Why it pays to talk about risk
When investors have the right solutions, and know it, they stay put—and that’s good for business.
Ulicny has always supported the use of clear, concise language in all investor communications, but today it is more important than ever before. The complexity of today’s market amplifies the risks investors face.
The current environment presents asset managers with a powerful opportunity to distinguish themselves by talking about risk and how they manage it in plain English—not just to satisfy regulators, but also to retain and develop clients.
Rationalize your fees
Firms that discuss risks clearly in their product materials, and demonstrate how they manage those risks, do more than set client expectations—they rationalize their fees. This is particularly important on the active side of the business today, as the passive revolution continues to put pressure on costs. As McKinsey noted in a recent report on asset management in North America, “Active firms, in particular, will need to develop a sharper and more nuanced framing of their value propositions that encompasses, for example, not only their profile of returns, but the approach to risk management.”
Managing risk isn’t easy; that’s why your investment teams work so hard at it. Shining a bright light on risk, rather than relegating it to footnotes and disclosures, enables you to put risk in context for your investors. It helps your clients—whether they’re advisors or end clients—understand the risks they face, and cultivates their appreciation of the role you play in protecting them.
Make regulators smile
Regulators recently sent a letter to one of our clients, a large asset manager. This wasn’t the typical, dreaded missive from regulators: They sent it proactively to compliment the plain-English explanation of risks we wrote in a client-facing piece about alternative mutual funds. The piece explained, through jargon-free language and clear graphics, how risks related to short-selling, derivatives, leverage and other frequently misunderstood techniques can affect clients’ investment. The balanced discussion helped investors comprehend the funds’ risks, and empowered them to have intelligent discussions about those risks with their advisors. That kind of clarity builds trust, and helps clients appreciate the value they receive for their fees.
Regulators have made clear that these complex products should be wrapped in blankets of education. In this case, what’s good for investors is good for asset managers as well. Effectively delivered education will ensure that investors not only are placed in the right solutions, but understand that the solutions are right for them. When investors have the right solutions, and know it, they stay put—and that’s good for business.
Support the advisor
The advisor benefits as well. He has the tools to reach out to clients, explain risk and present a solution that suits clients’ circumstances and risk tolerance. Cutting through all the confusion and anxiety clients feel makes him a hero in their eyes. What was once a negative becomes a positive. At Ulicny, we say that information fuels conviction and conviction fuels trust. When the investor understands the journey he is about to take, and has reasonable expectations for the bumps he might encounter on the way, he is more likely to stay on the path.
Talking about risk is good for investors…and business
This level of transparency and alignment of interests is precisely what the Department of Labor is looking for across all products, not just alternatives. But initiating a clear, open discussion about risk isn’t key just for compliance—it’s also critical to investors’ success, and to asset managers’ and advisors’ businesses. Consider this input from Cerulli, from its current report on US Retail Investor Advice Relationships: “Providers have a unique opportunity to teach clients the importance of understanding the different levels of market, investment, and portfolio risks…Providers that can better help investors understand their own capacity to take on investment risk over a long horizon should be able to substantially improve their clients’ outcomes.”
“Navigating the Shifting Terrain of North American Asset Management” McKinsey & Company, 2015
“US Retail Investor Advice Relationships” Cerulli, 2015