I’ve been thinking about alternative investments and client perceptions of risk this week. It has been on my mind since the webinar I moderated last month, The case for alternative investments in 2025. Risk came up in two contexts: the use of alts for diversification purposes during periods of volatility, such as the one we’re in currently and the unique risks associated with some alts.
Mustafa Bukhari, national team lead at Skyline, put it well on a question about fund gating provisions that prevent clients from accessing their investment during certain periods. He described this liquidity risk as “not only just a technical, but also an emotional issue … when you have a client looking to get access to their funds.”
What’s important, Bukhari said, is that advisors communicate and educate clients on how gating works. Not easy, by any means. But he’s right about the importance of proactive communication — there is nothing closer to a silver bullet when it comes to building client relationships.
There is a third aspect of risk in all of this, not solely related to alts. Your clients don’t understand how it works.
Our inability to clearly articulate the nature of risk-return tradeoffs is at the heart of Canadians’ struggle with financial literacy.
It is a multidimensional issue, of course, having to do with numeracy skills, the difficulty we have producing plain-language messaging consistently and much else. But people’s aversion to risk belies a foundational crack in the relationship too many clients have with their advisor and financial plan.
I’m not talking about risk profiles as they’re noted in know-your-client documentation. If we’re being honest, those are more a reflection of life stage and financial goals than a genuine reflection of the client’s understanding of the nature of risk.
It’s more likely that they think about investment risk the same way they do health risk, for example. Which is to say that it is something to be avoided.
Selling risk
Years ago, during the financial crisis, I was on a conference panel as a representative of Sun Life, my employer at the time. A fellow panellist, who worked at an asset management firm said to me, “You’re in the business of managing risk. I sell risk.”
It’s a useful line, as a kind of gauge of your clients’ understanding of risk-reward dynamics. Before each client meeting, ask yourself if the client you’re speaking with would understand what that money manager said to me.
If not, find a way to incorporate the subject into your discussion. Direct them to this excellent piece at getsmarteraboutmoney.ca.
In the same way that a good insurance advisor talks about product in the context of risk, explain investment options in terms of risk management.
And please don’t tell them that diversification is like not having all your eggs in one basket. I’m fairly certain that when you say that, most of them smile, nod and think about Easter eggs.