Education, three stage process

Education lies at the heart of managing client expectations. Most investor concerns over markets and performance are related to insufficient education and information at outset.

Education starts at the client’s first meeting, is developed in the initial investment planning report, supported by education material and reinforced at each investment planning review. The client should not be forced to learn through events and mistakes. Changes to preferences may still occur, but risk profiling should limit the magnitude of such change.

Education, basic examples

Your advisor needs to explain the benefits and risks of equity investment over time. This must include the short term risks, the natural ups and downs of equities and the importance of taking a long term view.

The advisor must explain that stock markets do not always go up and that you must be prepared to experience long periods of poor performance and periods of significant falls.

Has your advisor explained the initial risks of investment, especially during high market valuations and how they manage this risk?

There have been instances when equities have failed to produce real returns for investors over periods as long as 20 to 25 years. Equities can be detrimental to your long term financial security if bought at the wrong time.

Your advisor needs to explain the importance of cash and fixed interest investments within the portfolio and the consequences of either holding too much or too little.

Have they explained the risks of inflation and what inflation is?

Has your advisor explained to you their core investment disciplines? How will their investment discipline affect the management of your portfolio over time?

An organisation’s global and specific market strategy and investment style (growth/value, large cap, mid cap, small cap) will pose performance risks to the investor. The investor should be educated about the organisation’s allocation approach, the risk and the risk/return benefits over time. Only then can the investor assess his or her attitude towards these risks and select a profile which will either limit the performance risk or neutralise it.

Performance risks do not just involve return factors, but also risk factors. Where an investment style is characterised by higher volatility than the market, the client’s attitude to this risk needs to be assessed. Allocation and strategy can then subsequently adjust, providing the organisation has a valuation, allocation and management framework.

Complexity, the dilemma

One of the biggest problems with investment is the need to deliver complex issues simply and to provide access to more detailed and complex perspectives. The advisor should provide you with access to more detailed information about investment and their particular investment approach.