Over the past four decades, the mental health field has struggled to define cultural competency and its efficacy in psychotherapy. Recent cultural competency and treatment adaptation studies have pointed to predominant evidence that cultural competency yields positive experiences and outcomes in treatment. What remains largely unknown, however, is why cultural competency works. Existing literature provides guidance about knowledge, skills, and awareness for therapists to attain, and types and areas of psychotherapy to adapt to achieve cultural competency, but few have given a theoretical understanding explaining why these efforts would yield clinical improvement. In this paper, we present a thorough review of several decades of cultural competency and psychotherapy literature for the purpose of answering the question of how and why cultural competency works. Our literature analysis yielded 3 theoretical principles that explain the mechanisms of cultural competency. Cultural competency works because it creates: (a) a contextual match with clients’ external realities; (b) an experiential match in the microsystem of the therapeutic relationship or framework; and (c) an intrapersonal feeling of being understood and empowered within the client. These theoretical principles unify a broad and variegated cultural competency and psychotherapy literature, and provide a common foundation for understanding the basic principles and mechanisms of culturally competent psychotherapy. A case example is provided to demonstrate clinical practice implications. The proposed theoretical model is preliminary with future research needed to empirically test these principles as mediating variables in the process of cultural competency in psychotherapy.