Unleashing the growing investment power of women
An individual’s financial personality traits are far more important than their demographic characteristics, says Greg Davies, an expert in investor psychology and Head of Behavioural Finance at the behavioural fintech Oxford Risk. Greg recently outlined to Aviva why it is vital that advisers treat their clients as individuals, rather than relying on stereotypical assumptions.
Financial personality traits or demographic characteristics?
The media love to divide the population into demographic groups, such as baby boomers, women, the young, and the disabled. Fortunately, life is far more interesting because, as Greg points out, people’s personalities vary widely within these demographic groups:
Take attitudes to risk among men and women. The data show that on average women are slightly less risk-tolerant than men. However, the variation within each group is much larger than the average difference between them. It is certainly easy to find very cautious men and highly risk-tolerant women. That’s why advisers should focus on the individual, rather than whether they’re male or female.
The importance Oxford Risk places on an individual’s ‘financial personality’, rather than demographics, prompted research that identified ten personas in the population that tend to share common traits. These include ‘Pioneers’, who are more independent, more risk-tolerant, and a bit more impulsive than average.
Greg adds that:
all ten personality profiles include both men and women, but the proportion of each varies slightly
The exception that proves the rule?
There are some key differences between men and women that do hold true. Females, for example, tend to be less confident about investing than males, says Greg, so they are less likely to invest. That can prove very costly for clients, since uninvested cash gradually erodes in real value. However, Greg points out that men are also likely to trade far more frequently, and often on a whim. Consequently, once they are invested, women often generate better outcomes.
Understanding the emotional barriers to investing – and particularly women’s lack of confidence in investing cash – is a key challenge. As Greg points out:
If the share of wealth controlled by women is increasing, a larger share of the nation’s wealth is likely to be sitting in cash. So, it’s increasingly important to help people feel emotionally comfortable moving from cash into investments.
It is not just women who are sitting on unnecessarily large cash piles, of course, and Greg believes that the industry’s efforts to encourage people out of cash have focused wrongly on education. He asserts that:
there’s not a knowledge gap; there’s more of a guidance gap. Most people don’t need more technical detail—they need help getting started, overcoming inertia, and managing their emotions
That’s because people need help to overcome various emotional barriers, which include: a lack of confidence; fear of complexity; and the emotional discomfort of moving money from a savings account that feels safe to investments that in the short term appear risky – even though investing is the best long-term builder of wealth.
Greg concludes that:
if we want to help people to put more of their cash to work – and the imperative for doing so is increasing as more women hold the purse strings – the need for behavioural tools that can overcome these emotional hurdles is ever more pressing
Moreover, once an individual has decided to invest, it is vital that they are steered towards the investment that best suits their particular personality profile. For example, says Greg, an individual’s impulsiveness, rather than just their financial circumstances, should in part determine whether an annuity might be more suitable. That’s because an annuity is particularly appropriate for those who spend impetuously and hence draw down their portfolio much faster than is wise.
So, even if two individuals have the same financial circumstances, the behavioural element can be critical in determining which product is the most suitable for each. That is particularly relevant given the FCA’s ‘targeted support’ proposal to ensure more people receive professional financial advice. Greg believes that while targeted support for clients is an excellent idea:
it must go beyond demographics. If you ignore behavioural differences, you risk giving the right advice to the wrong person
You can find related content including our 'Exploring and rethinking retirement' webinar with Greg Davies below.
