A Quantitative Study Examining the Relationship between Demographic Factors and Financial Risk Tolerance

Financial advisors assist clients in determining the optimal portfolio allocation for each client and generally use asset allocation models that correspond to investment risk tolerance categories. Typically, age, years to retirement, gender, income, education, cash flow needs, and ability to tolerate risk are used to determine the appropriate risk category for the client. Not all financial advisors use relevant information when placing clients into risk groups. The problem is that while financial advisors use demographics in the financial advising process, there is not a consensus on which demographic variables of clients are connected to risk tolerance. If specific demographic factors can be linked to financial risk tolerance, those factors may serve as an appropriate method for placing clients into risk tolerance categories. This quantitative research study utilized a financial risk tolerance survey, administered via the Internet to approximately 608 current full-time faculty, staff, and administrators of two Southwest Idaho higher education institutions to examine the relationship between demographic variables and risk tolerance. The results of the study determined that gender had a significant relationship with financial risk tolerance, r_s(188) = -0.311, p < 0.05. The results also determined that income had a significant relationship with financial risk tolerance, r_s(188) = 0.205, p = 0.005. Gender and income were a combination of factors that had a significant relationship with financial risk tolerance, r2(188) = 0.119, F = 12.542, p < 0.05. Multinomial logistic regression analysis indicated that the variables of women and income were best for predicting the risk tolerance category, c2(108, N = 189) = 152.486, p = .003. It is recommended that financial advisors regularly examine the financial risk tolerance of all their male clients and pay particular attention to changes in income levels as it appears men are more sensitive to changes in income than women. Further research needs to be conducted regarding the relationship between age, years to retirement, and education with financial risk tolerance. New studies might include a population that would allow for a more evenly distributed sample of men and women at varying income and education levels.