Risk From a Client’s Perspective

Published by Marshall Smith, CIPM, Managing Director - General Manager, Products
February 27th, 2015

What is the best way to measure the risk of your investment portfolio?  If you ask your investment advisor, he or she is likely to rattle off measures such as standard deviation, Sharpe ratio or other related statistics made popular by modern portfolio theory.  If your investment firm is GIPS compliant, you should be able to see the standard deviation for three year periods in their prospective compliant reports.  Never seen one?  Ask for it!  If you are really lucky, you might have even seen these measures in a report on your actual investments.  The problem is most investors don’t define “risk” the same way most of us investment professionals do.

Investors and institutional investors alike are more likely to define risk as “mission failure”.risk  In this case, the mission isn’t orbiting the moon but likely retirement, savings, charitable giving or funding the mission of a non-profit or foundation.  The risk is running out of money, reducing your lifestyle in retirement, not giving away as much as you hoped or not being able to fund your non-profits operating budget.  Imagine a world where you meet with your investment advisor and they provided you with a report that answered those questions!  That would be a world that many clients would prefer to live in than the one in which they see standard deviation, Sharpe ratio or even the information ratio!  Don’t get me wrong, these statistics hold great value for investment managers who investors pay to manage their assets.  However, putting them on client facing reports is likely not the best way to communicate the value of your investment process.

As in every industry, the challenge of a service provider is to show their clients that they are an integral part of delivering a product or service that they need!  If you are not communicating the result of your investment process in terms that clients can readily understand and connect with, they are more likely to listen to someone else who says they can.  The times are changing in the investment industry, with the introduction of robo-advisors and technology driven investment platforms, investment managers need to excel where machines cannot, building personal relationships to understand their client goals and delivering customized investment solutions that meet those goals.  If the reports you provide to your clients don’t communicate the progress towards those goals AND the risk that you will or won’t achieve them, you need to rethink your strategy.

About the Author: Marshall Smith CIPM, Managing Director of Service Bureau, has been with First Rate since 2006. In this role he oversees Service Bureau, the business line responsible for clients that outsource their performance processing function, develops and maintains client relationships, and develops strategic planning for all Service Bureau operations. In addition, he leads First Rate’s Marketing team. You can follow Marshall on Twitter @1stRateMarshall, or connect via LinkedIn.

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