Clients are as varied as entries in the dictionary but there are some broad categories that segment. Quantum of money is rarely the deciding factor; in many cases the amount of capital is the least important differentiator. Banks and other financial institutions typically initially segment by source of wealth for example professional, inheritor, or entrepreneur. So, the potential mismatch starts right at the outset. It is a professional variation of the 1993 best-seller book “Men are from Mars, Women are from Venus”.
Unsurprisingly investment professionals seek out wealthy clients and the primary filter is how much money is available for investment. This is commercially prudent for the institution but more often than not falls foul of the adage “to every man with a hammer everything looks like a nail”. Institutions need to sell products and services to be in business, that is after all their business. Sometimes clients may need to buy those very same products and services, but this is not a certainty. May be what the clients actually need is unavailable? If so, what happens? The answer is the next best approximation which axiomatically cannot be optimal.
Think of it this way, if you go to a branded Mercedes car showroom all the options and suggestions about a new car will be a Mercedes. Same deal applies with financial institutions in their engagement with potential clients. You will only get offered their range.
So why is it so difficult for a client to make informed decisions? First, wealth does not automatically empower an individual with investment expertise. A client’s business success in manufacturing gives no support to making investment decisions in public and private markets across multiple asset classes. Indeed, why should it? The reverse trade is also true, in that investment managers are not renowned for being able to run a non-financial business.
The investment world, like most specialisms, is full of its particular jargon and technicalities. The hiring process in investment firms centres on technicals and the subsequent professional qualifications are also uniformly technical. There is no particular emphasis on clear plain communication and all the many professional examinations are inherently technical. The continuous professional development (CPD) programmes are all technical with no soft skills component.
Increasingly, the supply chain of investment products has been segregated to client managers and investment managers, sometimes with a product expert inserted between the two. The deduction is that the client manager is rarely either a product specialist or an investment manager. The client is left asking unsophisticated questions of a relationship manager who only has limited direct knowledge. The move to standardised portfolios by risk categorisation, usually misplaced by reference to volatility as a proxy for market risk, means that clarity is the casualty. Against these odds it is unlikely that the client has even half a chance of making an informed investment decision.
Investment advisers often only know part of the picture because clients decide, either deliberately or inadvertently, to only offer part of their wider lives. The duties of the investment manager lie in ensuring that the products and services offered are suitable based on the information made available to them, or which they should have reasonably enquired about. This process is inherently full of holes and even more so if the manager is not skilled in picking up non-verbal signals and does not have an appetite to qualify extensively all the circumstances of the client.
A client can safeguard themselves by explicitly requiring a fiduciary standard of care from their advisers and by asking how their advisers are remunerated. The manner in which people are paid has a material influence on their behaviours.