Effectively communicating your investment philosophy to clients is crucial for building trust, managing expectations, and aligning their investment goals with your approach. The following are five simple tips that you may find useful in positioning yourselves and your investment philosophy in front of your clients. Note that the prerequisite of these steps is having a well-defined and documented investment philosophy.
Tip 1: Document your philosophy in clear, simple language
Writing down your investment philosophy in simple language is important for a number of reasons. Firstly, documenting your philosophy ensures you can refer to it and talk about it consistently with clients, mitigating the risk of you telling different things to different clients.
Secondly, seeing the written words gives you the chance to stress-test the philosophy first to see if it makes sense and is easily understood. The best investment philosophies are those which are easily understood by all clients, regardless of their degree of financial literacy. Fine tuning – simplifying – becomes easier when something is written down rather than in your head.
Tip 2: Understand your clients to develop a clear and concise message
Take the time to understand your clients’ financial goals, risk tolerance, investment knowledge, concerns and most importantly, their personality and the type of message that is best received by them. It is important to tailor your communication and use language they can easily comprehend.
Some practical examples include:
» Asking them what their investment experiences havebeen (any previous poor experiences will shape their future outlook);
» Asking them what their definition of investment, risk, return is.
» Articulating your entire investment philosophy in the context of their responses to these questions.
Tip 3: Develop a story and use visual aids
Condense your investment philosophy into a clear and concise message that can be easily understood by clients. Avoid technical jargon and use simple, relatable language to explain your approach.
Use storytelling techniques to illustrate and articulate your investment philosophy. Share examples of successful investments or adverse market scenarios to help clients understand how your philosophy has worked in the past and how it has been ‘stress tested’ during volatile times. Storytelling can make your message more engaging and relatable.
A simple case study
Using the banking crisis of 2023 as an example, one simple way of explaining this phenomenon could be:
1. Explain how the banking system works – banks receive deposits, and then invest it somehow to earn an extra return. If they pay savers 1% and get 3%, the 2% difference forms a bank’s profit.
2. Stemming from point 1, we can then understand that banks do not hold much cash themselves, as most of their funds are invested. However, when savers start to panic and request for their deposits to be withdrawn at the same time, that is when banks will face liquidity issues (this phenomenon is known as a bank run).
3. A bank like Silicon Valley Bank has its customers concentrated in the technology sector, and this sector has been hard hit in the post Covid world (clients can relate since it is common knowledge that tech firms are laying off and cost cutting in 2023).
4, Hence, when SVB starts to see more customers requesting for withdrawals, it becomes a start of a self-fulfilling prophecy and a freight train gaining momentum that cannot be stopped. SVB then started to liquidate its investments and, within less than 48 hours, entirely collapsed.
Linking this back to an investment philosophy, advisors can explain to clients the power of diversification. Being in Australia, the big four bank shares are loved by many – high franked dividend, perceived capital stability being the main factors. However, this is a prime example to clients that despite all of these, a key risk of every bank is the risk of a bank run. If we are invested in a bank, there is no way to extinguish this risk except to mitigate it through diversification (outside of the banking sector).
Tip 4: Provide educational resources
Offer educational resources such as articles, videos, or presentations that explain the principles and rationale behind your investment philosophy. There could be materials available that contain a concept that can be explained in a much clearer way to a client. This empowers clients to make informed decisions and strengthens their confidence in your approach. Be sure to acknowledge the source for these materials when you provide them if the materials are from a third party source.
Tip 5: Encourage questions and dialogue
An experienced advisor once shared with a group of young advisors ‘it is not a lesson, you are not a teacher’. Sometimes, it is easy to forget this but we should always go back to basics – think of your very first day in financial planning, every client that you talk to feels this way about the industry (they do not know much at all). One powerful tip is to ensure that constant pausing occurs throughout your conversation, and prompting a client to ask as many questions as they need to in clarifying any aspects of your conversation.
What happens during volatile periods?
This when your investment philosophy is being put to the test! Remember, it is a philosophy so it should not waiver and cannot be dependent on market conditions. Being calm and confident of your own investment philosophy is key to portraying your confidence during volatile periods. More importantly, your client should feel that you are ‘in control’.
Conclusion
It is important to not only know your investment philosophy inside out, but also to be able to articulate this to clients. Advisors know their value, but it is vital that their clients know this too – it breeds confidence in advisors’ ability and ensures that clients continue to trust in you to manage their portfolio and finances. Ensombl’s investment space is a great tool for advisors to learn off one another, and through feedback from one of our advisors ‘learning from other industry professionals is critical, as you might pick up on a different way to explain a concept to a client, which could end up with the client being able to better understand.’ Investments typically form one of the most technical aspects of financial planning for a client, so it is vital to ensure that a client fully understands an advisor’s philosophy and is comfortable with it.
Lastly, always remember that “when sitting in front of a client, it is an emotional and psychological process and not typically a technical session!”
Schroders has launched an investment education space on the Ensombl platform to give advisors a safe space to expand their investment knowledge to have more influential conversations with clients. Join the space here
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