By Steve Adubato, PhD
With the financial markets in major meltdown and nervous investors anxiously watching their portfolios dwindle on a daily basis, communication is a huge part of this complex and scary equation. The way people who manage your money communicate is more important than ever. We want straight answers. We want them calming our fears but at the same time being candid. We don’t want them to panic, which only makes us panic more.
Yet at the same time, investment advisors and money managers are confused and scared themselves. They see much of their world crumbling around them and they are not exactly sure how to communicate to their clients. Consider this example.
A long-term “conservative” investor who is a great saver gets a bad feeling about six months ago and tells his money guy; “Let’s flip the portfolio from 70/30 equities to fixed income to 70/30 fixed to equities ratio.” The money manager initially resists saying it is a short term and narrow approach, but the investor persists. He can’t take the volatility and just wants to “protect his principal.” Reluctantly, the move is made.
So, earlier this week with the stock and bond market in a state of turmoil, the investor asks for a meeting with his financial advisor. (The financial advisor never proactively reached out to the investor.) When he finds out the condition of his portfolio, which is down considerably from where he expected, he asks a direct question. “How can we be down so much if we put the lions share of my money in ‘fixed’ investments? Didn’t I say I wanted to minimize the impact of the volatility in the stock market on my portfolio and protect my principal?” The financial advisor responds, “Yes, but by ‘fixed’ that didn’t mean that you were really protected.” The money manager goes on to explain that certain bonds and money markets were susceptible to “mutual fund fluctuations.” The investor is shocked and asks; “But wait a minute. How could you have put the money in a money market that wasn’t fixed? Didn’t we agree that it would in fact, fixed? What are we doing messing around with mutual funds? They’re not fixed.” Finally, the financial advisor says, “Well, by fixed I didn’t think you meant a CD or cash.” Clearly the conversation doesn’t end on a positive note and this relationship isn’t likely to last much longer.
This example illustrates many important communication issues, yet the biggest is how we define certain terms like “fixed.” By any reasonable standard, fixed means locked in, safe, and not susceptible to fluctuations in the stock market. Yet, it was clearly incumbent upon the investment advisor to proactively communicate the risk in connection with this so-called “fixed” investment.
In these difficult times, investors and their advisors have to be specific with how they define terms. They must get on the same page. Investment advisors have to know that they use language and communicate in ways that are unique to the financial world and not to the average investor. That has to be taken into account when giving advice. Scenarios in which can go wrong must be communicated to investors. All possibilities must be on the table.
This isn’t about blame; it is about understanding that if the world of financial markets is unclear and confusing, the world of communication is just as complex. One world we clearly have little or no control over, but when it comes to communicating we can do a lot better, particularly those who are managing the money of the people who see their family’s life savings tied up in this crazy and scary roller coaster ride. Emotions are high, which means communication must be more clear and more concise than ever. Not doing this produces bad feelings and an even worse bottom line.
How are you communicating with your money manager? Write to me at This email address is being protected from spambots. You need JavaScript enabled to view it.