GUEST BLOG: Who Run the World? by Aegis Frumento Esq

January 24, 2019

Who Run the World? 

The news, most of it, is dismal. Male politicians have screwed things up to a fare-thee-well. The federal government has been shuttered for over a month. Close to a million government workers are furloughed without pay and being told to think of it as a vacation, or being made to work for free, and to babysit, dog-walk or hold bake sales to make ends meet. All because a President wants to blow $6 billion on a wall to keep out the imagined barbarians at the gate and to show Ann Coulter his manhood. Let's face it: We're going to hell in a bucket and not even enjoying the ride.

It was a welcome tonic, then, to read an Op-Ed in The Times Tuesday last week by investment adviser Blair duQuesnay arguing for investors to ditch their male advisers and hire a woman. DuQuesnay wrote that, according to a recent study by the Warwick Business School, women investors outperform men by 1.8%. To be precise, men were shown to have beaten the market by 0.14%, and women by 1.94%. That means that women advisers beat the market by almost 14 times more than men advisers. That's dramatic.

The reason seems pretty straightforward. Women actually take seriously the efficient market hypothesis and its practical embodiment, modern portfolio theory. Women minimize transaction costs by trading 67% less often than men, they avoid short-term hot picks in favor of long-term value investing, and they drop losers more quickly than men do. The researchers found that "female investors were less likely to indulge in the ‘lottery style' of investment that appealed to men." Men are simply more likely to gamble with customer assets by following their instincts, and women are more likely to make consistent progress by following directions. Men, it seems, are just so much drama. Is anyone surprised?

If you are, then you should take a look at the latest treatment guidelines for boys and men from the American Psychological Association. They are dated in August, but -- coincidence? -- they made the news last week about the same time as duQuesnay's article. The Guidelines labeled typical male behavior a diagnostic problem, and this has raised the hackles of the usual suspects. I don't plan to wade into that particular swamp, but I don't think there can be much disagreement over what the report identified as the common indicia of masculinity: "anti-femininity, achievement, eschewal of the appearance of weakness, and adventure, risk, and violence."

The Warwick study demonstrated most of those very traits in male investment behavior: achievement (by chasing home-run-level returns), not wanting to appear weak (by holding on to losers rather than admit mistakes by selling them), and adventure and risk (by trading early and often). I don't know if those traits really amount to a psychological problem for men, but they do seem to drive down men's investment returns.

Yet, despite men's inferiority in this as in so much else, they still dominate the investment world. Only between 16% and 20% of all brokers and/or investment advisers are women. The investment patriarchy lives, but I don't see how that can remain so for very long. There are too many fundamentals running against it.

First off, consider one more difference between the sexes. Women live longer. Therefore, as the baby boom generation shuffles off its mortal coil over the next two decades, much the wealth that it accumulated will inevitably end up in women's hands. There seems to be a broad consensus of opinion that in a dozen years, 2/3 of the nation's wealth will be controlled by women.

Women already control a third of all wealth, and over 60% of them are sufficiently dissatisfied with their wealth adviser (probably male) to take seriously duQuesnay's advice to ditch him. Why? Women have a different investment style. Eighty-four percent of them are looking for ethical investment options, and they invest for particular goals rather than for the adventure of chasing returns. In general, male advisers speak a foreign language to them, when they speak to them at all.

For those reasons, women are well-positioned to turn the entire industry on its head. Women investment styles lean towards solid and honest financial planning. It's no surprise, then, that almost a quarter of all CFP's are women, and growing. It's also no surprise that women investors prefer dealing with women advisers. Women investors find women advisers to be less patronizing, more empathetic to their individual needs and concerns, and generally more "in sync" with their unique financial goals than typical male advisers.

But there are two other elephants in this room. The first is that since serious financial planning is a procedural enterprise, it is susceptible to algorithmic solutions. We already know this from the prevalence of algorithmic trading at the institutional level. Morgan Stanley and others are now employing artificial intelligence to make even retail investment decisions. That trend will inevitably grow as machine learning becomes more sophisticated. It is likely to happen sooner than we think. Designing a competent financial plan is not harder than being a chess grand master, and the current chess champion, the computer program AlphaZero, mastered the game, starting with knowing only the rules, within 24 hours. It learned Go at the same time, just for good measure. So, any broker or adviser who thinks superior portfolio design is beyond automation is whistling past their own tombstone.

The second elephant is the question, Why bother? After all, beating the market by 2% is nothing to crow about, especially after taking into account fees and the hassle of dealing with yet another person in your crowded life. It makes the old advice to just put your money into index funds and forget about it seem pretty reasonable. And if you are trying to better the 2% bogey, then aren't you slipping into the very same "lottery style" investing that you ran away from male advisers to avoid?

These are existential questions for all advisers, male and female, and they are hard. I think there will be a role for financial planners and advisers, but it will be fundamentally different. Or perhaps better said, that role will more clearly be seen as what it has been all along. Investors might no longer need advisers and brokers to design portfolios or buy and sell securities. But investors will still seek out advisers who are perceptive enough to understand clients' goals -- and even more so those who can envision their clients' real concerns more clearly than even the clients themselves can. Advisers who are articulate enough to explain those goals and advocate how to achieve them. And, perhaps most important, advisers empathetic enough to provide the emotional support that clients have always needed and will always crave.

In short, I see the traditional salesperson's role giving way to that of the professional. As a lawyer, I know that role very well. I also know that women can render that kind of holistic professional advice at least as well as men and very often far better. The coming changes may serve women advisers very well indeed.

Take all that in and on top of it consider this. DuQuesnay pointed out an objective competitive advantage of women advisers over men. She addressed an audience that in a dozen years will control the vast majority the country's wealth. Most have male advisers but would rather switch to women advisers. Good fundamentals for an ad campaign, don't you think? But duQuesnay didn't run an expensive ad campaign. She published an Op-Ed in The New York Times.

Whatever might be said about duQuesnay's investment acumen, that girl knows how to market!


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.