In order to differentiate ourselves from our peers we need to consider parting ways with some of the most cherished marketing practices in the financial industry.
Talk About How You Will Deal With Macro-Economic Uncertainty
In other words, stop the macro small talk. So many in the industry love to make off-the cuff predictions about where interest rates will go, or muse about the direction of the EURUSD. But I can count on one hand the number of those traders with anything close to a decent record of predicting the markets. And I’ll use the other hand to count those who are actually able to use those predictions to put on a trade that makes money.
Anyone who is not a trader should stop acting like one, which includes me. Raising expectations and then casually dismissing them later destroys trust.
Sell Risk Management, Not Performance
Financial industry professionals know very well that there is no investment performance track record that cannot be sliced and diced to look favourable. In private equity, for example, everyone seems to be a top-quartile, or at least upper quartile performer.
Also, using irrelevant metrics is prevalent, such as monthly volatility figures that are much lower than the intra-day volatility numbers. The latter may provide a much more accurate risk profile of a specific investment strategy.
Also, if you sell on performance, you will have to go and hide during times when performance dips, which might be entirely outside of your control. Sell your risk management capabilities. It is much easier, and more honest, to explain that you were too cautious in certain market conditions.
After all, the wording you find in every offering document is not just compliance language but the truth: past performance is no indication of future results.
It’s Still About the People, Not the Processes
There were times in our industry where things in the back-office were so hectic that expertise vanished with every staff departure. So everyone established processes to counter uncertainty with a minimum level of quality and predictability. We truly believed it when we explained to our institutional investors that our investments and risk management were process-driven and people independent.
Then came the financial crisis, and it proved painfully obvious that, while processes provide comfort, they did not guarantee smooth sailing.
We don’t like to admit it, but there are key people in every organization, and when they leave, it will be felt. Sometimes, that means closing down a fund and returning the money to investors.
When they ask you what would happen if A left, score with the truth. That you are realistic about what that means, and that you have already agreed on procedures that will close all positions and safeguard the assets until the way forward is agreed upon.
I am sure you will be able to come up with more examples along those lines. The ugly little secrets of our industry are eroding the credibility toward our investors. Every day is a good day to climb the ladder of excellence.
