Unlocking Real Value Blog

What’s Best Way to Frame Poor Performance?

Published in FUNDfire – An Information Service of Money-Media, a Financial Times Company
Written by Andy Klausner, CIMA, CIS, the founder of AK Advisory Partners LLC., a strategic consultancy serving the wealth management industry.

In today’s environment, where the confidence of investors has been shaken by many nonperformance issues, how investment managers frame poor performance is more important than ever. Above all else, honesty and full transparency are necessary.

Remember that a lot of money is in motion these days. Many investors feel the need to make a change for change’s sake, not necessarily for any rational reason. In this environment, when investors are more likely than not to become spooked, underperforming managers must be clear and confident in their conversations with clients.Clients appreciate honesty. So rather than try to mask poor performance, underperforming managers should begin with a simple statement of the facts. They must explain that they did underperform and then explain why. Further, they must make it clear upfront that their goal in explaining their performance is not to make excuses. Rather, the objective is to make surethat the client has a very clear understanding of why the underperformance occurred. You might go so far as to tell the client that you do understand if they make a change – as long as they are doing it for the right reason and with a full grasp of the facts.

Give specifics about why you underperformed – a missed stock pick (or two), poor sectorallocation, too much cash, etc. This explanation may very well be the same whether you are talking about your relative performance as compared to a benchmark or relative to your peer group. Next, it’s important to explain to the client what you learned from the mistake, what you will do to prevent identical mistakes in the future and how this knowledge will make you a better manager.

It’s also appropriate for you to describe some of the things that you did well, in order to reinforce why they hired you in the first place. Also, frame the quarter’s performance in along-term context. Importantly, if you believe that your portfolio may continue to underperform for a quarter or two, let the client know this as well. Remember that, above all else, clients do not like surprises.

End by thanking the client for their business, show empathy for their position and help them leave the meeting with a positive attitude about you and your firm regardless of what they ultimately decide to do with their investments.

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