“limited words, unlimited thoughts”

Over the last few years the world has seen major changes in the process of managing wealth and advisory services. Gone were the days when banks used to be retail shops for investors and depositors to pick products offered on the shelf. Now the world is talking another language of hand-holding. Engaging the client in the whole process has become prima-facie.  One of the key challenges I feel for a bank is educating the client about the investment process. An investment process is as complex as the DNA system of human being. There are so many mental models and psychographic behavior patterns that come into play while designing the perfect solution for the client. Not only we need to understand the future needs of the client based on present scenario but also the future needs based on futuristic scenarios. I believe that the transition of an offering from being a plain vanilla to a complex structured offering with all sorts of options, and payoffs and participation has been faster and more rapid than the transformation of the mindset and the awareness levels of clients. And this leads us to the problem of information asymmetry. We have seen several cases of inappropriate products offered to clients in several cases the risks not being properly articulated which led to huge losses and a loss of reputation loss for the banks the classis case of which is the court case between Bankers Trust and P&G. On the advise of Bankers Trust, P&G had taken a leveraged position of 1:20 in an interest rate swap product structure around a 5-30 treasure bond which paid a fixed rate as against paying a floater on commercial paper. Now the question would arise that why would an FMCG company ever enter into an interest rate swap and that too leverage 1:20. One would understand a currency hedge if most of its earning were denominated in foreign currencies. This is a  problem of a right product to a wrong client.  This leads us into the next process of client engagement which is making him aware of the risks associated with a given solution. An ethical organization would have good disclosure norms which would make the client aware of best and worse case scenarios and the probability associated with it. For example even an offering as safe as a bank deposit has risks associated with it of the bank not paying back in time if there is a run on the bank even though the probability of it would be less than 1%  Thus going forward the key for an institution for sustained business growth and long term relationship is handholding with its clients and constantly educating and informing them about the features and the risks associated with the product. So that no client should ever turn back and say, “Right, you’ve told me everything, now tell me, what’s that catch?”