Rethinking risk aversion

Study after study finds female investors more risk-averse than men. On the one hand, these results make a lot of sense. Some women—particularly older, single women—don’t have much financial knowledge or experience. Women also live longer and therefore want reliable savings.

But on the other hand, a record number of women are opening their own businesses, buying real estate and luxury automobiles. They’re also active participants in family finances, dragging their husbands to meet advisors who will create financial plans. This is not exactly risk-averse behaviour.

So what’s the real story here?

A study, called “The Impact of Difference in Risk Aversion on Expected Retirement Benefits of Men and Women,” examined the investment habits of people employed in the Australian university sector. While women were found to be more risk-averse, the distinction was slight, notes Stephen Horan, head of private wealth for The CFA Institute in Charlottesville, Va. The study’s results were published in the summer issue of the Financial Analysts Journal, which is peer-reviewed by The CFA Institute.

Read: Women don’t understand money…right?

“The difference amounts to about two percentage points and it’s not dramatic in terms of economic significance,” he says. “But it is detectable.” For example, the study’s authors found that if a male professor had 80% of his portfolio in stock, a woman of similar employment, age and income had about 78% of her portfolio invested that way.

One industry observer believes gender studies only provide part of the picture. Cristi Cooke is the owner of Majority Marketing, an Ottawa-based consulting firm that helps professionals better market their services to women. In her research, she finds women are in fact risk takers but they require more information and comprehension to make informed investment decisions. “[Gender studies] rarely get into what defines a woman’s level of risk,” she says. “The industry is still trying to clearly describe financial products to the market. Women aren’t getting the information they need to make decisions, so they take a step backwards and make lower risk decisions.”

Read: How women learn about finances

The fact that men’s portfolios are larger than women’s, though, contributing to the retirement accumulation gap, isn’t the result of risk aversion, says Horan, it’s really due to a difference in income. “Women save less because they earn less,” he says. “Is the answer to push them to take more risk and make up the difference? Absolutely not. The best prescription is financial education.”

In other words, it’s really financial knowledge, not gender, that influences risk tolerance. What advisors need to do, then, is improve that knowledge. Here are some tips to get started:

1. Ask more open-ended questions.

The questions you ask women don’t change per se. Rather it’s how you ask the question. Avoid questions that will give you a “yes” or “no” answer. Also avoid multiple-choice questionnaires, since the client will often have answers that aren’t listed. To start a conversation about risk, Cooke recommends this question: “What criteria would you use to decide whether an investment is too risky?” This allows the woman to define the question, not just the answer. She has more control and opportunity to communicate what she needs to know from you. Sheldon Rice, an investment advisor with Canaccord Capital in Ottawa, likes to engage in a conversation about her goals and dreams. He’ll ask, “What’s important about money to you?”

2. Seeing married couples? Make sure you connect with her, and her husband.

Does this sound familiar? You have a prospect meeting with a married couple. You really connect with the husband but not the wife. The meeting ends positively and you hope they pick you as their advisor but you never hear from them again. “I’m quite aware that if the wife doesn’t like me, I probably won’t get the deal,” says Samantha Lie, investment and retirement planner for Royal Bank in Ottawa. In some situations, a woman may seem like she’s taking a back seat and just wants to put a face to your name, but Cooke says this is far from the case. “In the car ride home, she’s telling him how it’s going to be. She’s asking questions and making comments about the advisor.” What you can do is have the “car ride home” discussion in your office. Cooke recommends stepping out of the office towards the end of the meeting for a few minutes. When you come back, ask if any questions came up while you were gone and look directly at her. Even a passive woman will respond when she is directly asked a question.

Read: 3 ways to demonstrate sincerity

3. Practise active listening.

Many advisors, like most people, love hearing themselves talk. You may ask questions but if there’s a pause, you tend to fill the silent space. Or if the person starts to answer, you cut her off. You may only be trying to position yourself as the expert but that doesn’t replace information-gathering from the person you are supposedly helping. Be more conscious of this behaviour and realize that sometimes silence is OK, says Susan MacIntyre, a client and retired teacher based in Iroquois, Ont. “We really value being listened to but it’s rare where we are,” she says. “One of my friends received an inheritance and wanted to invest the money. But she was basically told what to do and she didn’t feel she had any input into the decision because the advisor wouldn’t listen. I told her not to feel forced into making choices. Sometimes women aren’t quite as assertive as they need to be.”

4. Avoid financial jargon.

MacIntyre was investing in stocks and contributing to RRSPs long before these reached the height of their current popularity. She rates her financial knowledge as average to intermediate. Still, she found her former advisor consistently went out of his way to use complicated industry lingo. When she would ask him to explain in layman’s terms, he wouldn’t budge. Finally, a few years ago, she changed advisors. “I just wanted a different approach,” she says. “I wanted someone who would be easier to talk to. I’ve personally found female advisors tend to be stronger at trying to relate better to people.”

Read: Build conversations that persuade clients

5. Lay out the options.

You shouldn’t convince someone who is loss-averse into high-risk investments—unless you want to open yourself up to liability. So how do you explain the risk equation to clients? Catherine Hurlburt, a financial planner with Assante Financial Management in Vancouver, likes to talk about the three variables (rate of return, rate of savings and timeline) outlined in the book Risk Is A Four-Letter Word by George Hartman.

Hurlburt provides the facts in a non-judgmental manner and lets the client make up her own mind. “I don’t believe you should ever put someone in an investment that’s inappropriate for their risk tolerance,” she says. “They just have to understand the consequence of their choice.”

That could mean the client needs to save more money between now and retirement, retire later, lower her expectations or, as Hurlburt says, “be more dependent on things she didn’t want to count on like an inheritance or downsizing her home, or a government pension.”

The client could be comfortable with adjustment. If she isn’t, she might decide to educate herself sufficiently about the markets, so that one day she might be comfortable “moving up the risk food chain by one notch.”

Either way, it’s crucial to ensure client portfolios actually fit client risk tolerance, regardless of gender.