Airline safety announcements and the role of an advisor

While traveling by air, I prefer to take the emergency exit window as one gets better legroom there. Every time, before the flight takes off, one crewmember appears and briefs about the safety and how and when to operate the emergency exit. This briefing is specific to those seating near the emergency exit. Apart from that, there is also a safety announcement for all passengers.

This is done for each and every flight. No passenger could ever say that one is not aware of this procedure. For someone like me, who prefers the emergency exit window, I know the whole script by heart by now. And still, the airline crew would perform the ritual.

What does this do? Such a ritual achieves a simple purpose of making the passenger aware of the risks, but at the same time also gives comfort that there are enough safety mechanisms to reduce the risk to almost nil.

From high up in the sky, let us come down to the ground where an investment advisor meets an investor or a potential investor. The regulations require that the investor be made aware of the risk factors. The industry complies.

However, such regulations have two possible side effects.

1. The intermediary creatively hides the risk factors. This can be achieved in different ways.

a) Someone had said, the best place to hide is a crowd. If you offer too much information, it is easy to hide the material facts. This could be called non-disclosure by too much disclosure.

b) Use of technical terminology is another way of hiding facts. Jargons need interpretation and many clients do not have enough financial education to even doubt something or seek clarification.

2. The other side effect is that the investor gets too scared to even consider investing. At the least, the investor delays the process.

It is expected of a good advisor not to resort to the 1st point above – hiding crucial information. An advisor’s duty is to make the investor aware of the potential risks. However, a good advisor would also like to ensure that what is required for the investor, does not end up scaring the investor away.

That is where we come back to the airline safety announcements. The safety announcements are not so much about the risks as they are about the precautions and safety mechanisms. A repeated reminder is soothing for the passengers.

In an advisor – investor relationship, it is important for an advisor to repeatedly give assurances to the investor that things are under control. Someone may argue that when the prices of an investor’s holdings are going down for a prolonged period, how can one give a comfort that everything is under control? The behavior of market or the price movements are factors beyond the advisor’s control. The airline never announces that there will be no turbulence. The announcement is about what to do when there is turbulence.

A good advisor has to ensure that the investor wears seat belt while seating – there is enough reserve fund, there is adequate insurance for the unforeseen events, the portfolio is well diversified. A good advisor would explain to the investor that though one cannot avoid turbulence, the investor would not have a hugely negative impact since the portfolio is robust.

A final lesson from the airline industry: “keep repeating your message in each and every interaction.”