The democratization of capital markets is a widespread concept that, despite its heightened buzz, has yet to materialize. While the industry has made efforts to provide retail investors with access to private markets, recessionary fears have left many rethinking their portfolios. This results in a growing appetite among clients to get a taste for alternative investments.
As the industry seeks to expand retail engagement with private markets, asset managers and financial professionals should work together to play the role of “educators.” The onus of educating investors falls on both sets of shoulders, as asset managers should provide financial professionals with the tools and resources needed not only to help them understand the asset class, but also to help them explain the benefits of investing to their clients. A thriving investment ecosystem requires multilateral information sharing and dynamic engagement between all parties to best address client needs.
Through my work as chair of The Investment Management Education Alliance (IMEA), I lead industry-wide efforts to ensure investment management executives have a forum to exchange perspectives, gain insights, and strengthen industry efforts and understanding of how to improve client services. We provide a broad range of tools, networks and resources—from giving members access to aggregated educational content for investors and financial professionals, to hosting portfolio construction events discussing alternative investment education. The organization’s goal is to better meet the diverse needs of investors. Communication is integral to educating clients, and without it, many investors are left sitting on dry powder that could otherwise be put to work.
Take real estate, for example. A recent Invesco Global Consulting survey, Building Opportunities, demonstrated that while 60% of investors claimed to believe that it was a good time to invest in real estate, only 46% said they were likely to invest in real estate. This disparity reflects a fundamental disconnect between the financial services industry and its clients, the root of which lies in a lack of understanding among investors of the true role real estate can play in a portfolio. The survey further demonstrated just how much word choice matters when introducing clients to private market investment opportunities, particularly for REITs. When broaching conversations with clients around REIT investing, advisors will be wise to consider the following guidance.
1. Use Plainspoken Language
One of the survey’s primary findings is investors’ desire for plainspoken language. Simply put: lose the industry jargon. Some investors find jargon not only confusing, but also deceptive. Here are three examples showing why simple word choice matters:
• When identifying what is most attractive to discuss when considering retirement, using the word consistent—was preferred by 57% of investors—rather than durable (23%) or alternative (20%).
• Similarly, when discussing which type of investment one should invest in, use the phrase income potential, was preferred by nearly twice as many investors (66%), rather than yield potential (34%)—further underscoring the power of simple and client-friendly language.
• Refrain from using words like exclusive, as a large majority of investors (68%) would be more interested in investing in a premium real estate investment rather than an exclusive one (32%). In addition to preferring inclusivity, accredited investors also associate exclusive with higher fees and less value.
In addition to simplifying language, simplifying the investment concept is also necessary to establish mutual understanding. For real estate, it’s helpful that there are tangible assets involved—in the form of office buildings, shopping centers, hospitals, etc. The physical structures are familiar to investors, but how they translate into an investment strategy and how they can potentially help investors achieve their goals is still far less familiar. People learn in different ways, so harnessing the most effective words and images plays a key role in ensuring investors are properly educated.
2. Ease Into The “Diversification” Conversation
The survey pointed to nuanced sensitivities that exist around discussing “diversification” with investors, many of whom believe they are already sufficiently diversified. In fact, nearly half of respondents (44%) preferred the word comprehensive over true (29%) and enhanced (27%) when discussing diversification—reinforcing the belief that they are already diversified. To avoid this language pitfall when discussing investing in REITs, financial professionals can indicate that a move into alternatives is about achieving comprehensive diversification, which is proven to resonate better with clients.
Further, when framing a conversation for clients to consider real estate investing, make sure to position REITs as an investment that will help meet a portion of their income needs. Twice as many investors responded more favorably to this positioning with the word portion (70%), versus broad positioning that REITs will help meet their income needs (favored by only 30% of respondents). If the word portion isn’t explicitly mentioned, investors may assume they are discussing a change to their entire portfolio. This distinction underscores investors’ sensitive dual desire for both stability and diversity, as it implies enhancement of their existing portfolio rather than a dramatic overhaul.
While alternative investing can help mitigate volatility, many alternative investments are highly complex. While these products are not new, advisors and their clients would benefit from a deep understanding on how they could potential perform in different market cycles. There is a significant range of characteristics across the universe of alternative investments. One area that is paramount for advisors and investors to understand is the liquidity terms, which is the ability to access the clients’ invested assets. Some real estate strategies offer daily liquidity while others offer a quarterly window where clients can request to liquidate their shares. This is one of the reasons why it is critical for asset and wealth managers to provide ongoing education to advisors about alternative investing. Once advisors understand how real estate investing could fit into a portfolio and the characteristics of different products, they can have more effective conversations with their clients. The effects of ongoing education could be a ripple effect by increasing advisor and investor adoption of the asset class.
The business of being a financial professional is a relationship business. Therefore, while financial products and services are measured in varying ways, above all, determining the value of an offering relies on trust and understanding built through sound communications. Purposeful word choice and education are the linchpin for helping clients understand and embrace opportunity in new market segments, and the responsibility to educate investors lies not just with financial professionals but also with asset managers. Real estate is just one alternative strategy to bridge conversations with clients. As the industry continues to find ways for retail investors to participate in private markets, it will become increasingly important to manage client conversations with intent, candor and purposeful word choice.
John McDonough is head of U.S. Wealth Management Intermediaries Distribution at Invesco.