Reading about a successful misselling damages claim the other day, I noted another reader commenting cynically on the fact that “a little old lady” had been given a generous award by the court. She had been talked into parting with her savings to invest in a second home in Spain at the height of the property boom. Soon afterward, disaster struck as the bottom fell out of the market and the investor was awarded substantial compensation. While she was indeed given negligent advice and deserved to be compensated, it struck me immediately that it is not only little old ladies who need protection, and sometimes, they may be more informed than big young men.
The Stereotypes and their Connotations
The little old lady, who is by definition an "inexperienced investor" and thus naive and gullible, is the converse stereotype of the well-educated man who is expected to be an “experienced investor,” and thus deserves little sympathy, no matter what hideous asset or portfolio he was sold.
Although it is necessary to categorize people to some extent in order to deal with them, stereotypes remain generalizations. Investment stereotypes may lead to misunderstandings, misspelling and to injustice in damages claims.
How much people really understand about their investments depends on various factors, including how much money they have invested and for how long, how much they were informed about their investments and how much they bothered to educate themselves.
It is important not to reduce after-the-fact problems with investments down to what the investor did or did not know. Here too, oversimplifications are dangerous and unfair. It is easy for sellers to rationalize almost anything away on the basis that the investor knew what he or she was getting into.
The nature of the investment is equally or even more important. Not only are some investments a lot easier to understand than others, one has to look at whether or not the investment was ever really any good, and if circumstances changed over time, what, if anything, did the seller or broker do about any such changes?
One thing is clear. It is no more valid to assume that the eponymous little old lady was taken for a ride, than to assume that a 40-year-old businessman, with a degree in economics, knew what he was being sold. An elderly lady may have had a husband who told her for 40 years not to trust stockbrokers and to beware of having too much money in stocks. By contrast, the male business graduate may now work in the marketing field, never having got to grips with the practicalities of investments, relying on advice and ongoing management from the seller.
Every Situation Is Unique and Must Be Considered on Its Own Merits
Oversimplified generalizations are common in the industry, but are not a good basis for giving or taking investment advice or for awarding damages. Everyone and each situation has unique characteristics, which determine to a large degree what people want or need and what has a fair chance of being a good investment.
At the time of investment, one can certainly generalize to some degree along the lines of high, medium and low risk, or a preference for American versus foreign stocks, for instance; but such generalization has its prudent limits.
What Does Matter Then?
Particularly if something goes wrong, one needs to delve deeper and find out what really happened, including the interplay between what the investor should have received and actually did. Hard facts are what count, not simplistic notions based on age, gender, formal education or even alleged experience.
The very basis of good investment, that has never changed and probably never will, is that one needs a suitable, well diversified portfolio that is monitored and adjusted regularly. Suitability means the right level of risk in terms of age, preferences, earnings, complexity and so on. Diversification means a sensible mix of asset classes. Whether or not this scenario prevailed is really the crux of the matter, far more than the age and gender of the investor. Indeed, suitability will take the latter factors into account anyway, but there should be no automatic and stereotype-based sympathy for one group and vice versa.
What is reasonable to assume is that, irrespective of age, sex and other such factors, no normal investor wants an unsuitable investment. In addition, unless there is hard evidence to the contrary, it is reasonable to assume that people do not want to take big punts with much, if any, of their money. Therefore, in dealing with sellers, or with an investor who has incurred large losses, the focus should be on the nature of the investments, and objective suitability factors, rather than on a stereotype which may be quite at odds with the reality of the particular situation.
The Bottom Line
When selling investments, whether to little old ladies or to big young men, it is certainly necessary to find out how much they know about investments in general and specifically about the one in question. But it is more important to ensure that the investment is suitable for the person in terms of the usual criteria such as age, overall wealth level, risk profile and so on.
After the fact, if things go wrong, nothing can be more inappropriate and unfair than jumping to stereotype-based conclusions about what the investor knew at the time, and then overemphasizing the significance of such alleged knowledge. Not only is such a simplistic approach flawed in itself, what really matters most in such unhappy situations is whether the investment was any good in the first place and suitable for the investor.