How clients’ personalities affect financial advice

Understanding clients’ personalities and how they respond to risk can lead to stronger relationships where advice is followed, a study from TD Wealth says.

TD Wealth has made use of the big five personality traits — conscientiousness, agreeableness, reactiveness, extroversion and openness — for its wealth personality assessment tool. Research has shown the traits are related to risk preferences and investment decisions. In a report released Tuesday, researchers analyzed data from an online survey of 2,088 mass-affluent Canadians that TD conducted with the Maru Group in 2018.

The report offers insight into how advisors can adjust to different clients based on their personalities and how clients are likely to respond in different risk environments.

Clients who score highly for extroversion are more spontaneous and outgoing, and may be more confident in their investment knowledge, said Laura Goodyear, a PhD candidate and research assistant with the Behavioural Economics in Action Research Centre at the Rotman School of Management, speaking at a webinar on Tuesday.

Extroverts may be more likely to be self-directed investors, she said, but they may also require additional support from advisors due to their overconfidence.

“Overconfident, highly extroverted investors could prove to be challenging as they may state they are very willing to embark on highly volatile investment but have neither the capacity nor tolerance to do so,” the report said.

Conscientiousness is associated with more careful investors who are likely to stay course through a market downturn, Goodyear said. They’re also confident investors and are less likely to have had a negative relationship with their advisor.

Clients with high scores for reactiveness are more likely to experience negative emotional reactions during market downturns and therefore may require additional interaction with advisors to ensure they stick with financial plans, Goodyear said. They’re more likely to have had poor relationships with advisors.

Clients who demonstrate openness — willingness to engage in new activities and experiences — are generally better equipped to handle market fluctuations and stick with their investment plans, the report said.

Finally, the study found no connection to risk tolerance for clients who score highly in the agreeableness trait (describing clients who are polite, friendly and co-operative). The trait may provide insight on advisor-client relationships, though.

“Those who are highly agreeable may be more unlikely to raise an issue or concern and may agree with the recommendations of their advisor despite their concerns,” Goodyear said.

The study also found that clients who classified themselves as working in volatile careers or having volatile incomes were more likely to prefer risky portfolios. These clients were also less satisfied with their preparation for retirement.

“As younger Canadians enter the workforce, this potential instability may be a result of the younger generation working in contract positions and may result in different financial planning challenges than advisors have seen in the past,” the report said.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.