IFAs can draw lessons on how to alert and caution investors from airline safety instructions. Read on to find how…
While traveling by air, I prefer to take the emergency exit window where one gets better legroom. Each time, before the flight takes off, one crewmember appears and briefs about the safety and how and when to operate the emergency exit. This briefing is specific to those seating near the emergency exit. Apart from that, there is also a safety announcement for all passengers.
As you would be aware, this drill is followed for each and every flight. Most frequent fliers would even know the entire script by heart. And yet, the airline crew performs the ritual.
Why is this done?
Such a ritual achieves the simple purpose of making the passenger aware of the risks, but at the same time also reassures the passengers that there are enough safety mechanisms to reduce the risk to an insignificant level.
Coming down to earth, let us see how this applies to an investment advisor and his/her investors, both existing and potential.
The regulations require that the investor be made aware of the risk factors and both the manufacturers – the AMCs and distributors have to follow certain guidelines on disclosures etc.
However, such disclosures have two possible side effects.
1. The intermediary creatively hides the risk factors. This can be achieved in different ways.
a. Someone had said, the best place to hide is a crowd. If you offer too much information, it is easy to hide the material facts. This could be called non-disclosure by too much disclosure.
b. Use of technical terminology is another way of hiding facts. Jargons need interpretation and most clients are not savvy enough to question something or seek clarification.
2. The other possibility is that the investor gets so scared that he wants to reconsider investing at all. At the least, the investor delays the process.
It is expected of a good advisor not to resort to the 1st point above – hiding crucial information. An advisor’s duty is to make the investor aware of the potential risks. However, a good advisor would also like to ensure that what is required for the investor, does not end up scaring the investor away.
That is where we come back to the airline safety announcements. The safety announcements are not so much about the risks as they are about the precautions and safety mechanisms. A repeated reminder is reassuring for the passengers.
In an advisor – investor relationship, it is important for an advisor to repeatedly give assurances to the investor that things are under control. Someone may argue that when the value of an investor’s holdings is going down for a prolonged period, how can one give a comfort that everything is under control? The behavior of market or the price movements are factors beyond the advisor’s control. The airline never announces that there will be no turbulence. The announcement is about what to do when there is turbulence.
A good advisor has to ensure that the investor wears seat belt while being seated – there is enough reserve fund, there is adequate insurance for the unforeseen events, the portfolio is well diversified. A good advisor would explain to the investor that though one cannot avoid turbulence, the investor would not have a hugely negative impact since the portfolio is robust.
And now for the final lesson from the airline industry: “keep repeating your message in each and every interaction.”
Amit runs Karmayog Knowledge Academy and can be reached at amit@karmayog-knowledge.com