Sallie Krawcheck, former CFO of Citgroup has just launched an investment platform, Ellevest, which has several interesting features, although it is not directly relevant to Indians. First, Ellevest is strongly focussed on women (though it will accept men as clients as well).
Krawcheck’s research indicated that (American) women tended to be under-served and unhappy with traditional investing products. She deduced there was a space in the market and Ellevest tries to fill that gap. Right now, membership is by invitation only.
Ellevest is an automated digital investing platform; it offers instruments such as low-cost ETFs. That in itself is not very different from several other digital investment platforms. But, there are key behavioural differences between the ways men and women think about investments and that does indicate a practical problem with “one-size-fits all”.
Ellevest seems to be trying to find a more flexible asset-allocation pattern, which will suit women better. This is a socio-political minefield but gender differences in attitudes to investing are very well-documented and quite consistent, even if there are many hypotheses as to why such differences exist. By and large, women tend to be more conservative and less likely to indulge in over-trading, or to take big risks in the hopes of making big killings.
Apart from the attitude, the data also indicates some other gender-differences which affect financial planning. In most places, certainly in America, women tend to outlive men and often to outlive men by a significant period. (This is not true overall in India, but it is true for upper income Indian women who often outlive their partners.) There are more widows than widowers, which means that women have to plan for longer retirements.
Also in most places, including India, women tend to get paid less for doing the same work. Women also take more career breaks (for childbirth and rearing), which can mean gaps in earning. Women also face glass ceilings in that they are less likely to end up at the top of the corporate heap. In divorces, women are more likely to end up with custody of children and hence, hit with the double-whammy of larger financial responsibilities and less time to devote to paid work.
Put it all together and it may explain the risk aversion. What this attitude difference means, according to Krawcheck, is that women are more interested in knowing the potential maximum downside to a given investment plan than to knowing the potential maximum upside. They have life-goals and prefer to take only the risks necessary to fulfil their life goals.
This makes women uncomfortable about most financial planning models. Investors have some life-goals and some risk-tolerance. The normal financial planning model starts by asking the investor to define risk-tolerance and then sets up an asset allocation plan that fits the stated risk-tolerance. The returns from such a plan are open-ended.
Ellevest has reverse-engineered this by asking women to define their life-goals rather than define their risk-tolerance. Given clearly defined life-goals, the site creates asset-allocation plans to fulfil those goals.
It uses Monte Carlo simulations to assess how likely it is that the plan will generate enough to fulfil the stated life goals. The site uses a 70 per cent threshold for the Monte Carlo simulations. It will recommend a plan that hits the life-goals at least 70 per cent of the time in the simulations. Crucially the site also makes “worst case scenario” estimates. In effect, this tells the investor how much risk she must carry to fulfil her goals.
There is no equivalent to this site in the Indian context and there may not be enough women controlling their own money to even make a gender-specific desi website marketable. But, the behavioural insights driving this model are interesting. Risk-assessment and goal-setting are central to financial planning. Regardless of the actual level of risk-tolerance, the Ellevest model makes sense simply because it is easier to state life-goals than it is to define risk-tolerances accurately.
A lot of Indian households, and individuals for that matter, are instinctively risk-averse. They tend to shun the stock market because it seems like a casino to them. But of course, every individual and household has definable life-goals and might be prepared to take the risk required to fulfil those.Therefore, goal-oriented investing rather than risk-tolerant investing may make more sense to a risk-averse individual. Again regardless of gender.
The author is a technical and equity analyst
