Glen Foster

Rising interest rates and inflation has put the spotlight back on the need for educating clients about market risk and patience, according to an investment manager.

Interest rates have been making news lately, after investors spent the last couple of years expecting rates would not rise as fast or as much as it has this year.

However, Atrium Investment Management head of risk Glen Foster tells Professional Planner this was never guaranteed.

“This year has been interest rate risk. Interest rates were basically at zero, so your expected return is zero,” he says. “But then at the same time, you’re in an environment where inflation is a risk and central banks are going to start increasing interest rates, so the variability of that outcome becomes really wide and uncertain.”

As a risk-focused firm, Foster says explaining this to clients has put the focus on the need for education.

“Investing in general’s an area that there’s not enough education on. When you talk about the risk side of that equation, it’s even more so. To explain it to a client, you link it back to their objectives and how certain they are of meeting those objectives.”

Foster referred to this as the “sleep at night factor”.

“If you’re not sleeping at night because of your investment risk, you’re taking too much risk,” he says. “Our job is to take as much risk as they can, but still sleep at night, maximising the returns for the risk that they’re willing to take.”

Maximising returns for clients

Return is the outcome and result of investing, but Foster says clients need to be aware that it’s not the whole process.

“That’s obviously really important, but that’s backward looking. That’s what’s already happened and you can’t change that. But where you are now is risk.”

Foster says common misconceptions, like high risk bringing high returns, and a focus on rewards over risk are important distinctions for clients to understand.

“They say past performance isn’t a good guide to future performance. That’s more or less true, but what is a good guide is risk.”

Discovering the risk tolerance in clients