By Ben Goss, CEO of Dynamic Planner
Consumer Duty’s ‘consumer understanding’ outcome aims to ensure customers are in a position to make informed decisions about financial products and services. As such, firms’ communications should enable clients to understand the implications of their decisions, the features of the product – and the risks.
This last part is not easy. Although the concept of investment risk has been around since the first time someone bought a stake in someone else’s business or lent them money to expand, it can still feel quite nebulous. There has never been a single measure or metric on which every market participant agrees.
See also: Five ways Consumer Duty will impact advisers and investment managers
And helping clients to understand the likelihood they will meet their goals, or lose more money than they are comfortable with, in anything other than long-term, high-level ways remains a central challenge for the industry globally.
Of course, if you deal with asset class returns in aggregate, you know that in the balance of probabilities a portfolio is likely to deliver a net positive return of X and to bounce around that long-term return with a volatility of Y.
That, however, makes me think of a cartoon in a favourite book – Sam Savage’s The Flaw of Averages – which shows a drunk man weaving around the central markings of a road, with cars whizzing by on either side. The caption reads: “The state of the drunk at his average position is alive, but on average he’s dead.”
This is a brilliant summation of the problem. A 55-year-old investor looks at their pot today, wondering if they can afford to retire at 65. If they obtain the average return, things are looking good – but almost no-one sees the average outcome. No balanced portfolio treads that middle path all the time.
Read the full article in Portfolio Adviser’s June 2023 magazine.
