Thoughts

Sharing information slowly

Share information in digestible bites.  It sounds simple enough.  Yet, how many of us – given the opportunity – will launch into our firm’s history, products, representative work, and other information.  It’s an old problem that continues to  occur – especially for wholesalers meeting prospects.

This summer we helped an established firm launch a new business line.  They have the right ingredients: a savvy, experienced leader, current clients to call on, and an achievable plan / goal for year one.

As we worked together on the marketing strategy and material, I remembered the value of patience – sharing small amounts of information over time.   And as the sales team has started pitching, they’ve realized that using a 3 or 4 short meeting sales process is more effective than attempting to make a sale in an initial 90 minutes meeting.  Instead of looking for the prime lunch spot, the sales team is looking for 15-20 minutes at the end of the day, towards the beginning of the week.  Not only are prospective clients more likely to accept, the sales team can assess the potential relationship from that first encounter.  Subsequent meetings can assuage any concerns about the product, firm, or investment process.  All that leads to a potential closing opportunity.  In this process, that opportunity will feel very natural, as the prospect has had time to digest information slowly, ask questions, consider with colleagues, and speak to references.

There are numerous sales processes, sales funnels, and even sales pyramids to use.  They all cover the steps and actions; but not the actual interactions.   For the interactions, perhaps consider the 15-minute, 1 major point meeting.  That can potentially be memorable.

Why Day-to-Day Financial News is Useless

Rewind to yesterday. If I asked – “Do you know who Juergen Stark is?” – what would your answer have been?

Mine would have been “no”. Same for the two financial advisors I spoke to this morning. But apparently we all should have known because Mr. Stark is single-handedly capsizing the markets today.

Yes, I write that with thick sarcasm. As much as I avoid CNBC and the nonstop nonsense explanations around the day-to-day moves of the markets, sometimes my frustration gets the best of me.

David Swensen and the Reality of Past Performance

If you read our blog, by now you’ve probably also read David Swensen’s op-ed from the Saturday New York Times. There’s a lot in there worthy of discussion, but one paragraph in particular got a strong reaction from me:

Mutual fund companies, retail brokers and financial advisers aggressively market funds awarded four stars and five stars by Morningstar … But the rating system merely identifies funds that performed well in the past; it provides no help in finding future winners. Nevertheless, investors respond to industry come-ons and load up on the most “stellar” offerings.

Let’s all say it together: past performance is not predictive of future results. True in investing? Yes. In life? No.

The reason David Swensen gets to write an op-ed for the New York Times and lead the Yale endowment is because of what he’s done in the past. Looking at the track record of anything is the most intuitive evaluation barometer we have. Ignoring it is neither natural nor logical.

This doesn’t mean the issue Swensen raises – investors unsuccessfully chasing performance – isn’t real. I just think he’s angrily, unfairly, and incorrectly casting blanket blame on mutual fund marketers and financial advisors, who generally believe in what they’re doing and try to do right by their customers and themselves.

The real enemy here for Swensen is human nature. It’s in our nature to be emotional and overconfident, and compensating for these realities will require a lot more than broad-stroke, ham-handed criticisms of an entire industry.

Marketing Volatility – Clarify What You Mean

A headline from the closing bell today brings out another tactical but important issue investment firms will face in talking about volatility.

The headline prominently cites the VIX (Volatility Index), which has gotten an increasing amount of mainstream attention over the last few years as the designated “fear gauge”. This makes incorporating volatility into marketing tricky, because in today’s environment volatility has multiple meanings.

There are traditional, backward-looking, vehicle-specific measures like standard/downside deviation. And there are forward-looking, blended measures like the VIX. Any investment manager wanting to incorporate volatility into its messaging may have to start by clarifying exactly what they’re talking about.

Marketing Volatility – A Tendency to Oversimplify

Take a look at the following chart:

It’s taken from a recent MainStay Investments piece on volatility. MainStay uses this chart and two others to point out why volatility (standard deviation) matters: despite a significantly higher average annual return (12.6% vs. 7.3%), Investment A underperforms the more-stable Investment B in terms of 5-year total return to the tune of about 9%.

The piece is solid overall. It’s both concise (1 page) and visual (graphics communicate the message). However, I think it also illustrates one of the pitfalls in talking about volatility: oversimplification.

In MainStay’s example, the more volatile product delivers lesser performance. Pointing out the potential pitfalls of looking at average annual returns is ok, but I don’t think a thoughtful investor/advisor is truly challenged by the conclusion here. They can get lower volatility and a better return with the same product. It’s a slam dunk.

But a simple, minor shift in the data creates a much different conversation. For example, what if the Year 3 return for Investment A was -53% (instead of -58%)? In this case, Investment A delivers excess total return of about 4% over the 5-year period, but with twice the volatility. Now we have an interesting discussion. Should people forgo the extra return for a smoother ride?

In these more complicated scenarios is where the illuminating conversations about volatility can be had. As firms continue to incorporate volatility into marketing messages, especially with alternatives, I suspect that the most successful ones will be those that most deeply explore the details of how volatility really matters.

More on volatility later this week…