Research belies the blanket assumption about women’s interest, aptitude and risk tolerance regarding investing.sorbetto/iStockPhoto / Getty Images
The traditional narrative in financial services is that women are more risk-averse than men when it comes to investing. But is this true?
While research shows female clients are more likely than male clients to hold a higher proportion of cash in their portfolios, these choices appear to be mediated, at least to some degree, by the advisor’s gender.
When a woman works with a female financial advisor, she’s more likely to invest in risk assets, such as equities, according to a recent paper. She’s also more likely to report higher levels of financial literacy and confidence than when she works with a male advisor.
In short, research belies the blanket assumption about women’s interest, aptitude and risk tolerance regarding investing.
“The stereotype that women are more risk-averse than men as investors is, in my view, a gross overgeneralization,” says Lisa Kramer, professor of finance at the University of Toronto.
“Studies show men and women exhibit the full spectrum of preferences – from very risk-averse to extremely risk-seeking, regardless of gender.”
Without assessing individual variations, both men and women are ill-served when advisors operate from a template of gender stereotypes. However, it’s female clients who potentially suffer more if they’re herded into higher-cost and lower-potential-return investment products, and are more at risk of retirement savings shortfalls if their investment returns are insufficient – a situation compounded by lower lifetime earnings and longer lifespans.
Dr. Kramer says female advisors may just be more aware of women’s realities, such as career interruptions to care for children and lower average earnings compared to men, making it easier to prepare them for retirement.
“That, counterintuitively, often means taking more financial risks,” she says. “So, any advisor who is categorically lumping all women into very safe investments is not doing their client a good service. I would prefer to see advisors assessing the risk preferences of each client as an individual.”
However, she says psychometric assessment tools, such as those used to identify personality traits, are only estimates and the results are subject to change.
Self-reported risk tolerance – how much a client cares about the potential upside versus downside of an investment – varies based on how questions are phrased, she says.
For example, when a capital loss is presented as a percentage, clients report less risk aversion than when the loss is shown in dollars.
Risk appetite also varies based on the environment; investors are more risk-averse in a bear market or after a recent market crash than during a bull market.
Elke Rubach, president of Rubach Wealth in Toronto, uses psychometric assessment tools to build better communication with clients. It also provides her clients with validation of how they process information, make financial decisions, set goals, and approach risk.
“When they first see the results, they’ll laugh and say, ‘Oh, that’s totally me!’ Everyone needs to understand their own profile and risk appetite, and the consequences of those,” she says. “My job is not to judge people.”
After signing a non-disclosure agreement, Ms. Rubach offers clients access to a diagnostic questionnaire from Phoenix-based behavioural firm Kolbe Corp. that identifies their strengths and communication style.
“It helps me cater reports to them,” she says. “How much detail do they need? Am I going to kill them with a 12-page document?”
If Ms. Rubach observes deeper issues related to risk tolerance – for example, if a client checks their portfolio “every three minutes” – she may recommend lowering the portfolio risk level or refer the client to a psychologist to explore the underlying cause of their financial anxiety.
“Everyone comes with money messages from their past. It can be helpful to discover what’s behind them,” she says.
When clients visit Svetlana Antonyshyn, a registered psychologist with InnerSight Psychotherapy Inc. in Woodbridge, Ont., they often seek guidance on managing financial anxiety.
“Money doesn’t create specific traits, but it can amplify existing ones,” she says.
In her opinion, the perceived gender differences in risk tolerance are partially influenced by hormonal biology. “That’s not good or bad. Men take more risks because they are less relational than women,” she says, meaning women are more likely to prioritize interpersonal relationships.
Ms. Antonyshyn says female clients may report higher levels of confidence and financial knowledge with female financial advisors because they feel psychologically safer.
“The human nervous system is designed to scan the environment for safety. When a woman talks to a female advisor, based on their shared history as women, she’s going to be less defensive and more open to taking in information,” she says.