Morningstar Debunks the 'Male, White-Collar' Investor Myth
A new white paper from Morningstar suggests advisors need to avoid forming recommendations based on stereotypes.
Investors are far more diverse than common stereotypes would indicate, according to a new report from Morningstar.
Jake Spiegel, a senior research analyst on Morningstar’s policy research team, looks at how stereotyping investors could hurt long-term financial success in his new white paper, It’s Time to Redefine ‘Investor.’
“When we hear the word investor, many of us picture the stereotype: a male, white-collar professional,” Spiegel writes. “Perhaps he regularly meets with his financial advisor and has a subscription to The Wall Street Journal or Forbes. He takes an active role in building his portfolio, trading stocks in an online brokerage account and reading detailed reports about earnings and cycles. This is a vivid picture, but it’s incomplete; it’s too narrow and doesn’t reflect the changing reality of who investors are.”
According to Spiegel, these common investor stereotypes — based on age, income, ethnicity or income level — aren’t that helpful. Rather, Spiegel writes that there is an alternative to investor stereotypes, and these are categories based on what an investor does, rather than her demographic profile.
So, who are investors? To answer this, Spiegel analyzed the Survey of Consumer Finances — a nationally representative survey of American households conducted every three years by the Federal Reserve that covers Americans’ finances, demographics and aspirations.
Spiegel found that, in fact, most Americans are investors.
Morningstar defines an investor as anyone who has exposure to financial markets, such as through a company-sponsored 401(k) plan, and is saving for specific goals, such as retirement.
“Using this definition, we find that investors are much more diverse than the stereotypical investor we described earlier,” according to Spiegel.
As of the most recent Survey of Consumer Finances in 2016, over half (52.9%) of all American households and well over half (61%) of currently working American households were invested in the markets.
In addition, the report finds that one-third of these investors are younger than 44, and 40% do not have a bachelor’s degree. The median income of a household that invests is about $75,000 – “solidly middle class,” according to Spiegel.
The occupations of investors run the gamut from white-collar professional services to blue-collar manufacturing jobs. According to the data Morningstar analyzed, no more than 45% of investors work in the aggregated category that includes professional services — or an industry where one might have expected a “stereotypical white-collar investor to work,” according to Spiegel.
This means that at least 55% of investors work in industries outside of those typically associated with a white-collar investor.
“Investing may have previously been an exclusive club for old, highly compensated white-collar executives, but it is clear that this is no longer the case,” according to Spiegel.
While there is great diversity among investors, Spiegel also found that there’s another distinction that’s important: how people invest.
Most investors are workers who have exposure to markets through their tax-advantaged retirement accounts, he wrote in the report.
According to Morningstar’s analysis of the Survey of Consumer Finances, 66% of investing households invest solely through these accounts. In that group, more than half invest exclusively through workplace-sponsored retirement plans, another 24% invest exclusively through IRAs, and the remaining 22% have both workplace-sponsored plans and IRAs.
“The shift toward defined contribution plans and reduced barriers to entry for investing have led to many more people investing compared to previous decades,” according to Spiegel. “Today, an investor might have a brokerage account that she uses on her smartphone, alongside several scattered retirement accounts left behind at previous employers.”
For advisors, this diversity of investors means that personalized advice is essential.
“One way to highlight the value of advisors is to talk about this diversity with clients — how one-size-fits-all investment strategies and approaches to financial plans aren’t appropriate,” Spiegel writes in the report.
According to Spiegel, prior research has found that many advisors do use stereotypes in their work by basing recommendations on an “investor’s shallow visual characteristics.”
Spiegel points to research on debiasing that finds one technique advisors can use to avoid using such stereotypes is to externalize: “Write out the specific criteria that guide a recommendation, and apply the same criteria to all clients.”
With a deeper understanding of who investors truly are, financial professionals can put themselves in a position that helps these investors take a more active role in their portfolios, define their financial futures and reach their goals, Spiegel concludes.
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