Citizen Journalists as Mutual Fund Character Assassins
August 31, 2012
Crisis may be the new normal for investors, but it's also the stark reality of the communications landscape. Good news may travel fast, but bad news travels even faster-and mutual fund companies are by no means immune from the threats to their brands.
Not that long ago, threats were limited only to traditional media. Much like the Spartans were able to defend against the more powerful Persians at the pass of Thermopylae, crises would develop and be resolved at the choke points of print articles and broadcast stories.
However, social media has given rise to a new threat: the citizen journalist. Think of them as brand assassins, wielding more power and influence than even the largest armies.
As a result, mutual funds must realize that the number of threats to their brands stemming from misinformation or a lack of education has never been greater. It's no longer a matter of if, but when, a crisis will occur, and mutual funds will be judged more by their response than the crisis itself.
Crises have the potential to generate lasting financial impact. The 2011 Burson-Marsteller Crisis Preparedness Study found that 59% of business decision makers have experienced a crisis in their current or previous company. Among those involved in a crisis, 32% experienced a drop in revenue and 24% were forced to make cut-backs or layoffs. To further illustrate the imminent threat, 79% of business decision makers believe they will experience a crisis within the next year. The same study found that just over half (54%) of companies have a crisis management plan in place.
Mutual fund companies that have a plan will be in a far better position to weather the storm than those that do not. Rather than utilize a reactive response after the crisis occurs, funds must proactively develop a plan that addresses both the potential threats and rapid-response execution needed to quell misinformation and ensure that key stakeholders are able to separate fact from fiction.
There are many crises that can potentially affect mutual funds. Weak performance, an exodus of investors or even a sudden change of management are ever-present. However, the most prevalent crisis we've seen recently is a crisis of education, especially for alternative mutual funds.
It's human nature to fear what we don't understand, so when an asset class is unfamiliar, many attempt to fill in the gaps with whatever information is available rather than gaining a better understanding of how a fund works or the factors that influence its performance.
"Newer" strategies bear the brunt of this threat, as evidenced by repeated misinformation spread around liquid alternatives, which include managed futures funds. Their sophisticated strategies and implementation, coupled with atypical fee structures, have made them a scapegoat for the press.
The industry is rife with commentary about liquid alternatives, particularly when their relatively higher fees are compared to the lower fees of traditional mutual funds. An apples to apples comparison of liquid alternative fees with more standard funds isn't accurate due to their completely different structures.
Confusion often begets misinformation, the burden of which can fall on one fund that is singled out in an article or blog post. Much like the game of telephone that children play, the inaccuracy of misinformation has a tendency to become even more inaccurate and dramatic as it spreads through both traditional and social media.
While this confusion affects the entire investment community, the mere mention of a specific fund's fees can have tremendously negative implications for the fund itself, even if the fees are in line with the industry standards. The crisis becomes one of miscommunication and lack of education, which can lead to investors leaving the fund or an inability to attract new investors because of a negative perception permeating the investment community.
Rather than take a reactive approach and attempt to address misinformation once it has already spread, many liquid alternative funds are proactively identifying potential issues that could arise in the media and developing communication strategies to educate both investors and advisors. In the communications arsenal of these companies, compliance-approved responses to potential questions and a letter to shareholders explaining the fund's strategies and fee structures are the best weapons to both prepare for and respond to the crisis of misinformation.
Just as having a fire extinguisher in a house doesn't raise the likelihood of a fire taking place, it does ensure that the damage is significantly less than if there were nothing available to quell the flames. This also applies to preparing for a crisis. When a plan is already in place, the odds of coming out on top are significantly higher than trying to mitigate the damage once it has already occurred.
The threats to the reputations of mutual funds and the ability for misinformation to spread at lightning speed have never been greater. However, mutual funds are uniquely positioned to shape the conversations around their expertise and investment strategies to ensure that key audiences receive accurate information.
While this is a preventative measure, there is a constant, though, among those funds that have weathered crises of misinformation, miscommunication and mistrust.
These companies succeed through preparation: identifying the potential threats and developing proactive, targeted responses that can be implemented as soon as a crisis hits.
Jennifer Connelly is Chief Executive Officer of Jennifer Connelly Public Relations.