NEW YORK | Krawcheck rose from research analyst to the highest echelons of Wall Street before becoming disenchanted with the status quo in wealth management. She decided the high-cost stock-picking approach wasn't ideal for most investors, and women in particular were getting left behind. So last year, the former CEO of Smith Barney, Citi Wealth Management and Merrill Lynch Wealth Management started Ellevest, an online investment adviser designed specifically for women. Krawcheck's goal: to close the gender investment gap.
What made you feel there was the need for a female-focused digital adviser?
I started from the point of view that there was no need for a digital investment platform for women, that the idea was sexist and condescending. But I completely changed my tune when I dug deeper and began to recognize the gender investment gap in the United States.
What exactly is that gap?
Women in the United States retire with two-thirds the money that men do. It's driven in part by the gender pay gap. Were we to close that gap, the retirement savings gap would then close by one-third. The difference in investment returns between men and women is also driven by the fact that women invest a lesser percentage of what they have than men do. They put more of their money in the bank, earning close to 0%, rather than the 9.5% annual return that one has earned in U.S. equities since the 1920s, on average. That typically costs a woman hundreds of thousands or even millions of dollars over the course of her life.
How is Ellevest different from its competitors?
We practise something called liability-based investing. That targets having a certain amount of money by a certain time, and our goal is to get the client there in the vast majority of markets. And we're the only ones taking into account a woman's longer life expectancy and that her salary typically peaks sooner than a man's.
Do women tend to invest differently from men?
The big mistakes investors make—falling in love with the winners, overtrading, chasing performance—are mistakes men make. When women invest, they tend to be longer term, they tend not to churn and trade, they tend not to chase. They just don't invest enough.
Does that make women well suited to the robo-adviser model you offer?
We spent thousands of hours with women, asking what they were looking for in an investment provider. Do you want to guess how many said their goal was to outperform the market? It was zero. Most of the investing industry in the U.S. has the goal of outperforming market indices. And it fails to do so. The numbers are telling you it doesn't work. So why keep doing it?
A common concern is that digital advisers haven't been seriously tested through an extended period of market stress. How do you think your clients might react in a bear market?
Nothing good happens in the investing industry in a bear market. But we have a long history of underestimating the staying power of the individual investor. During the Nasdaq crash in the early 2000s, the individual investor outperformed the institutional investor. They just sort of buckled their seat belts through the rest of the downturn. We educate our clients about making investing a habit. Automate it—take a bit out of every paycheque. Don't check your account every day. And just invest through it all.
Do you follow that style yourself?
Yes, and I have for years. I used to buy and sell stocks when I was an analyst. I would always buy well, but then I wouldn't sell. Then I got shellacked in the 2007-to-2008 downturn. My financial adviser had me in a number of investments that, in hindsight, were too risky, given that Citi was my largest holding.
Did you hold Citi shares all the way down?
The leadership team at Citi had what we called a "blood oath." None of us sold the stock. It was an act of commitment to my partners. And it cost me the majority of my net worth. Once it was clear it was going to be bad, I had insider information and couldn't sell. I had a spreadsheet with my investments, and I went in and put zero in on Citi's stock, because you could just feel it coming. It was bad. That being said, we didn't have to get rid of the house, and we could feed the kids.
So you don't buy individual stocks at all anymore?
Was it difficult to admit that the market couldn't be beat?
No. I just view myself as a recovering research analyst. I am no longer enamoured with the undertaking. /Interview by Tim Shufelt