Most clients are uninterested in the "nuts and bolts" of investment decision-making and instead require a more tailored discussion around risk, according to consultant Tim Hale.
Speaking at the Institute of Financial Planning's (IFP's) annual conference in Wales this week, Hale, of Albion Strategic Consulting, told delegates that discussions on the merits of short-term bonds or modern portfolio theory (MPT) are "extremely dull" for most customers.
Instead, the conversation should centre around the firm's risk management processes, he said.
"It's important to recognise that most clients find the nuts and bolts of investment decisions extremely dull, meaning advisers need to tailor their conversations more carefully," Hale said.
"How diversification works, MPT, short term versus long term bonds, none of it is interesting to clients. What they want instead is for their adviser to be their ‘performance' or ‘risk' manager.
"The process is all about managing risk for the client, and as such the really important conversation to have with clients will be around the company's risk management processes. This is the conversation that is most likely to inspire the required trust," he said.
Hale said these processes would include...
1) Whether the firm is independent or restricted and why;
2) An explanation, backed up by company philosophy, regarding what asset classes the firm will, and will not, work with;
3) The client should be made aware that the company does sensible due diligence on investment options and be provided with information on its due diligence processes;
4) Finally, the client should be made aware of the company's risk control process which would include a formal investment committee that assesses risk in the long term.
"In short, the adviser needs to tell a story," Hale added. "They need to say 'we work like this because it makes sense to us and we're confident about our approach for the following reasons'.
Hale said an adviser might say: "On this risk decision we have decided to do X as a firm. This is because..."
Hale added: "This bit might include a discussion around a belief in markets, or capitalism more generally.
"Similarly, it might be helpful for a client to consider the adviser as an invesment coach, where the adviser provides the right education and expectation management around the client's investments.
"Investors are incredibly bad at predicting markets. Behavioural biases make people behave in an irrational manner. The adviser's role as investment coach and risk manager should help mitigate this."
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First mentioned in Cridland Report
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