Investing Stereotypes
Everyone knows how important it is to save for the future and with increasingly poor returns on bank deposit accounts, investing in alternative assets is something which is no longer the sole domain of experienced traders.
Unfortunately, over the years there have been cases of rogue mis-selling by financial advisors but the outcome often factors in the type of investor who was the victim.
We take a look at whether the ‘little old lady’ should really be treated any differently from a ‘market savvy business man’ and consider whether the investing stereotypes hold any truth.
Pigeon holing investors
As humans, we all make snap decisions about another person when we meet them based on first impressions, no matter how hard we try not to. This could be even on an unconscious level. However, the individual is often very different than their appearance would suggest which is why in the vast majority of cases stereotypes simply don’t bear any resemblance to reality.
When it comes to financial affairs, an older individual, particularly a woman will probably find that people assume she is completely naïve when it comes to investments. Youngsters are likely to face the same presumption too.
“It’s difficult just by looking at somebody to know what type of investor they are.”
On the flip side, consider an investor in their 30s or 40s, a professional with a well-paid job, probably a man – would you expect him to know more? The truth is that this individual is expected to have a decent understanding of at least the rudimentary aspects of investing, and certainly to be shrewd enough to check the small print before signing anything.
Of course, whilst there are individuals who meet the traditional stereotype, there are at least as many, if not more who are the complete opposite.
Using the example of a pensioner, why should getting older mean you can’t have a good grasp of what the risks are? If some-one is retired they will have more time to check out the facts and do their research before deciding to invest! And of course, years of experience and perhaps coping with financial hardship at times, can make them savvier and switched on than an advisor might expect.
At the opposite end of the spectrum, the professional worker in the prime of their life may seem like the most likely candidate to be an informed investor. However, this may be their first dabble in investing so everything is unfamiliar and new. Or perhaps they have an accountant who takes care of everything so they never have to get to grips with the complexities of their finances.
The above examples show that stereotyping investors can lead to serious mistakes in understanding an individual’s needs.
Why it matters
If stereotypes exist in everyday life, as they do, you may be wondering why they pose such a problem when it comes to investing.
There are many issues but there are two main fundamental problems.
The first relates to the point of sale. Assuming that a financial advisor was involved in setting up the investment, a large part of the process rests on his or her recommendations. In order to identify the best investment vehicle, an accurate assessment of the customer’s attitude to risk must be carried out as well as ascertaining whether they will be actively monitoring their asset on an on-going basis.
“It’s vital to get sound financial advice”
The older generation, and women in general, are both likely to be almost instantly categorised as a type of investor who is risk averse. Whilst this means their money may be better protected, it could also mean they don’t have the opportunity to enjoy a greater return (which comes with the higher risk products). Conversely, a professional man will be tagged as far more tolerant of risk and probably willing to take a more proactive role in the investment, thus leading to an entirely different recommendation.
Research has shown that financial advisors make different recommendations based on investor stereotypes¹ which ultimately could result in individuals receiving the wrong advice.
The second main area of concern relates to a claim for a mis-sold product. In this case it is not the financial advisor who is making the assumption but the adjudicator. A claimant who meets the quintessential ‘little old lady’ criteria could well receive far more sympathetic treatment than a younger, male complainant who may have to contend with the assumption that he knew what he was doing.
Any cases of mis-selling must be carefully judged based on the evidence regarding what information the individual was given and what they may have reasonably known, based on their individual circumstances. Making an assumption about their degree of understanding based on age, gender or affluence is likely to lead to the wrong decision.
Conclusion
Investor stereotypes still exist and whilst some may have a modicum of truth at times, they are far from trustworthy on every occasion. To ensure the individual ends up with an investment which suits their needs, it is essential to ensure that a full analysis is carried out which covers their attitude to risk as well as their approach to investing. Finally, once the recommendation has been made, a document setting out exactly what has been advised and why, will ensure that there can be no misunderstandings, whatever the level of knowledge.
Written by Arnold Hill consultants offering bookkeeping services in London.
Share this:
Category: Investing
