A preponderance of research suggests that women soon will be driving the global economy – if they aren’t already.
In the United States, women outnumber men on college campuses and have recently surpassed men in earning advanced degrees – among adults 25 and older, 10.6 million women have master’s degrees or higher compared to 10.5 million men, the latest U.S. Census data show. In the workplace, although women still earn less on average than men, young single women in metropolitan areas have jumped ahead of their male peers, according to an analysis of Census data by Reach Advisors, a consumer research firm in Slingerlands, New York.
As it stands, women control nearly a third of the world’s wealth, according to a 2010 survey of affluent women by The Boston Consulting Group (BCG). Yet surveys like that of BCG show time and again that women are less confident and knowledgeable about investing and growing wealth. The problem persists despite the fact that women often control or take part in key financial decisions for their households and handle day-to-day money management responsibilities, such as budgeting and paying bills.
“All my research shows women are less financially literate than men,” says Annamaria Lusardi, an economics professor at the George Washington School of Business.
And although women are interested in educating themselves, they don’t reflexively turn to experts for help, but rather to friends and family, says Mary Ann Sisco, director of Personal Financial Services client solutions for Northern Trust. They realize financial planning is not “a do-it-yourself project” yet are reluctant to put trust in wealth managers.
That may be because many feel they come up against stereotypes when dealing with financial advisors. The BCG survey suggests women feel like “second-class citizens.” More than half said advisors must improve how they approach and address women’s needs, and acknowledge that women’s risk tolerance, investment goals and objectives are often very different from their male counterparts.
Risk-Intelligent, Not Risk-Averse
Too often, wealth advisors operate on the assumption that women have a low risk tolerance and propose solutions accordingly, as stated in BCG’s survey.
Although research suggests women generally are more risk-averse than men, not all of them fall into that category, Sisco points out. “I work with lots of women, and for many if I came to them and said, ‘As a woman, I know you’re risk-averse, so we put together a relatively conservative portfolio for you,’ that would be the last day I was their advisor,” she says.
Semantics may cloud the perception of women and risk. “Women want to understand the risk they’re taking and make sure it’s appropriate based on what they’re trying to accomplish,” Sisco says. “That’s risk-intelligent, not risk-averse.”
While men are prone to riskier investment behaviors – they trade more, for example, and rack up higher commissions – women’s lack of overconfidence may help them avoid financial mistakes and impel them to take steps to educate themselves, Lusardi says. “The fact that they are careful and really take the time to understand can lead to better decision making,” she says.
Women’s Unique Priorities
Risk tolerance aside, women’s investment goals and strategies often differ from men’s because they generally face different financial challenges that call for a tailored approach. Women live longer, face greater medical expenses due to longer life spans and are more likely to take breaks from work to care for kids and elderly parents.
Not surprisingly, women want financial products and services geared toward them, as well as financial advice that isn’t patronizing, Sisco says. “Compared to men, women are concerned about different things in different orders,” she says.
According to Spectrem Group, which annually conducts research on wealthy households, women’s financial decisions are frequently driven by concern for others. Their research finds:
- Women are concerned about retirement as well as providing for children and grandchildren.
- Nearly two-thirds worry about their own health and becoming a financial burden to their family.
- An equal number worry about the health of their spouse.
- More than half are concerned about aging parents.
Women have made it clear that they want advisors who take into account their life goals and recommend financial strategies that align with them. And they want an ongoing dialogue with someone who understands how life changes through marriage, pregnancy, illness and divorce may impact their investment priorities. This requires many in the financial services industry to adapt and change their style to meet this need.
A Different Approach to Investing
One such change underfoot is a move toward goals-based investing. “A goals-based investment philosophy measures success by the portfolio’s ability to meet your specific goals and objectives, rather than achieve uncertain performance benchmarks – an approach that aligns with why women invest in the first place,” says Sisco. Due to their long-term view, women investors tend to be more patient and “not as distracted by short-term performance,” she says. As a result, they tend not to leap in and out of investments to chase the highest returns. Once in the market, women generally stay in it for the long run, riding out peaks and valleys and reaping the rewards.
For this reason, a goals-based investment approach is ideally suited for women. “This approach focuses on goal attainment and directly connects your assets to your objectives,” Sisco says, adding that in goals-based investing, asset allocation is the result rather than the starting point of the discussion.
Instead of determining a client’s risk tolerance and placing her on a risk spectrum with a corresponding asset allocation, the goals-based investing approach indicates how close the client is to funding her lifestyle and aligns specific assets/classes to achieve specific objectives. “The goals-based investment approach helps not only women but all clients make smarter decisions about their investments, by bringing more precision to the portfolio construction process,” Sisco says.
Sound Investment Regardless of Gender
Successful investors share certain hallmarks, regardless of sex. In fact, among good investors, there are more overlaps than differences between men and women.
And on the other end of the spectrum, uninformed investors – men or women – tend to invest in stereotypically “female” ways, suggesting traits like risk aversion might be tied to lack of experience rather than gender, according to research published last year in the Journal of Financial Services Marketing.
“The people I meet who are good investors have one or two things in common: They’ve either taken the time to really educate themselves about personal finance and are committed to taking that topic as seriously as their health, spirituality or education, or they’ve taken the time to find quality advisors and work intimately with them,” says Manisha Thakor, founder of the Women’s Financial Literacy Initiative.
Male or female, an investor’s success is determined by how well-informed and broadminded he or she is. “Success comes from a well-defined investment strategy and the discipline to stick with it even in times of turmoil,” Sisco says.