Jim Exley stared down at a new client’s risk score and couldn’t comprehend the number he saw. Earlier in the day, the client had talked about how, in addition to his role at a Fortune 500 company, he had covert side gigs — including selling stereo equipment out of his car — that could have cost him his job.
This guy was willing to take significant risks, but the assessment told a different story, triggering a much more conservative risk profile than his own anecdotes about his life would indicate.
“When you give him the risk tolerance profile, he does it so you have got to put it all in money markets,” said Exley, an advisor, researcher and wealth management coach in Alpharetta, Georgia
Exley looked to another set of data to reconcile the disconnect — a personality test. In particular, he used the Big Five O.C.E.A.N. test, which he and colleagues Patrick Doyle, Michael Snell and W. Keith Campbell recently used to understand how personality can predict financial behaviors and outcomes. Their findings were published in the
In Exley’s case, the client’s personality turned out to be seriously extroverted, which suggests he’d be willing to take on more risk. But extroverts also tend to have lower financial literacy, the authors found, which likely caused him to answer the risk assessment questions conservatively.
“Personality science gives me important clues,” Exley said. “There’s more going on in a person’s life than risk tolerance.”
Research findings
Exley, Doyle, Snell and Campbell surveyed more than 400 people to determine how personality and finance interact. Subjects gave demographic data, including wealth accumulation and annual income, and took tests that assessed their risk tolerance and financial literacy. Those attributes were matched with the O.C.E.A.N. test that assesses personality based on openness, conscientiousness, extraversion, agreeableness and neuroticism.
The goal is to give advisors and planners another tool to assess how to interact with their clients to help them reach their financial goals. Campbell said risk tolerance is helpful, but only tells part of the story.
“We can ask questions and get a measure of risk, or get personality into play and learn more,” he said. “Those measures that are only behavioral aren’t very stable, whereas the personality traits are more stable and last over time.”
The authors found that certain personality traits were positively or negatively associated with financial behaviors and outcomes. Most important for advisors and planners are the connections to financial literacy and risk tolerance.
Financial literacy: Positively associated with openness (O), conscientiousness (C) and agreeableness (A); and negatively associated with neuroticism (N) and extraversion (E).
“When assisting individuals high in C and O, planners may see higher financial aptitudes,” the authors wrote. “High Os and Cs may benefit from more detailed explanations of advanced topics involving their investing and planning. This advanced learning should allow high Os and Cs to grasp more complex strategies that may assist in reaching their goals.”
On the other hand, advisors might have to come up with different ways to educate those who display neuroticism or extraversion.
“While high Ns may readily admit this shortcoming, high Es may deny low financial literacy, as high Es can be prone to overconfidence,” they said. “Planners assisting high Es and Ns should consider creative ways to spend time on basic financial literacy in review meetings rather than assigning self-learning tasks these individuals may not value or complete.”
Risk tolerance: Positively associated with extraversion; and negatively associated with openness, conscientiousness and agreeableness. The issue here is convincing conscientious and agreeable people to take greater risk when it’s necessary.
“Planners may consider more detailed explanations of the costs and benefits of risk, appealing to high Cs’ and As’ higher financial literacy,” the authors wrote.
Those displaying extraversion, however, might be willing to take on too much risk.
“When assisting individuals with high E, planners should be mindful that big, extroverted personalities tend to add risk even when it may be detrimental to their long-term goals. Spending extra time evaluating and understanding high Es’ risk tolerance over and above industry protocol should be beneficial with these clients,” they wrote. “A ‘sandbox strategy’ or ‘trading account’ consisting of a small set of risky assets that are fun to discuss at cocktail parties may scratch the risk itch while not endangering the entire financial plan.”
The importance of personality
About a year ago, Brent Weiss, co-founder and chief evangelist of Facet Wealth, an advisory firm offering flat-fee planning to mass-affluent clients, started thinking hard about the role psychology plays in financial advising and why so many people don’t take the financial advice of professionals.
“The financial advice given to people, they don’t take action on. Less than 20 percent of financial advice is implemented. What is the reason for this?” Weiss said. “No. 1, it doesn’t take into account the psychology of how you think about money. If I don’t know how you interact with money, my advice might not be right for you.”
Weiss not only considers personality, but he tries to understand the seminal moments or issues that influence how clients think about money. Someone may be wealthy, but if they grew up poor, they might be unwilling to take on too much debt or take large risks.
“I might say, ‘I can get you 8%,’ but you had a horrible financial history,” Weiss said. “The first time the market drops, people sell and it destroys their investment plans.
“I might think max return is best, but I need to consider what they’ll stick with,” he added.
Jacquette Timmons, a fInancial behaviorist and president and CEO of Sterling Investment Management in New York City, got interested in financial behavior when the economy soured in the 1980s. She was shocked at the difference between those who were content to ride out the downturn and those who panicked. She figured that those differences needed to be accounted for to nudge people toward good investment decisions.
“Back then, we would have asked a few questions, plunked it into some software and it would have said ‘this is your risk tolerance,’” Timmons said. “But if success with money were a mathematical equation, this would be a much different conversation.”
She recommends advisors help clients determine their attitudes toward the non-money things in their lives and use them to make better investment decisions.
“How do we take your strengths and apply that to money?” she said. “This could be good for an advisor, saying that this will not only help me understand you but help me make better financial decisions on your behalf. That will go a long way.”
Aaron Klein, CEO of Riskalyze, a company that provides portfolio risk assessment software to financial advisors, leans more heavily toward an analytic approach to assessing risk tolerance. He believes that emotions can cloud the right decisions, and his company tries to strip that out to give advisors objective risk scores for clients.
“We were put on Earth to help advisors set aside behavioral personality issues and figure out how to harness behaviors to get to the right outcomes by really trying to remove the emotion from the decisions and bring logic and data to decisions,” Klein said. “The quantitative approach takes a client through an explanation about where they prefer risk and where they prefer certainty using dollar amounts that are relative to them.”
While Klein said personality and qualitative data might help an advisor connect with a client, he doesn’t believe it should drive investment decisions.
“Extroverts tend to have more positive sentiment about the thrill of investing. That does not drive the actual decisionmaking,” he said. “The personality doesn’t change. It’s fairly hard-wired. It will drive qualitative risk questions to tilt a certain way based on personality. But it’s not capturing actual risk tolerance.”
Still, he suggests that understanding some of the whys of a risk assessment is important. Once a risk score is computed, advisors are expected to learn more about the factors that led to a particular number.
“It is through that discussion that we actually learn a lot about our clients and what motivates them. It’s the motivation that drives the action,” Klein said.
Putting it into practice
Certainly, getting to know clients over yearslong relationships can tell advisors a lot about personalities. But for those who can’t interact face-to-face with clients as often, especially during the COVID-19 pandemic, or those who are taking on new clients, there are personality tests that could help.
The authors used the NEO-IPIP 60, a survey that assesses people based on the O.C.E.A.N. criteria. Exley said administering the tests and scoring them is easy for advisors to pick up and can make a significant difference in their client relationships. A version of the test and more information can be found at
“We’ve taught the language to the advisors,” Exley said. “Planners, regardless of experience, can understand O.C.E.A.N. really well.”
