Women and millennials are the target clients for today’s investment firm. Are we ready to meet their needs?

Knowing our clients is the best way to retain them.

Combined, the two groups represent over 60% of the adult population.

Yet more work needs to be done to better understand their respective views about money and finance. The more we understand these clients, the better job we can do for them. I have conducted several focus groups over the last few years, and have learned that there are many similarities between women and millennials when it comes to their attitudes about investing. The most common theme? That money and meaning are not separate considerations.

Sarah Saska, managing partner at Feminuity, and one of the 2015 Canada’s Most Powerful Women: Top 100 Award Winners told me in a recent interview that:

“Millennial women are working to demystify the investing space and learn through multiple channels. I think that financial advisers need to be on their toes when it comes to millennial women looking for help with investing and financial planning questions. Further, for me (and many of the women in my life), money and meaning cannot be separated. I work to take a socially-responsible lens to my portfolio and prioritize investments that have low carbon emissions, advance cleantech innovation, or support gender equality. I know that companies with a moral compass bring more value, both financial and otherwise, and I suspect that financial advisers will see this trend growing exponentially among female millennial investors.”

The most effective way for an adviser to assess a client’s investing behavior is through a serious in-depth discussion about prior investing experiences and reactions. It is imperative to include personal stories detailing how the investor felt in differing market and life circumstances.

As Ashvin Chhabra, president of Euclidean Capital, explained in our 2016 Rich Thinking interview:

“The future is about ‘know thyself.’ The role of the sophisticated adviser will be less about finance and much more about having the skills to assess complicated problems that people face and being able to translate them in a cohesive way to a system of investing that makes sense for each individual.”

We must watch our clients’ actual investing behavior to learn more about their investing attitude. This may sound obvious, but theoretical questions are not nearly as helpful as seeing what happens in the real world with real money at stake.

Why encourage clients to invest on their own if they are paying an adviser to manage some or all of her investment portfolio? Because by trading their own accounts, they practice and gain valuable insight about themselves. We, as their advisers, will, in turn, better understand how they think, what their interests are, and what scares them.

Have clients open a trading account.

Yes, they must use real money, though it should only be a small amount — about 5% of the total they want to invest. Encourage them to buy and sell a few stocks. Then ask, “Why did you buy or sell those stocks? What did you learn about yourself along the way?”

Susan Knowling, a recent retiree, is a perfect example. Her adviser suggested that she open a trading account because Knowling was curious and wanted to better understand how the stock markets work. She explained:

“Being a cautious person, I started with a modest sum during a market slump and for months hung on every fluctuation of the economy and the stock market, often selling what I should have kept. I’m more relaxed now and I have learned to trust my initial judgment. Panic is not an emotion that will make money or safeguard future income. The knowledge necessary to build a financial portfolio is considerable. I now have a greater understanding and respect for the job done by my adviser. My new knowledge hasn’t changed my approach to investing but I am clearer on some of the issues.”

As every adviser knows, one of the job’s greatest challenges is keeping clients invested during turbulent markets. Jason Voss, CFA, and C. Thomas Howard wrote that “investor emotions are the most important determinant of long-horizon wealth in an investment portfolio.” They point out that “the task of the adviser is to encourage clients to adopt this long-term view while avoiding emotional reactions to short-term events. Evidence indicates that such myopic loss aversion decisions have a profoundly negative effect on wealth. Emotional coaching is one of the most important services an adviser can offer clients.”

If we arm our clients with more self-knowledge, they will be more inclined to pay attention when we shine a light on their self-limiting patterns of investing behavior. The likelihood of changing their strategy will be greater, thus paving the way for a more successful investing outcome.

Use modern tools to foster adviser–client conversation.

Saska spoke in detail about how millennial women think about financial matters:

“Overall, I’ve seen the women in my life become increasingly more financially savvy. For me, part of being an independent, millennial woman meant learning how to manage my finances and plan for the life I’m designing. I’ve been day trading since I was 18 to put myself through school, and for the past few years, I’ve run a trading group on WhatsApp with friends and colleagues who work across a range of sectors and industries. This group is one of the best places that I learn.

“On any given day, we discuss advances in technology, from artificial intelligence (AI) to blockchain and cleantech. I listen to podcasts and read blogs from platforms such as GoldBean. I also rely on the thought leadership of women like Joy Anderson (Criterion Institute), Sarah Kaplan (director, Institute for Gender and Economy, Rotman School of Management), and Jackie VanderBrug (managing director, U.S. Trust).

“As a possible alternative to traditional advisers, I think Wealthsimple is great. They’re disrupting the investment space and allowing everyone to access relatively high-end, sophisticated advice at a low cost. They’re smart, they meet millennials where they are, and enable us to meet with advisers from the comfort of our condos through video chat and text message.”

In my own research work, I have come across many trading sites and platforms similar to those Saska mentioned. For example, eToro based in Israel, POEMS Mercury in Singapore, Shareville in Sweden, Nutmeg in the United Kingdom, and Invest Diva in the United States. These sites can help our clients learn how to invest by keeping track of trades and investment performance so that they can discuss it with us later.

Thomas Beattie, CEO at Voleo, a social trading platform, says “I believe that making our own investment decisions helps to not only demystify the markets, but it instills positive financial habits and the opportunity to learn about ourselves.” And if we can help our clients learn more about themselves, they benefit, we benefit, and the adviser-client relationship grows stronger.

But what if clients start trading their own stocks, do well for a month or two, and then suddenly think they can do a better job investing without adviser assistance? First, it is our job to point out that short-term success could be luck. Next, I find that most of my clients are too busy to manage their own money. In my experience, only two clients started trading on their own and decided to fire me. They probably weren’t a good fit for discretionary money management anyway. Finally, I believe that the insight we gain by watching our clients trade is worth the risk. Plus, it’s the right thing to do.

Beware the status quo and don’t rely on traditional methods of offering advice.

The traditional technique for understanding a client’s investment personality is something similar to this simple quiz. It focuses primarily on determining risk tolerance.

But risk tolerance or risk profiling is only one factor in an investor’s personal collection of psychological quirks and nuances.

Further, these questionnaires have recently come under fire. As Tessa Norman writes:

“Morningstar Investment Management co-head of investment consulting and portfolio management, Dan Kemp, claimed advisers’ use of risk-profiling tools is ‘dangerous’ and likely to lead to unsuitable recommendations and complaints. . . . Kemp said most tools are based on inadequate statistics, such as using historic volatility as the key metric for measuring risk.

“It comes after the FCA warned in May that it still has concerns about advisers’ use of risk-profiling tools and after The Platforum described the tools as a ‘ticking time bomb,’ . . . claiming some prioritize risk tolerance too heavily over capacity for risk.

“A 2011 FCA review also found that nine out of 11 risk-profiling tools had weaknesses that could lead to ‘flawed outputs.’”

The investment policy statement (IPS) is widely regarded as the gold standard for addressing a client’s objectives and constraints. But the IPS isn’t just about using a “template.”

According to Elements of an Investment Policy Statement for Individual Investors:

“Templates that purport to offer convenience and ease in development of an IPS almost inevitably sacrifice consideration of factors that are highly relevant to the investor. The investment professional must thoroughly understand the investor’s objectives, restrictions, tolerances, and preferences to be able to develop a truly useful policy guide.”

More importantly, “the most relevant and useful language should be developed in consultation between the investment counselor and the client.”

Remember what NOT to do.

When I started advising clients, I “learned” how to conduct portfolio review discussions by sitting in on meetings with my more experienced colleagues and their clients. They would briefly greet the client, sit her down in the boardroom, and then proceed to talk not with but at her about her investment portfolio.

One colleague would rarely glance up as he worked his way down our list of 20 stocks, speaking in a monotone, and barely pausing for a breath. His clients never interrupted. I often wondered if they were so passive because he was the expert and they were paying him for his advice or if they just didn’t know there was any other method.

A client of this colleague later told me that she could anticipate every word of his script since she had heard it so many times. She was amazed that he never asked her anything about her life. This was my personal aha moment. This client — and many others, as I soon found out — wanted more from her adviser. She wanted a relationship, insight, and understanding.

Listen to the wake-up call.

Women and millennials tend to be underinvested in equities. A traditional risk profile would likely show they are risk averse, which might account for the lower equity exposure.

But when we look at other data, that characterization doesn’t make sense. For example, women are founding start-ups and companies now more than ever. Women Who Tech shows a 68% increase in US women-launched businesses between 1997 and 2014.

My own research has shown that women and millennials prefer to invest in causes and concerns that matter to them. I often observe them searching for and investing in stocks and funds that reflect their core values about women, diversity, the environment, and the developing world. These clients are investing in what might be described as riskier assets than the average S&P 500 stock, but they knowingly embrace that risk since it reflects their beliefs.

They aren’t risk averse, they are risk aware.

The financial industry needs to understand the value preferences and the behaviors of female and millennial clients. Doing so will help to formulate the best advice for how these clients can allocate their resources, and their values, via traditional equity markets.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Dorling Kindersley

Barbara Stewart, CFA

Barbara Stewart, CFA, is a researcher and author on the issue of women and finance. She recently released the seventh installment of her “Rich Thinking” series of monographs. Previously, Stewart worked as a partner and portfolio manager with Cumberland Private Wealth Management. Stewart is a frequent interview guest on TV, radio, and print, both financial and general interest, as well as a former columnist for Postmedia newspapers in Canada and the Mrs. R website.

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