Retail investors are the most vulnerable of all investors. They are constantly confronted by the complexity of products and the choice available to them, and they often lack sufficient financial education.
Adding to this, it is often hard to find the necessary information one needs to make an informed investment choice. Accurate daily NAV, fund costs, historic fund performance, company details and individual fund manager expertise are only a few examples of this.
Many investors turn to fund distributors or financial intermediaries for advice, but some have given advice in the past motivated by front-end commissions and retrocessions rather than by sound investment principles.
This complicates things further and makes the decision-making process for retail investors a generally time consuming and, all too frequently, risky undertaking.
This highlights the importance of honest and up-front investor communication to the retail market, and the financial crisis has confirmed this. Having seen 15 years of savings simply disappear in ten months, it is natural that retail investors started to question the mechanisms behind their investments.
They have begun to voice their desire to understand what they are buying, who they’re buying it from, and the implications that investment choices will have on their savings.
It can be a real challenge for asset managers to reach out to their investor community. However, in a world where investors are crying out for greater transparency, this is an obstacle which must be overcome.
Fund managers will have to equip themselves with the right tools for investor communications and distributors will play a key role in this new environment. Tomorrow’s leading distributors will be those that help close the communication gap between fund manager and investor, at least at the first stages of the investment.
In turn, those asset managers willing to provide information over and above regulatory requirements in a regular manner will emerge stronger from the crisis and be favoured by investors.
So what communication channels are available to fund managers?
When viewing basic investor information, such as daily pricing, it is no surprise to see how difficult it can be for retail investors (and in some cases fund distributors and intermediaries) to obtain a correct price and, consequently, to accurately evaluate investments.
With the over-abundance of information available, the challenge today is to provide the right information at the right time.
Fact sheets for example enable fund managers to communicate with their investors on a regular basis on past performance. They also provide an insight on the potential future evolution of the product.
In Europe, however, many fund managers still consider fact sheets as a necessary evil rather than a perfect way of promoting their products and communicating with investors. There are a select few proactive companies which understand the potential of regularly engaging with their clients and have even gone so far as to using video communication to do this.
As the way in which people consume information undergoes a fundamental change from paper to screen, from stationary to mobile, video is quickly taking its place as an essential tool in investor communication.
Regular communication from fund managers using this medium can deliver a message powerfully and comprehensively, in addition to using the print media. Combined with electronic channels such as email and the Internet, video reaches a far wider audience in less time, resulting in more engaging, accurate and timely information, ultimately resulting in fewer costs to the investor.
When it comes to less frequent but nonetheless critical events in the life of a fund (e.g annual general meetings, dividend payments, investment guideline changes and fund mergers), the picture becomes even more opaque.
End investors are often left to discover that these events have taken place before they knew about them. This problem can also stretch to intermediaries, who only know about these events after they have taken place.
The reason for this information delay is often due to the number of different actors involved in the fund value chain (e.g. fund administrators, custodians, transfer agents, IFAs, fund platforms etc). This sometimes stops the fund manager’s information from sieving through to the end-investor.
Fund managers should therefore ensure they have clarity on the various actors involved in the value chain of their funds and effectively communicate the same information to everyone involved.
Regulation, of course, has a key role to play and another form of investor communication which continues to spark industry interest is the fund prospectus. Needless to say, every investor should receive the prospectus upon investing in a fund.
However, this basic rule is not always respected as fully as it should be, and even if the investor receives the document, they might not fully understand it. In answer to this issue, the European Commission introduced the concept of the “simplified prospectus” within its UCITS III directive in 2001.
While the aim of this document is to focus on the heart of the investment product, the reality looks somewhat different. In fact, many market participants think the simplified prospectus is as complex and lengthy as the original.
In this context, the excitement around the new document proposed as part of UCITS IV, the KII or KID (Key Investor Information or Key Investor Document) to be implemented in 2011, is understandable.
Inspired by its US equivalent, the KII or KID is a two-page document summarising the necessary information investors need to know before buying a product. It will also help investors to understand fee structures and allow them to compare similar products, all of which has been difficult in the past.
It is the hope of the industry that this new document will allow to compare funds more easily on a like-for-like basis.
Within this more relevant documentation, investors will also benefit from greater transparency on incentives and especially compensation systems. So-called trailer fees have been the focus of many industry discussions during this past 12 months.
European regulators are currently investigating this area and the recent initiative by the UK to publish new rules that will remove commission bias from the sale of retail investment products and thus help restore consumer confidence, is a clear signal that changes are happening.
From the end of 2012, UK firms will have to be upfront about how much they charge for their services. The rest of Europe could take inspiration from this model.
As asset managers begin the transition from survival to recovery, their overall service proposition is regaining focus. As the retail investor becomes more discriminating, outstanding investor service is the key to customer retention.
Every day, fund managers must show that they understand their needs by engaging in honest dialogue and creating products which address real needs.
In addition, not only should fund managers consider making use of the new communication channels available to them, but also go above and beyond these regulatory requirements in disclosing fund information.
In order to succeed, they have to know the needs of their clients and those of the different players involved in the value chain. This can only be achieved through communication; on all topics of concern, on all occasions and everywhere the investors are.
