Successful entrepreneurs who have made substantial sums in their own business often find it hard to appoint an investment manager. They have been in control of their own business and rightly have expected high returns and have been prepared to take risks in a business they understand. An investment manager asks for discretion to invest and usually offers a lower return and aims to control risk. So they ask for a level of trust in their abilities which the entrepreneur may find hard to accept.
As investment managers, we know that most entrepreneurial clients will know at least one sector of the market better than us. We can learn from them whilst building their confidence in our ability to manage their wealth. The key to this process is listening. We do not go into a meeting expecting to sell a portfolio. We begin with a blank sheet and start to build an understanding of what the client does and what they want to achieve. As we progress we may explain how our business fits with their objectives. Thus we build a proposition to fit their needs rather than try and fit them into a pre-existing proposition.
In any investment there is a pay off between risk and reward. The dilemma we often face is that a client’s ability to tolerate risk does not match their desired return. Clients with less to invest may look for high returns to build wealth but not be in a position to take risk. Very wealthy clients who take risk in their businesses often look to preserve wealth with less risk in their investments. Thus a client with £100,000 may want to target high rewards and hold a risky equity portfolio, however this could drop 30% in a year; a £30,000 drop for this client would be life changing. A client worth £100 million, who drops 30%, while a very unpleasant shock, may be much more able to look through short term volatility.
It is important for us to understand a prospective client’s attitude and ability to take risk. Equally it is vital that we explain the potential benefits and risks in any proposed investments. Historically many investment managers have used mathematical models to explain risk. This has little meaning to the average client and usually relies on historic data. All financial products carry risk warnings that past performance is no guide to future returns; this has never been truer. Interest rates have been falling for the last 30 years and with rates close to zero this cannot be repeated. Some equate volatility with risk; volatility on the upside is fine; it is the potential volatility on the downside that we want to reduce. As investment managers we look for more upside return than downside risk for our portfolios.
The key to gaining trust is communication and understanding in both directions. We tailor our proposition to each client, explain the risk and rewards and ensure there is a full understanding on both sides of the partnership between client and investment manager. Once the proposal has been accepted we need to continue to review and update all aspects of the relationship. After all, we never lose sight of the fact that it is your money we manage.