January 22, 2014

Are You Stereotyping Your Clients by Gender?

If you’re advising clients based on their gender, you’re limiting yourself

The differences between the investing behavior of men and women are well-documented, and today, gender studies are an important segment of behavioral finance research.

However, although the behavioral traits these studies have revealed can, to a certain extent, give financial advisors a sense of how their male and female clients are wired, their scope is nonetheless limited, says Michael Liersch, head of behavioral finance and a member of the client solutions and segments team at Merrill Lynch Wealth Management. Viewing clients through a gender lens, he believes, ultimately offers only a superficial understanding of who they are.

“The roles of men and women are evolving in such a way that we can no longer rely on heuristics,” Liersch said. “Today, we need to be looking at men and women as individuals; we need to go beyond the averages.”

Take the trait — statistically proven through many studies — that women on average are more risk-averse than men when it comes to investing, and that men, by contrast, veer toward being overconfident.

“When we’re talking about averages, though, we can’t neglect the fact that there are also women who are risk takers and men who are risk-averse,” Liersch said. “The average doesn’t represent the individual, and if we’re going to focus on the needs of individual investors, we cannot evaluate behavior on gender stereotypes.”

Today, the use of gender studies has become increasingly prevalent across the financial services industry as companies try to figure out the best solutions to the many issues they’ve faced in the aftermath of the financial crisis. However, relying too closely on gender stereotypes can prove limiting, particularly to financial advisors.  

“When you look closely at the research, you come to understand that it is a fallacy of logic to take a certain approach to investing based on gender,” said Ellen Kinlin, founder and president of recruiting firm The Kinlin Co., which in 2012 launched a Women Executives division to build a database of women in financial services and promote female representation in senior managements and boards of directors.  

Statistical numbers are one thing, but the numbers also show that the chances of a randomly selected woman being matched on risk aversion with another randomly selected woman is only 37.5%, Kinlin said. “Investment managers and advisors would be much better served in taking an individualized approach or in using customer surveys where clients can be segmented based on their responses instead of based on their gender.”

Recently, Merrill Lynch conducted a survey of 11,500 people, roughly 5,000 of whom were women, to determine their investment goals and habits regardless of gender. The Merrill Lynch Investment Personality Assessment (IPA) asked clients and prospective clients of Merrill to react to a number of statements designed to reveal how they think and feel about investing. The results, Liersch said, suggest that men and women may be significantly closer in their investing views and habits than many people assume. Where differences between the sexes do occur, he said, they appear to be shaped more by social and demographic factors — education, employment status and financial circumstances, to name a few — than by innate, gender-based characteristics.

Liersch believes that the IPA is a useful tool for financial advisors since it allows them to begin conversations with clients as individuals as opposed to viewing them through the narrow gender lens. The questions, he said, are designed to assess investors’ perceptions about investing rather than their actual investing knowledge, and they’re focused on an individual’s financial goals.

The results of the survey indicate that the behavioral trait of risk aversion is as much due to some women knowing less than men about investing as it is to others knowing as much as men but having less confidence in their knowledge.

“We’re talking here about a much more nuanced and detailed approach to understanding people as individuals,” Liersch said.

Ultimately, Merrill Lynch’s survey showed that the key behavioral difference between men and women is a result of the differences in their confidence levels with respect to investing, as opposed to more innate characteristics and assumptions of gender-related behavior.

“This is why we want to encourage men and women to participate in the investment conversation in a goal-oriented way,” Liersch said.

Moving away from the notion that there are no real inherent differences between men and women can make for much more fruitful and productive financial planning, he said, and allow for a much more meaningful conversation that’s centered on individual investment personalities.

That conversation, Liersch believes, will also encourage individuals to be much more proactive and engaged to a greater extent in their own financial planning process.

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Check out Busting the Risk Myth of Women and Investing on ThinkAdvisor.

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