Friday, March 20, 2009

Companies and Consumers: Worlds Apart

Regardless of the industry, it is valuable for a company to step out of its own world and take a look at its products and services through the eyes of its customers. Take financial services, for instance. Financial advisors view risk in terms of Beta, Alpha, inverse relationships and diversification. This expertise is essential to their profession. However, it’s not how the average investor looks at financial risk.

Most investors, even many with substantial investment portfolios, have only a cursory understanding of their holdings and the litany of available investment vehicles. This relative naiveté causes many investors to feel like they are not in control of their finances, especially during volatile times. And since most of us don’t like feeling out of control, we do all sorts of things to create the perception of control. One way for investors to create perceived control is to stick with investments they know and understand. Perceptually speaking, an inherently “risky” investment that we’re familiar with appears safer than a truly “safe” investment we know nothing about.

For an advisor, risk is measured through empirical data. For investors, risk is measured in more intangible terms. Financial advisors who can see the task of managing risk and volatility from both perspectives will have a less volatile, more loyal book. Likewise, any company that is able to blend the realities of its business with the vagaries of consumer behavior will attract and retain more customers.

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