I’ve been involved in a couple of interesting discussions lately. While a lot of the advisers I’ve bounced ideas around with, speak to and link with regularly are keen to learn, there seem to be quite a number who really don’t see why they need to change what they have done for the last few years.
How about you?
Do you think you can have “a bit of a chat” to find out what people really need? Or maybe “an in depth discussion to identify their real attitude to risk, their deepest desires and their future plans”, based on your experience of clients?
I wonder, do you think somebody could talk to you for an hour or so and find out all the things you want that you’ve never even thought about clearly for yourself, let alone told your partner? Would you really “open up” like that to a relative stranger?
Similarly, do you know your own “attitude to risk”? I don’t mean what you get from a standard questionnaire or in terms of software company’s risk categories (which you might have doubts about anyway). I mean your real attitude, bearing in mind that if you were asked the questions in a different way it is about four to one on that you’d give different answers each time.
And that is you, and you’re an expert and think about this stuff all the time. Do you think the average client has thought about, or has any real idea what their innermost dreams are and what are really scared of, and if they do, do you think they’re going to tell you relatively easily? Finding out what people really want and what they really fear, what excites them and what bores them involves a lot of work. It also, from 100 years or so research in coaching, psychology, counselling, teaching etc. requires some training to be added to natural skills to do it reliably and efficiently.
Similarly, I’ve found some advisors who say that they understand that the market doesn’t follow a normal distribution and is potentially chaotic, and that therefore they don’t use probability theory when they talk to clients. Then they say “I explain the downside risk” – meaning they use probability as their method to explain risk to the client. Similarly, they say they use volatility as a proxy for risk. Volatility isn’t necessarily a good proxy and it also uses probability theory inappropriately to calculate the relevant details.
How about you? Are you assuming that you can use the “probability” of potential shortfall from required return and volatility as a proxy for market risk, and therefore use two educated(?) guesses about future events and present them to the client as carefully calculated “probabilities” that are actual facts? Even if you totally understand all the assumptions and guesswork that goes into all the figures yourself, how do you express that to the client without confusing or scaring them, or building up unjustified expectations? Or do you just hide the truth from them, because you can’t find a way to explain to them what is really going on, working on the basis that “what they don’t know, won’t hurt them”?
It is hard to accept that the way we’ve done things in the past is good, but not good enough. It is even harder to learn new ways to do things. But there are better ways, both to understand the clients’ thinking, and explain concepts like market risk so people understand them. They don’t depend on fantastic intelligence or unbelievably good interpersonal skills (although being “good with people” to start with is a big help). They depend on proven science about people, their thinking and their behaviour, and you can learn enough to apply some of the basic principles in a couple of days.
You can also learn some of those principles and try them out. When and if you find that it helps you to build better relationships with the client, and you have a firmer base for doing business, you can decide whether to invest the time to learn more.
But you do have a choice.
On one hand you can choose to learn how to do things better, have better client relationships, more secure business and give a much clearer picture of how you work.
On the other you can stick with something that doesn’t really allow you to understand the client or their thinking, that gives both of you a false idea of how well you really “know” what they want and that leaves you in the position of giving them a false picture of what the “risks” really are and possibly even confuses you about how scientific your “measure of risk” really is.
It is up to you.