Wes Ervin

We all have an intuitive grasp of financial risk. It’s an intangible, a possibility, both an opportunity and a danger. But one thing is certain: without risk there can be no reward. “Nothing ventured, nothing gained.” This article considers how information design can be used to help laymen investors better understand and manage financial risk. Risk has become a hot topic today. After the bubble burst in 2000, investors fled to safer investments. Or so they thought. The recent scandals roiling the US mutual fund industry are sure to rattle investors even more. Many firms in the financial-services industry are doing an admirable job of trying to educate the public on the question of risk. But there’s much more that could be done. This article focuses on the customer statement as an opportunity for education and guidance. Very few statements include visual displays of risk. And when such charts are used, often they are inappropriate or inadequate. This article proposes one possible solution, a risk-reward scatter gram.

It used to be that only governments, institutions, and the wealthy had to worry about investment risks. No longer. America has become, for better or worse, a nation of individual investors. In 1980 only about five percent of U.S. households participated in the stock and bond markets through mutual funds. Today more than 50 percent of American households own mutual funds, mainly through Individual Retirement Accounts (IRA) and 401(k) retirement plans, so named after the provision of the US tax code. Yet how well do most of us understand this brave new world?

One 58-year-old Kansas man, for example, had withdrawn his entire pension savings from his employer at the market’s height in 2000 and invested it in a variable annuity. His broker assured him he’d receive $2,800 a month in income without reducing his principal, until he was ready to receive his Social Security benefits. All of this sounded low risk. He didn’t realize that his money would be invested in sub-accounts heavily exposed to high-growth, and hence high risk, stocks. When the market plunged, he started loosing $20,000 a month. His nest egg of $433,000 shrunk to $190,000 before he moved his money into low-risk money market funds.

Figure 1 illustrates a monthly financial account statement in which there is a marginal message, titled “Experienced Investors Should Never Stop Managing Risk.” The idea is to educate the consumer at the very moment they are focused on their account, a kind of “just-in-time” informative intervention.

A few companies are taking the next step—targeting or tailoring the information to the individual recipient. Figure 2 shows a hybrid statement-cum-newsletter, produced by Securian Retirement Services, one of the large US companies in the defined contribution, or 401(k), industry. The first two pages of this customer communication provide the account data (value, asset allocation, performance, etc.). The last two pages are newsletter-style content. In this case, however, the content can be varied, depending on criteria such as value of the account, the asset allocation, age of investor, years until retirement, and so forth. This is possible because the entire statement—transaction data and educational content alike—is dynamically composed, i.e., page composition is performed on-the-fly by a sophisticated document composition engine (in this case, based on eXstream Software’s Dialogue). The Fidelity Institutional Brokerage statement, to take another example, uses on-statement messaging to alert the investor to changes such as an upgrade or downgrade in a bond’s rating. These messages are printed in the statement’s margin within the section where the change has occurred.

Links