's what we do relative to mapping and if a firm has 20 portfolios to map or nine, whatever it is, fine.
We can do that, but they can move forward in a systematic way and eliminate the guesswork. And perhaps more importantly, know where to go in the relationship. When you have a conversation, your clients don't have all the time in the world, neither do you use an advisor and you could go a million different directions with a conversation.
This basically says, okay, here's the reds and reds aren't good or bad, reds are priorities. This is probably a priority item for you to talk about with your client right now and get to it. It's going to make the most of your time, most of all of you, to both the client and the advisor's time.
Braden Warwick: Can you go into a little bit more detail about that. You touched on what the advisor gets to see, but what specifically does the output of the MRI questionnaire tell us?
Charles Chaffin: So it is the use case of the client takes it and then that output relative to all these different areas we talked about. So everything from financial confidence to history of fraud in the family to FOMO, to overconfidence and biases and all these different things and it shoots out a pretty succinct overview that goes to the advisor specific to that client saying, here's what we saw. This client has high levels of FOMO or they have low levels of financial confidence.
Here's what to think about relative to that. And it's written in a way, kind of going back to what we talked about a while ago, it's written in a way that first of all is not as if it was written by three PhDs, but very, very basic. So an advisor could read it very quickly.
But more importantly, it's written without judgment. So we do have firms that want their clients to see it. And that's not a problem.
They can see it. The language in there says your client is this. It doesn't say the individual.
Now some firms are customizing to change that, but that's okay. We wrote it in a way that if the client saw this, they wouldn't be offended. They wouldn't feel judged and whatnot.
And then based upon that, there's the opportunity in that discovery meeting. Here are the three things that we want to start with in this conversation relative to the plan, and let's get to it. And in our first year, what we're seeing is it is incredibly helpful, not only for existing clients, but on that discovery and converting prospects.
Because you know where to go with the conversation. You're going to talk about things that you're sure are relevant to that client.
Ben Felix: It makes a ton of sense from the perspective of the advisor and improving the quality of that relationship. From the perspective of the end investor of the client, can you talk about how the full set of information provided by MRI helps someone make better financial decisions?
Charles Chaffin: It kind of goes back to what we were talking about is understanding yourself better. We all have elements of irrational behavior. We all have elements of our history that helps us and gets in the way of our goals.
So if we understand that better, then it goes back to altering our environment, altering our behaviors to reach our goals. All those different things. So for individuals, and we're seeing this amongst a lot of firms that working on that consumer facing element of MRI, we think there's an opportunity there.
That is a critical piece for individuals to set better goals because of their financial confidence or their high levels of FOMO or whatever it might be.
Braden Warwick: That's super insightful, Charles. This has been great. Last question, how do you define success in your life?
Charles Chaffin: In my life or life in general?
Ben Felix: Your life?
Charles Chaffin: I think at a 30,000 foot level, if you want your life to matter, then everything you do has to matter. And mattering means that it's beyond just impulsive behaviors. If that's what you want, if you want to satisfy impulsive desires, that's there's again, there's no good or bad.
I'm sorry, I'm not putting any judgment to that. But if you want there to be meaning, you want to have some element of impact, which is important to me, then you want to have alignment. You want to have alignment of your environment.
You want to have alignment of the people around you. You want to have alignment of your behaviors that are consistent with that. And if that's a real issue for people that are listening to this saying, I'm not doing that, then take stock, take that inventory.
What is getting in the way? And don't beat up on yourself and say, it's because you have no willpower, or because you're not meant for it. Be objective about the environments that you're in, and adjust if they're not working for you.
And that goes to even if your goal is to satisfy impulsive desires, fine, then have an environment that's conducive to that. But to me, I think that element of having meaning and purpose is important. I think that I'm going back to that retirement piece.
I don't think that we talk enough about the gift of people relying on you. When you have someone counting on you, whether they're counting on you for food and shelter, or they're counting on you for support, counting on you for love, counting on you for just an ear to listen, that is actually an incredible gift that not only you're giving that person, but you're getting. I always feel sorry for people who don't have that, that they don't have somebody relying on them for something.
So to me, that goes back to that idea of impact. And I think tying in to the money piece, this is a financial conversation, the money is a tool to get there. And that's where the extrinsic and intrinsic, the extrinsic is the fuel to get to what their real meaning is, which is really the intrinsic.
Ben Felix: That's a great answer. Thanks, Charles. This has been great conversation. We really appreciate you coming on the podcast.
Charles Chaffin: Thanks for having me.
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