Earning investor loyalty is not an event, it’s a process

We spend a lot of time and energy on client communication because we think investors stand a better chance if they understand exactly what’s happening in the markets, in the economy and in their portfolios.

It’s not that we think the news of the day is so important (we don’t) or that we think market activity over short periods of time is significant (it isn’t) – it’s that we know how loud and aggressive the media has become. So if people are going to be assaulted with crash calls and bubble screams and all manner of hysteria each day, we’d prefer they hear the other side of it from us rather than have their confidence shaken by noisemakers and click monsters.

And when the market is truly in trouble, which happens from time to time, we want to be crystal clear about what we will and will not do in terms of risk management.

The CFA Institute just released the results of a global survey they conducted among both retail and institutional investors to find out what they want in a manager. I found this bit about loyalty very interesting (emphasis mine):

Investors have mixed loyalties to their investment managers. When asked what would make them leave their current firm, the top response was underperformance (53% of retail investors and 60% of institutional investors). Other common triggers for a move include fee increases, a data or confidentiality breach, and lack of communication and responsiveness. Once they consider a move for any reason, 76% of retail investors and 74% of institutional investors will switch investment firms within six months. Similarly, only 51% of retail investors and 41% of institutional investors would recommend their current firm, suggesting an underlying weakness in loyalty.

The implication here is that investor confidence in their manager – when shaken or lost – does not easily recover. The fact that three quarters of clients who become doubtful about your service will eventually leave should be a wake-up call to managers who are not communicating effectively or executing on what they’ve promised.

This becomes even more important when the market is in the midst of a tantrum. That’s when money is truly in flux as investors second-guess the managers they’ve hired and the strategies they’ve pursued. According to the CFA study, “A time that loyalty is particularly at risk is during a crisis, with 27% of retail and institutional investors saying they would re-evaluate their manager based on their performance through a crisis.”

For me, the takeaway is that earning investor loyalty is the first step – and obviously a key one – but it is by no means the end of the process. Keeping that loyalty is the real task – a task that never ends. It’s what separates truly successful firms and professionals from everyone else.

You can check out the whole study here:

From Trust to Loyalty (CFA Institute)