A recent article that we came across that focused on alternative investments touched on the need to educate clients on the specific strategies underlying the funds chosen for a portfolio. It alluded to the difficulty of those conversations with laypeople, and even highlighted one advisory firm that flat out said using alternatives, “…requires too much explanation to a client.” As such, that firm has opted not to use alternative strategies at all.
And that got us thinking about this educational hurdle. We certainly believe that part of our job is to educate our clients about the strategies that we run, and the more transparency and insight we provide, the greater the confidence that our clients will have. But we operate in a business-to-business model; we only communicate with professionals, specifically, financial advisors and due diligence teams. In contrast, our clients are mostly business-to-consumer, and that greatly changes the nature of the conversation.
In fact, we started to wonder whether there even needs to be a strong educational effort in the B to C world, at least at the fund level. What we mean is, when we compare our industry to others, there appears to be a granular focus that doesn’t exist elsewhere. Take for example the medical profession. The client/patient is concerned with one thing – outcome. A cancer patient wants to be rid of cancer. A lung transplant patient wants the new lung to fully restore his/her breathing. While doctors do provide some education about the treatment or procedure, they certainly don’t let the complexity of the treatment or procedure, and the related client education obligations dictate their course of action. They do what they need to do to achieve the best outcome for the client.
This storyline is virtually identical across all professions that we can think of, from accounting to law to engineering, and so on. All of these professionals focus on outcome, and while keeping clients informed is important, they don’t let client education alter their solutions.
So with that in mind, should financial advisors allow the difficulties of client education alter how they construct portfolios? We would argue against that. As we’ve written many times before, it’s the sum of the parts, not the individual pieces that matter when building portfolios. Clients may be intellectually curious about the components, but they task advisors with meeting some sort of goal, and if their need for information is incongruent with meeting those goals, then education becomes not a help, but a hindrance. The focus has to be on the total portfolio, and on outcome, using all of the tools at ones disposal to increase the probability of achieving a positive outcome over time. Change the conversation to focus on outcome, and you just might find that the need to explain the intricacies of say a market neutral strategy, may cease to exist.