Communicating with clients: the storytelling approach
In broad terms, the success of quantitative investment strategies in portfolio management is due to two things: performance—oceans of data processed by unprecedented computational power leading to strategies that regularly outperform humans—and increased regulatory scrutiny leading to lots of unforeseen costs. Regtech has risen to the challenge and found cost-efficient ways to comply with regulatory standards using technology.
However, wealth managers are still grappling with consequences. As a whitepaper co-authored by Adviscent CEO Thomas Bosshard argues, one of the consequences of quant investing is that there are no more stories to tell—e.g. stories about exciting companies, their great ability to innovate or promising product pipeline, top-notch management, etc. Besides hard numbers such as earnings, these stories used to be the information portfolio managers used to judge how a company would perform (or more importantly its stock). Financial advisors would then relate these stories to clients, for example to explain the risk of a portfolio relative to its return. And people understood. Stories resonate with us in a way that purely mathematical risk models do not—or at least not with all of us.
Investing has become largely mathematical
Now complex statistical models do the differentiating. Investment decisions are left to an algorithm, which does its job more quickly and cost-effectively than humans, and, in the meantime, also compliantly. However, these decisions are difficult to communicate. Try explaining a mathematical model or modern portfolio theory to someone. The problem is the numbers— or communicating purely mathematical decision-making based on probabilities.
It’s now up to financial advisors to find meaning they can relate to clients.
Numbers are meaningless
For most of us, numbers have little meaning unless they are visualized or contextualized in a way we understand. Stories create meaning, while numbers do the opposite: They require us to find meaning in them. Storytelling comes naturally to most of us the mathematics behind algorithms do not. Stories are our preferred way of sharing information, a pattern of information processing that we have been exposed to and have become used to since an early age.
For exactly these reasons, an exciting new discipline called “data storytelling” is catching the attention of more and more businesses that are trying to cash in on the data gold rush. However, in the world of investing, there are two potential problems:
- Storytelling requires human involvement (which is costly compared to quant investing).
- Weaving stories around data needs to be compliant—e.g. should not go near “selling”.
Stories are an incredibly powerful communication tool. However, storytelling can also be intentionally used to persuade or even deceive. In the age of fake news, where untruths and conspiracy theories spread widely and rapidly, stories are also often used to sway public opinion or manipulate it—in someone’s favored direction. Thus, people have also developed a healthy skepticism towards persuasive stories—or narratives, especially if they come from politicians, the right-wing media or from marketing departments. High-profile individuals with lots of media exposure like to take control of the narrative because it helps them wield their influence.
However, we do not need to revert to narratives to communicate meaningfully, especially if a narrative is full of “spin”. Thus, it is very important to differentiate between story, narrative, and plot, which are all often used interchangeably.
A narrative is an interpretation of the facts, a perspective. This implies that there is more than one possible perspective, so a narrative is one of many possible narratives. If plausible, i.e. if it explains the facts in a way that makes sense to us, we may believe it, and may even act accordingly.
Narratives do not change the facts. They are only used to “frame” them. This is the same as spin.
Sometimes we do not have all the facts, so we revert to probable scenarios or form hypotheses. These are narratives—they are neither true nor untrue, i.e. until more facts that either confirm or refute your belief are unearthed.
While a narrative is a way to frame or spin the facts, so you believe them, a story is simply a way to organize the facts, so that people understand them. An example is the way a journalist would use the 5 Ws (who, what, when, where, why) to answer contextual questions or give an audience the full picture to help them understand. Answering the 5 Ws has even become customary technique for fact-checking.
According to this definition, plotting data into a line chart that shows a trend or visualizing numbers on a map could also be considered storytelling. The organizing principles are time and location. However, this is very often not the “whole story”. It shows what happened, but not why. The borders between visualizing data and data storytelling are often blurred.
In literature or film, storytelling is associated with plot. A plot is a storytelling pattern. That means that it roughly has "three acts", a beginning, middle and an end. The beginning sets the scene, followed by a build-up where the "hero" of a story has to overcome an obstacle or solve a problem. The plots we love most are stories of people that come out of the experience transformed. This third act is also called resolution.
A novel or a movie can be based on facts—on a "true story"—but writers usually take liberties and create their version or take on the story.
Stories create meaning
So while narratives are like selling, stories are not. And if data (“the facts”) comes from a compliant source, the stories are compliant also.