When it comes to working with male and female clients, advisors usually hear more about working with the latter and rightfully.
Numerous reasons explains why the mainstream financial media and the financial services industry itself are placing added emphasis on advisors better engaging female clients. There's the obvious of women overlooked for far too long in the advisory business, but there's more to the story.
While there's still plenty of progress to be made on the equal pay front, women are making more money today. Additionally, women, on average, live longer than men, so there's obvious void to fill for financial advisors with female clients.
However, and not to turn this into the battle of the sexes – it's not – men need help from advisors, too. Lots of it. That's a primary takeaway from a recent paper by researchers at the Massachusetts Institute of Technology (MIT) entitled “When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling?”
Male Clients Feel Certain Burdens
The MIT researchers analyzed a novel dataset of 653,455 individual brokerage accounts belonging to 298,556 households and how those investors behave in the face of dramatic drawdowns.
While the accounts observed are likely discretionary accounts, not portfolios overseen by advisors, there are still lessons in the research for advisors. Namely, male clients in specific sets of circumstances are most likely to engage in panic selling – the absolute worst thing to do when market swoon. Panic selling is basically another way of saying “selling low.”
“We find that a disproportionate number of households make panic sales when there are sharp market downturns, a phenomenon we call ‘freaking out’. We show that panic selling and freak outs are predictable and fundamentally different from other well-known behavioral patterns such as over-trading or the disposition effect,” according to the MIT paper.
Not surprisingly, the notorious male ego comes into play as do other circumstances.
“Investors who are male, or above the age of 45, or married, or have more dependents, or who self-identify as having excellent investment experience or knowledge tend to freak out with greater frequency,” note the MIT researchers.
That jibes with scores of other academic research confirming that women are better investors than men with a large part of that explained by women being more risk-averse than their male counterparts.
Worse yet, the MIT research indicates that men are slightly more likely than women to go into full liquidation mode when markets tumble, meaning they aren't adequately positioned for the inevitable rebound – behavior that likely begets buying high.
Opportunity for Advisors
Again, the MIT research likely pertains to how investors treat accounts that aren't under the purview of an advisors, but as advisors know, many clients may have “adventurous” accounts where they could be taking on excessive risk with real capital.
There's value add opportunity here for advisors, particularly if they present the offer not in terms of an effort to gain more assets or specific buy and sell recommendations, but rather in terms of “how can we avoid panic selling and preserve more your hard-earned capital?”
Engage male clients about their home lives and professional situations to better understand why impulses that beget panic selling may be at play. It may feel like a therapy session, but advisors will glean important insight into client behavior while male clients, hopefully, will put ego aside, see the value in financial and learn that every market decline isn't a reason to hit the “sell” button.