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Financial Planning > Behavioral Finance

Advising Couples Who Disagree on Risk Tolerance

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When it comes to investing, women are generally less tolerant of financial risk than their male partners, and FinaMetrica data reveals just by how much.

FinaMetrica data reveals that in 67% of U.S. couples, men have a higher tolerance for financial risk than their female partners. Where there is a material difference in their risk tolerance levels, in 83% of cases it is the man who is the risk taker.

How does this compare to percentages in other countries? It’s not too dissimilar.

In 64% of U.K. couples, men have a higher tolerance for financial risk than their female partners. Where there is a material difference in their risk tolerance levels, in 87% of cases it is the man who is the risk taker, according to FinaMetrica data. In Australia, the figures are 65% and 82%, respectively. So while this male/female difference is a global phenomenon, its magnitude varies somewhat.

In the U.S. and Australia, as well as New Zealand and Canada, the male/female difference is more or less the same, but in the U.K., women are comparatively less risk tolerant than in other nations. This indicates the difference is not just a sex difference but is also influenced by cultural factors and attitudes toward women.

The important point is that financial advisors must not ignore the needs of the less risk-tolerant partner, who is usually the woman. Financial advisors often skip the process of separately assessing a couple’s risk tolerance and either apply the man’s risk tolerance in determining a financial plan or superimpose their own preferences on the couple, which is dangerous and unethical. The needs and risk appetites of both partners need to be taken into account by financial advisors, and risk tolerance must be separately assessed.

So why does risk tolerance matter? Risk tolerance is a comfort zone where the individual strikes a balance between making the most of their financial opportunities and putting their financial well-being at risk. It is a function of genetics and life experiences.

It is possible to have, on the low side, too little risk and, on the high side, too much risk. In terms of investment portfolios, the comfort zone can be expressed as the percentage of growth assets in the portfolio, including equities, property and commodities.

If we imagine a couple, Bill and Suzie, with risk tolerance scores of 40 and 60, their respective comfort zones are:

Clearly, there is no overlap here. If Bill and Suzie needed the return from a 65% growth assets portfolio to achieve their goals, while Suzie would be comfortable with the risk involved, it would be too much for Bill and some compromise would be required. Bill might be able to stretch to a 55% growth assets portfolio but 65% would probably be a step too far. In the next bear market, Bill would be at best extremely uncomfortable, which could trigger a sell-off at the worst possible time. Any differences between male and female risk preferences must therefore be considered. It’s also not unusual, for example, for women in couples to be several years younger than their male partners. This presents a significant challenge about how to communicate and advise a couple when the woman not only has a lower tolerance for risk but needs her investments to last longer.

Open discussion often leads to longer-term tranquility and satisfaction within the couple as each partner becomes empowered by their involvement with decisions about their future. These conversations will also help engender trust in the advisor, as she actively seeks and considers the couple’s input in the development of their financial plan, which caters to each individual’s needs.

To briefly explain the FinaMetrica risk tolerance test, risk tolerance scores are given on a 0 to 100 scale, mean 50 and standard deviation 10. Scores are distributed in the familiar bell curve as shown below. Our psychometric risk tolerance test is used around the world — in 23 countries in seven languages — and more than 800,000 tests have been completed over the past 16 years.

FinaMetrica's risk tolerance scale. Source: FinaMetrica


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