When is client education just too much information? When it comes to talking to clients about alternative investments, advisors can find it difficult to educate clients on specific strategies and the underlying funds chosen for a portfolio. In fact, some advisory firms find that using alternatives requires too much explanation to a client. And, worried that they may not be able to explain what role alternatives play in a client’s portfolio, some firms opt not to use alternative strategies at all.
And that got us thinking about this educational hurdle. We certainly believe that part of our job is to educate our clients about the strategies that we run, and the more transparency and insight that we provide, the greater the confidence our clients will have in us. But we operate in a business-to-business model; we only communicate with professionals, specifically, financial advisors and due diligence teams. In contrast, our clients are mostly business-to-consumer, and that greatly changes the nature of the conversation.
In fact, we started to wonder whether there even needs to be a strong educational effort in the B to C world, at least at the fund level. What we mean is, when we compare our industry to others, there appears to be a granular focus that doesn't exist elsewhere. Take for example the medical profession. The client/patient is concerned with one thing—outcome. A cancer patient wants to be rid of cancer. A patient with a badly broken leg wants to be able to walk again. While doctors do provide some education about the treatment or procedure, they certainly don't let the complexity of the procedure, and the related client education obligations dictate their course of action. They do what they need to do to achieve the best outcome for the client, and that is what the client wants as well.
This storyline is virtually identical across all professions that we can think of, from accounting to law to engineering, and so on. Professionals in all of these fields focus on outcome, and while keeping clients informed is important, they don't let client education alter their solutions.
Having worked with hundreds of financial advisors over our collective careers, we’ve observed that our industry has created its own problem simply in the way that quarterly performance reports are constructed and discussed. These quarterly conversations should be focused entirely on the clients’ goals and the objective progress toward achieving those goals. But instead, most reports that we’ve seen contain elaborate analyses of each fund, ETF or separate account manager in isolation.
In addition, there is often some sort of report card that provides a quick overview of which funds, etc. are outperforming or underperforming, and the conversation then turns to what led to Manager A’s outperformance and Manager B’s underperformance over the last 3 months, a time frame that has absolutely no explanatory power about the efficacy of a manager’s approach.
The result of this granular focus, based on our observations rather than rigorous scientific study, is unnecessary turnover. We are all biased to act, and so managers with too many red boxes are fired, likely at a point when the strategy is simply out of favor rather than being “broken”, and new funds or ETFs are purchased, which invariably have done well recently; performance that the new client will not experience.