When dealing with a new investor client, advisors want to know early in the first conversation how the investor approaches investing from a risk standpoint.
There may be questions an advisor can ask first which will provide an idea how a new client feels about risk tolerance for future investment decisions, rather than just dive into the risk tolerance topic, which can be off-putting if too much focus is placed there.
One question which tells volumes about an investor’s attitudes towards many different aspects of investing is “Do you make financial decisions alone, or do you make decisions jointly with your spouse?”
For investors who are married or living with a partner, the question of how financial decisions get made is handled rather quickly. For a little more than half of all households, the decisions are made jointly, with both spouses or partners involved.
However, there is a correlation between the risk tolerance of an investor and the way in which that investor handles household finances. Simply put, the investors who make decisions jointly are much more likely to be conservative investors.
“The point of this study is to look at the web of connectivity between advisor dependency, risk tolerance and knowledge,’’ said Spectrem president George H. Walper Jr. “Each of those three factors can be paired with one of the others to show a relationship that is not 100 percent certain, but shows signs of being undeniably likely.”
Proof is in the statistical pudding, as 70 percent of conservative investors are from households in which financial decisions are made jointly. That is in stark contrast to moderate investors, of which 55 percent make decisions jointly, and aggressive investors, of which 47 percent make decisions jointly.
Having multiple people involved in investment decision-making leads to conservative investment decisions. Often, it is perhaps a balancing act, in which one spouse is more aggressive than the other, and a more conservative investment path wins the argument.
There is also a correlation between an investor’s investment knowledge and their tendency to make joint decisions. Approximately 70 percent of investors who profess little or no knowledge about investing make joint decisions in their household. On the other hand, only 41 percent of investors who claim to be very knowledgeable about investing make decisions jointly.
This also makes sense. In situations where knowledge is lacking, two heads are better than one. Those investors who are admittedly not very knowledgeable are going to be careful about investing and will probably conduct multiple conversations with their spouse before investing.
Top Takeaways for Advisors
There is nothing wrong with being a conservative investor, or for making investment decisions jointly. There is nothing criminal about having a lack of knowledge regarding investment opportunities and products.
But advisors should inquire whether investors with little knowledge or with little risk-taking want to change those character traits. Advisors should be prepared to offer or suggest some educational opportunities for investors who want to know more about what is being done with their investment dollars and the investment opportunities they are missing due to fear created out of a lack of understanding.
©2018 Spectrem Group