C hapter 12 Financial Counseling and Coaching

1. Chapter 12Financial Counseling and Coaching

2. Topic Covered • Financial Counseling: A historical Perspective • Home economics’ Influence on Financial counseling • Financial counseling as a profession • Theoretical Approaches: A Financial Counseling Perspective • Family Resource Management Perspective • Resource Acquisition Perspective • Psychological Perspectives • Cognitive/behavioral approaches • Systems Perspective • Financial Counseling in the twenty-first Century • Financial coaching • Financial therapy • Life Planning

3. Financial Counseling: A historical Perspective • Financial counseling has been defined numerous ways. • For example, Pulvino and Lee (1979) describe counseling as a process of orderly, systematic steps whereby counselors help clients understand and act on their concerns and of helping others understand who they are and what skills and abilities they have. • Pulvino and Lee comment that preventive counseling can help a client to meet immediate crises that may cause the person undue anxieties through wise money management and planning; preventative counseling can develop the attitude that the client is responsible and capable of controlling the future in a positive, purposeful way.

4. Cont. • Williams (1991) views financial counseling as the professional field of assisting clients to obtain economic well-being and security. • According to Williams, financial counseling is conceived in a broad sense. It uses skills and information to assist clients in changing behavior in financial management, consumption, lifestyle, and the use of all types of resources in order to obtain and maintain economic security. • By definition, financial counseling shares many of the features associated with psychotherapeutic and family counseling approaches (Williams 1991). • For instance, financial counseling is premised on the following notions: (1) Counseling, as a process, is relationship oriented; (2) counseling is cooperative, with both client and counselor contributing to solutions; and (3) counselors ought to be both objective observers and active participants. • Pulvino and Lee (1979, p. 5) summarize the client counselor relationship as follows: “The counselor’s responsibility revolves around structure, the client’s around content.”

5. Cont. • Although similar in many ways to other forms of interpersonal psychotherapy treatment, financial counseling differs from services provided by clinical social workers, psychologists, marriage and family therapists, and others in one significant way; namely, financial counselors do not treat clinical disorders and the focal point of advice and guidance is directed at a client’s household or family financial situation. • Often those unfamiliar with the financial services marketplace confuse financial counseling and investment/financial planning. Financial counseling is similar to, but different from, investment advisory work. • In the case of investment planning, the goal of the investment management process is to increase wealth in pursuit of long-term financial goals.

6. Cont. • Financial counseling also differs from financial planning. Financial planners generally review a wide variety of topics related to a client’s financial affairs (e.g., insurance, tax, retirement, estate, investments, and special needs). However, few planners get involved with helping clients create a spending plan (i.e., budget), negotiate with creditors, or change spending behaviors. • That is, the role of a financial planner is to help clients manage their cash flow and net worth position in such a way that wealth is created over the life span as a way to fund tangible financial goals. Financial counselors, on the other hand, tend to provide guidance in ways that will achieve baseline levels of financial health without regard to wealth accumulation.

7. Cont. Home economics’ Influence on Financial counseling • Financial counseling has its historical roots in the home economics movement that began in the mid- to late 1800s. • The term home economics is a fair description of the early studies conducted to determine how households manage their resources (e.g., time, money, talent, and labor). • Researchers and land-grant university extension specialists were taking steps to organize studies and training dedicated to the establishment of financial counseling as a field of study and practice. • Family and consumer economists have traditionally maintained an interest in applying economic principles to develop normative strategies to help people function within the broader economic environment. Yet, the establishment of family resource management, within the context of family economic theory, gave financial counseling a true academic home (Williams 1991).

8. Cont. • Linking family resource management with financial counseling enabled new professionals to describe their primary client interaction activity as financial, rather than relational or psychotherapeutic. • Williams (1991) was among the first researchers to argue for a linkage between family resource management and financial counseling. She maintained that what makes financial counseling unique is the manner in which economic theory is blended with management processes. • Specifically, as Williams (p. 7) notes, the basic tasks of financial counseling, as an offshoot of resource management, “are to reconcile expenses with income, provide a balance among needs and wants, maintain a life style in light of hazards against economic security, provide stability while promoting growth, and to distribute resources in a just way (which depends on one’s philosophy of justice) equally, efficiently, and effectively.”

9. Cont. Financial counseling as a profession • The study of household decision-making is grounded in home, family, and consumer economics. • Although financial counseling emerged from these studies in the 1960s (Churaman 1977), people have been providing financial counseling services from a multitude of professional perspectives for well over a century. According to Bagarozzi and Bagarozzi (1980), social workers, the clergy, and other paraprofessionals typically provided financial counseling before the 1960s • Feldman (1976) categorized financial problems typically encountered by social workers and other help providers into four interrelated domains: (1) learned behavior; (2) behavior brought on through external stimuli, such as economic recession, deflation, and unemployment; (3) family crisis; and (4) financial behavior that is a symptom of emotional and/or personality characteristics

10. Cont. • This list also indicates the chasm that existed among help providers who were interested in helping individuals and families deal with financial stress through the 1970s. • On one side of the divide were those trained in traditional economics (also known today as standard or traditional finance) who viewed financial behavior from a perspective of normative resource allocation choice, in which decisions were based on quantitative or statistical attributes. • On the other side were help providers who viewed financial behavior as a function of other underlying personal and family issues (e.g., overspending as an outcome of child deprivation) • The type of services provided, the materials presented, and the resources gained by a consumer would vary dramatically based on who was providing the counseling service and how the counselor was trained.

11. Cont. • Although social workers and the clergy continued to provide financial counseling services throughout the 1970s and still do, the field of financial counseling began to crystallize with the work of family economists and resource management specialists who began to study how traditional economic theory could be blended with organizational behavior, counseling, and household management concepts. • Bagarozzi and Bagarozzi (1980) document three ways (i.e., remedial, preventative, and productive) in which financial counseling that originated from a resource management perspective was most often provided during the mid- to late 1970s. • During that time, credit unions were very active in providing financial counseling services to members. Credit unions required their members (i.e., depositors) who applied for a loan typically to receive a form of financial counseling. They provided remedial counseling in cases where a loan was rejected. The purpose of this form of counseling was to help members improve their financial situation so that they could receive loans in the future.

12. Cont. • The third, and largest, providers of financial counseling services were consumer credit counseling firms of which almost all were operating as nonprofit corporations. • Generally, consumer credit counseling companies marketed their expertise (e.g., firms widely advertised these services in radio and television commercials) to the most financially distressed consumers in the marketplace. In almost all cases, these consumers were on the brink of declaring bankruptcy. • The financial counselor would meet with the client. During the initial meeting the client would assign responsibility for negotiating with creditors to the financial counseling firm. The financial counselor would work out a debt repayment plan with the client’s creditors. Once the plan was established, the client would send a check once a month to the counselor who would distribute payments to each creditor.

13. Theoretical Approaches: A Financial Counseling Perspective • Financial counseling might have been founded with the academic study of economics of the home, but it had its coming of age during a time when strategic management was the dominant planning and decision-making framework used in government and corporate organizations (Overton 2008). • Consider the financial counseling process model first introduced by Pulvino and Lee (1979). Their model describes the steps involved in the counseling process, beginning with building a counselor-client relationship and ending with recommendation evaluation. The process is not a practice model, but rather a best-practices procedure. • One obvious limitation associated with the financial counseling process model is that it is not unique to the financial counseling profession. Financial planners, for instance, use a similar process approach when working with their clientele.

14. Cont. • Additionally, the process model does not adequately define or explain how financial counselors do or should interact with clients. The process approach only describes the steps that should be taken—in specific order—when working with clients. • Wall (2002) maintains that the practice of financial counseling can be classified into one of three approaches: (1) psychological, (2) behavioral, and (3) pragmatic. • Exhibit 12.1 shows, financial counselors tend to use one of four broadly encompassing theoretical perspectives when working with clients. While nearly all counselors may apply a similar client engagement process, each practitioner’s preferences, training, and core technical competencies tend to drive the choice of theoretical perspective when working with clients.

16. Cont. Family Resource Management Perspective • For many decades, Flora Williams, Professor Emeritus at Purdue University, was the leading spokesperson for the development of financial counseling as an academic field of study and practice. One of her foremost contributions to the field was integrating family economic theory with resource management and psychological concepts. • She conceptualized her work in the following economic security model (Williams 1991, p. 5), which shows economic security to be a function of a variety of financial, psychosocial, and sociological concepts: E$ = f($Mo, Fa, Pa, CR, D, At, Mg, Ct, VS, I) A (12.1) where E$ = economic security, which is conceptualized to be the result “of income in the total concept through developing, acquiring, and maintaining personal, household, and community resources” $Mo = money income,transfer payments, and in-kind income Fa = financial assets Pa = personal and human assets Cr = community resources

17. Cont. D = durable goods At = attitude toward money Mg = management abilities Ct = control over financial affairs and resources VS = value of simplicity I = insurance; and A = ability to adjust. • The resource management approach is premised on several key assumptions. • First, household resources are limited. For instance, income, assets, and access to help providers are restricted for most individuals and families. • Second, household demands for additional resources are nearly limitless. • Third, the inherent conflict between limited resources and unlimited needs results in unmet needs. • Fourth, households act in a rational manner by identifying and ranking resources and resource demands when making decisions related to which needs will remain unmet.

18. Cont. • Williams (1991) maintains that those who rely on a resource management perspective as a practice model share a common perspective that includes: Helping clients balance income and expenses, Developing procedures to help clients balance needs and wants, Providing rules to help maintain current living standards while maintaining economic security, Promoting financial growth and stability and Teaching clients to distribute resources justly. • Financial counselors who follow a resource management perspective tend to focus efforts on identifying and expanding concepts of income, time usage, social resources, household labor usage, household leadership, and knowledge enhancement related to consumer protection and choice, financial institution information, and public policy. • The core underlying purpose driving nearly all financial counselors who employ a resource management perspective involves behavioral change at the individual and household level.

19. Cont. Resource Acquisition Perspective • Financial counselors whose practice model focuses on helping clients acquire resources often work from a social justice theoretical perspective. • Broadly defined, social justice combines aspects of progressive economic thinking with social policy activism. • Although social justice is a theoretical perspective that is still actively debated, common linkages underlying a social justice perspective include: (1) recognizing the inherent dignity and equality of all individuals, (2) creating opportunities for economic equality, and (3) redistributing income and wealth to produce economic equality.

20. Cont. • Financial counselors who use a resource acquisition approach when working with clients focus on helping their clientele increase access to resources, such as income, assets, and insurance. • Often, the focus is on helping clients obtain publicly available—either governmental or private donation based—resources. • These counselors tend to be less fixated on the behavioral change aspects of financial counseling primarily because they believe the free-market financial marketplace is fundamentally unfair, and this unfairness limits choice and creates uncertainty for vulnerable households.

21. Cont. Psychological Perspectives • Some financial counselors incorporate psychologically based approaches in their work with clients. • Psychology is the study of normal and abnormal functioning of individuals, in which physiological and psychological aspects are considered and the applied goal is to help individuals with cognitive, behavioral, and emotional problems. • One psychological approach used by financial counselors is the practice of psychoanalysis, which Sigmund Freud developed to help explain how unconscious thought, primarily developed in youth, creates historical precursors of current behavior (Burke 1989; Klontz and Klontz 2009)

22. Cont. • Cognitive/behavioral approaches • Cognitive/behavioral counseling is a common psychological approach typically applied to financial counseling. • Williams (1991) notes, a practitioner’s philosophical approach has a direct influence on the type of recommendations made to help a client deal with financial stress. • Cognitive theory suggests that humans make behavioral decisions based on factors such as perceptions, attitudes, and beliefs (Burke 1989; Williams 1991).

23. Cont. • Common assumptions held by cognitive/behavioral practitioners include the following: (1) Individuals can control their own environment, (2) human behavior can be changed, (3) people prefer to be in control of their own thoughts and actions, and (4) humans are constantly learning. • What differentiates this practice approach from, say, a resource management perspective, is a counseling focus on helping clients gain control over their financial situation rather than a focus on maximizing a client’s financial satisfaction, although this can be an outcome associated with the cognitive/behavioral approach.

24. Cont. Systems Perspective • What happens when more than one person is involved in the financial counseling process? • Family systems theory is a perspective that is increasingly being applied when working with individuals and with groups in a financial counseling setting. • Family systems theory grew out of psychological processes by addressing similar issues related to cognition, behavior, and emotion. Systems theory also encompasses issues associated with relational aspects of a client’s life. • Family systems theory has its roots in Bertalanffy’s general systems theory and cybernetics, which views an individual as being part of larger family and social systems.

25. Cont. • Nichols and Schwartz (2001, p. 104) describes a system as “an organic whole whose parts function in a way that transcends their (i.e., individuals) separate characteristics.” In short, this means that individuals are still individuals, but understanding a person’s behavior without considering her social or family context is impossible. • According to Nichols and Schwartz (2001, p. 153), Bowen family systems counseling aims to lower anxiety and increase “the ability to see and regulate one’s own role in an interpersonal process” as mechanisms to change behavior. • Structural therapy approaches aim to change behavior and the experience of family members to change family functioning patterns by using altering boundaries and realigning subsystems.

26. Financial Counseling in the twenty-first Century Financial coaching • Wall (2002, p. 17) defines financial counseling in the following way: Financial counseling is a short-term educative process concerned with helping people to help themselves through the application of financial information, education, and guidance to specific situations. It typically involves helping people clarify issues, explore options, assess alternatives, make decisions,develop strategies, and plan courses of action. • Williams (1991) would argue that what this definition lacks is a focus on behavioral change and would not be alone in offering this critique. Many practitioners and policy makers have expressed concern that financial counseling, as generally practiced, tends to be too short-term oriented. This helps explain the growing interest in exploring new models and approaches that blend the best aspects of financial counseling with other interpersonal behavioral change techniques. • One relatively new practice approach is known as financial coaching. Financial coaching is a subset of something known as personal coaching, which has been practiced since the 1970s. Financial coaching combines aspects of financial counseling, financial planning, and personal coaching.

27. Cont. • Financial coaching is increasingly being applied as an intervention technique that can be used effectively with high-, moderate-, and low-income households. • Rather than directing efforts at helping clients solve short-term financial emergencies, financial coaches tend to focus on helping their clientele establish and reach long-term financial goals through directed behavioral change. • Financial coaching is premised on five key assumptions: (1) Long-term, rather than short-term goals are of most importance; (2) helping clients achieve long-term financial goals is a collaborative process between client and coach; (3) the coach’s primary role is to provide support to clients; (4) each client has unique skills and abilities and the coach’s task is to help each client discover and use these resources; and (5) clients have the capacity to change behavior.

28. Cont. • Clients who seek the help of a financial coach often find the term coach to be attractive because the idiom is most often associated with athletic success. • Coaches are known to help others set goals, develop strengths to meet and surpass goals, and provide ongoing feedback and guidance. In some ways, financial coaching combines aspects of resource management and cognitive/behavioral frameworks associated with financial counseling.

29. Cont. Financial therapy • Financial therapy is an emerging area of study and practice that has its roots in the financial counseling, financial planning, and mental health fields. • Financial therapy is conceptualized as the integration of cognitive, emotional, behavioral, relational, and economic aspects that promote financial health (Financial Therapy Association 2012). • Financial therapy is often practiced when a professional has training in both personal finance and mental health or when a financial professional (e.g., advisor, planner, counselor, or coach) and a mental health clinician (e.g., marriage and family therapist, psychologist, or social worker) collaborate (Archuleta et al. 2011).

30. Cont. • Financial therapists typically engage in a process to help clients improve their overall quality of life by helping clients improve their financial well-being (Archuleta et al. 2012). • The process typically consists of: • Developing a relationship between the client and practitioner • Addressing presenting issues and goals • Creating an intervention or introducing tools as a mechanism to meet clients’ expected outcomes and goals (e.g., changing one’s relationship with money).

31. Cont. Life Planning • Life planning emerged as an alternative practice approach for financial planners who were less interested in following the systematic financial planning process, which, by definition, tends to be focused heavily on financial problem analyses and solutions. • Many definitions of financial life planning are available. For example, Sharpe et al. (2007, p. 2) state that life planning is “a holistic, values-based, client-centered approach to financial planning.” • Anthes and Lee (2001, p. 90) define life planning as follows: “A process of helping people focus on the true values and motivations in their lives, determining the goals and objectives they have as they see their lives develop, and using these values, motivations, goals, and objectives to guide the planning process and provide a framework for making choices and decisions in life that have financial and non-financial implications or consequences”.

32. Cont. These two definitional frameworks highlight the following core assumptions underlying life planning: • Clients are viewed holistically rather than financially • Planner advice must be multidimensional, looking at financial and non-financial aspects of each client’s situation • Financial recommendations and solutions create interactions in other areas of a client’s life • Attitudes, feelings, and interactions with others influence a client’s behavior.

33. Cont. • The unique contribution of life planning, as it relates to the historical development of financial counseling, is the recurring requirement to continually focus on each client as an individual interacting in a complex world. • Rather than separating client goals and objectives into financial and other, life planners attempt to provide counsel that addresses multiple life outcomes simultaneously