Everybody has a bad quarter now and again.
No matter the investment strategy, it is a well-known, yet often forgotten fact (usually by clients) that not every approach is well-suited to every market.
When things are going well, very little needs to be said - just keep the good times rolling. But when a portfolio stumbles (or falls on its face… or tumbles down the side of a mountain...), investment managers and advisors have to brace themselves for a difficult conversation with clients.
How can investment managers, money managers, and investment advisors handle the task of telling the story of the quarter's performance? There are a few variables which can influence the tenor of the discussion:
Were you clear upfront?
An important component in investment management marketing is effectively setting expectations at the outset of the relationship. This important step makes having the difficult conversation related to a bad quarter much easier.
Hopefully, a manger clearly explained the exact risk-reward trade-offs inherent in the strategy. The client should know under which market conditions the strategy should excel, and those in which it may lag.
For example, if the portfolio had a “deep value” orientation, the client should have known it would underperfom in a “risk-on” market.
That way, when the market turns against the strategy, managers and advisors can remind their clients that while they’re not happy, lagging performance was to be expected. And if the client is and remains angry, they really only have themselves to blame for not fully understanding the risks inherent in the investment approach.
However, if an investment manager promised the sun and the moon, but delivered a box of rocks instead, clients will have every right to be upset, and even more understandingly, will question a manager's or advisor's integrity.
Was it the market, or was it you?
Unfortunately, the market isn’t always at fault. If the attribution analysis shows the quarter’s underperformance to be a stock-picking issue, the conversation becomes more difficult.
With clear-eyed realism and dispassion, take a look at where things went wrong and where they went well. At this point, don’t worry about managing the client message – just be sure you know what happened and why, to a reasonable certainty.
Own you mistakes
If the quarter was bad, and your attribution shows that it was bad because errors were made, then own it. Reasonable clients understand that everyone makes mistakes, and that all investors have bad quarters… what they can’t abide is an investment manager who is unwilling or even uncomfortable with honest conversation.
As long as a manager:
- acknowledges mistakes,
- explains how the mistakes were made in good faith, and
- firmly reiterates why he or she retains full confidence in the overall philosophy and process,
While this rule applies across the board in investment management marketing and client communications, being clear is especially important when addressing underperformance. While couching failure in finance-speak, gobbledygook, and jargon may make the explanation easier for the manager, for clients it is off-putting at best, and enraging at worst.
Explain to clients the reasons for the portfolio’s lagging performance, then explain what, if anything, the firm plans to do to help optimize the portfolio for future performance. If the answer is “Nothing,” then explain why.
In investing, the only thing that is immutable is past performance. The future is always uncertain, but clients will always be more inclined to work with and retain an investment manager or advisor who is honest about the past and has a thoughtful plan for the future.