The democratization of the capital market is a widespread concept, although the noise has increased, it has not yet been implemented. Despite the industry’s efforts to provide retail investors with a private market, fears of a recession have caused many to rethink their portfolios. This results in a growing appetite among clients for a taste for alternative investments.
Asset managers and financial professionals must work together to play the role of “educators” as the industry seeks to expand retail business with private markets. The burden of educating investors falls on both shoulders, as asset managers must not only help financial professionals understand the asset class, but also provide tools and resources to explain the benefits of investing to their clients. A thriving investment ecosystem requires multilateral information sharing and dynamic engagement among all parties to better address client needs.
In my role as Chair of the Investment Management Education Alliance (IMEA), I lead industry-wide efforts to enable investment management executives to share perspectives, gain insights, and strengthen industry efforts and gain insight into how to improve client services. We offer a wide range of tools, networks and resources—from providing members with comprehensive educational content for investors and financial professionals, to hosting portfolio building events that discuss alternative investment education. The aim of the organization is to better meet the various needs of the investors. Communication is critical to educating clients, and without it, many investors are sitting on dry powder that could be put to work.
Take real estate for example. A recent Invesco Global Consulting survey, Construction opportunitiesWhile 60% of investors believe it is a good time to invest in real estate, only 46% say so. It is likely To invest in real estate. This disparity reflects a fundamental disconnect between the financial industry and its clients, rooted in investors’ lack of understanding of the true role real estate can play in a portfolio. The study showed how much choice of words is needed when introducing clients to private market investment opportunities, particularly REITs. Advisors would be wise to refer to the following guidelines when discussing REIT investments with clients.
1. Use plain language
One of the primary findings of the survey was investors’ desire for clear language. Simply put: lose the jargon of the industry. Some investors find the terms not only confusing, but also deceptive. Here are three examples of why simple word choice is important.
• When you identify the most attractive thing to discuss when you think about retirement, use the word Consistent– It is preferred by 57% of investors Durable (23%) or Optional (20%)
• Similarly, use the phrase when discussing what type of investment to invest in. Income Potential, however, was preferred by almost twice as many investors (66%). Production Potential (34%) – further highlights the power of simple and customer-friendly language.
• Avoid using such words LonelyAs many investors (68%) will be more interested in investing Premium Real estate investment instead of property Lonely One (32%). In addition to opting for inclusion, accredited investors also have Ewhich includes High pay and low cost.
In addition to simplifying language, simplifying the investment concept is also important to create common understanding. For real estate, it is important to have tangible assets – like office buildings, shopping malls, hospitals, etc. Physical structures are familiar to investors, but how they translate into investment strategies and how they can help investors achieve their goals is still poorly understood. People learn in different ways, so using the most effective words and images plays a key role in helping investors learn the right way.
2. Simplify the discourse of “difference”.
The research also points to misguided sentiments surrounding discussing “diversity” with investors, many of whom believe they are sufficiently diverse. In fact, almost half of the respondents (44%) chose the word Comprehensive Above is true. (29%) and Improved (27%) when discussing diversity—reinforcing the belief that they are already diverse. To avoid this jargon when discussing investing in REITs, financial professionals may refer to the move as achieving options. Comprehensive A proven difference to better resonate with customers.
Additionally, when creating a conversation for clients to consider real estate investing, be sure to position REITs as a complementary investment. Room their income needs. Twice as many investors have responded positively to this position Room (70%), a broad position that helps REITs meet their income needs (selected by only 30% of respondents). If the word Room Not explicitly mentioned, investors may think they are discussing a change in their overall portfolio. This difference highlights the delicate combination of investors’ desire for both stability and diversification, as it implies a modification of an existing portfolio rather than a radical change.
While alternative investing can help reduce volatility, many alternative investments are very complex. While these products are not new, advisors and their clients will benefit from a deeper understanding of how they may perform in different market cycles. There is a significant range of characteristics among alternative investments. One area that can help advisors and investors is liquidity, which is the ability to access their clients’ invested assets. Some real estate strategies offer daily cash flows, while others offer a quarterly window in which clients can request to liquidate their holdings. This is one reason why it is important for asset and wealth managers to provide advisors with ongoing education about alternative investments. Once advisors understand how real estate investing fits into a portfolio and the characteristics of different products, they can have more effective conversations with their clients. Continuing education can be a ripple effect in increasing the adoption of advisors and investors in the asset class.
The business of being a financial professional is a relationship business. Therefore, financial products and services are measured in different ways, and above all, the determination of the price is based on trust and understanding. Purposeful word choice and education are the linchpins in helping clients understand and embrace the opportunity in a new market segment, and the responsibility to educate investors is not just that of financial professionals, but also of asset managers. Real estate is an alternative strategy for streamlining conversations with customers. As the industry continues to find ways for retail investors to engage in private markets, managing customer conversations with purpose, sincerity and purposeful word choice will become increasingly important.
John McDonough is Head of Intermediate Distribution at Invesco US Wealth Management.