Elizabeth Judd, Writer
A few years ago, Preet Banerjee, a retail investor based in Ontario and a personal finance columnist for The Globe and Mail, called the IR department at one of the companies whose stock he held for a routine clarification. The call was never returned.
“You’d be surprised how many companies aren’t doing something as simple as manning the phones and returning all calls within a few hours,” says Banerjee. “Bad news travels fast. The retail investors who call IROs are the ones with loud voices, and if their calls aren’t returned, they’ll go on the bulletin boards and tell everyone their story. You can’t really slack on the basics like returning a phone call in a timely manner.”
Banerjee is quick to point out that this experience wasn’t the norm. He’s also contacted IROs and been “bowled over” by the treatment he’s received. In one memorable call, he says: “The IRO was really articulate and plugged into the financials and the guidance for the next year. It was as if I were talking to the CEO, the CFO, and the COO all wrapped up in one.”
A skilled IRO makes a huge difference, especially for retail investors who don’t have the same access to the CEO or CFO as their institutional counterparts. “For retail investors,” says Banerjee, “the IRO really is the main conduit with the company.”
Keeping on One’s Toes
Just as the helpfulness of IROs runs the gamut from amazing to pitiful, the level of sophistication of retail investors ranges widely, too.
“There isn’t a well-informed group and a poorly-informed group. Retail investors are all over the map,” says George Kesteven, Manager of Corporate and Investor Relations at Sterling Resources. He points out that one investor bought unit trusts at PrimeWest Energy Trust, his former employer, because of a desirable yield and then phoned him to ask what business the company was in.
On the other end of the spectrum, Kesteven has also spoken with very savvy retail investors, including retired geologists. “When [the geologists] talk, I take out a notebook because they can describe some of the geological risks and reservoir characteristics better than many people inside the company,” he says.
Perry Quinton, Vice President, Marketing, for the Investor Education Fund, a non-profit established by the Ontario Securities Commission and funded by settlements and fines from OSC enforcement proceedings, agrees. “There are some really engaged investors out there. Often we’ll hear from them, and I do the same thing: I take out my notepad. They’re a wealth of information, and they really do know their stuff.”
The rise of StockTwits, online investor bulletin boards and services like Estimize (an open-source repository that publishes earnings estimates from all investors, not just the professionals) highlight a fact that most IROs know: the number of tech-savvy retail investors out there is noteworthy and growing. Estimize CEO and Co-Founder Leigh Drogen told IR leader that since December, when he launched the site, he has had over 5,000 unique visitors from Canada, most of whom are retail investors.
“The number one thing retail investors are looking for is a best-in-class website,” says Viki Lazaris, former IRO at BMO Financial Group and now President and CEO of BMO InvestorLine, a leading online brokerage. “Having worked in IR at the Bank of Montreal, we had lots of retail shareholders. Over the past six years, I’ve had an opportunity to speak to retail shareholders via email and the phone, and I’m more often impressed with their level of understanding than not.”
However, even companies that provide a wealth of information online won’t reach all, or even most, of their retail investors this way. Investor Behaviour and Beliefs, a March 2012 study by the Investor Education Fund, found that only 22% of investors used independent printed materials to make investment decisions, while 81% relied on a financial advisor. Not surprisingly, age plays a role in what sources of information an investor uses. The 20-to-39 years age group, the study found, used three times as many online sources as the 60 years and over age group.
A lack of financial literacy among investors remains a huge problem, says Quinton. “In the general population, the literacy level is pretty low. Finance is not a topic people rush to in terms of interest.” She continues: “A lot of people don’t have time, and they’d rather do anything than look at their finances.”
Gaps in the level of overall financial literacy present a challenge for IROs everywhere. “Most retail investors aren’t that knowledgeable and your main role as an IRO is to educate them,” says Susan Soprovich, Principal, Phoenix Strategies. “Ninety-eight percent of retail investors who call are not that well informed. They don’t understand financial markets or financial statements and they don’t understand your industry sometimes.”
When addressing a retail audience, Banerjee advises IROs to make their message crystal clear. “A retail investor may not grasp the information, but they also might not raise their hand and say, ‘I don’t know what that means,’ because they don’t want to embarrass themselves,” observes Banerjee. “IROs shouldn’t be afraid to get really elementary with explanations.”
Some Winning Techniques
When Warren Buffett writes his renowned shareholder letter, he imagines telling his company’s story to his two sisters, Bertie and Doris. Finding what is compelling in a message – and then expressing that kernel memorably and in a way any financial novice could understand – is the Holy Grail for communicating with retail investors.
“You have to speak to the lowest common denominator,” says Robin Taub, a Toronto-based Chartered Accountant, author of A Parent’s Guide to Raising Money-Smart Kids, and a sometime retail investor herself. “Even reading your own broker’s statement is really difficult, let alone understanding the underlying financial information. There’s way too much boilerplate, and it’s very off-putting.”
She continues: “You really want to use plain language, but there are limits. Some of the financing techniques and business strategies are very sophisticated nowadays – and it takes sophisticated language to explain these things.” Taub therefore recommends that IROs might try using infographics, or eye-catching charts that convey complicated ideas for audiences adept at interpreting advertising and using social media.
Many public companies with a large retail base do try to make information accessible. “When we issue financial results through our report to shareholders and press releases, we work very hard to present our information in plain language that’s easily understandable,” says Lazaris.
Another critical piece of advice is to be willing to engage in some handholding – or even amateur psychotherapy. “A lot of retail investors are checking on the consistency of your story,” says Kesteven. “They want to be sure what they’ve been told two or three weeks ago is still true today.”
IROs should prepare themselves for a torrent of retail investor calls when news is unwelcome. “When I was with Fording Canadian Coal Trust and something went bad, we would get 200 calls from investors a day,” recalls Soprovich. “They just want to know that the company hasn’t exploded.”
Occasionally, an IRO and a retail investor can bond over a company’s travails. Soprovich recalls that last year, when Compton was experiencing some dire financial events, a retail investor began calling once a month to express her concerns. “After one conversation, she mailed me [Nassim Nicholas Taleb’s] The Black Swan because she thought it was appropriate for the situation at Compton,” she says. “I was really touched by that!”
Although communicating with a retail audience adds to an IRO’s workload, an argument can be made that this exercise is invaluable. Lazaris points out that crafting a message for individual investors can help an IRO hone messages for all audiences. She observes that even IROs addressing institutional investors must be cognizant of the fact that these investors are then addressing the general public. “Ultimately,” she says, “a portfolio manager running a mutual fund or a pension fund is talking to the people investing in those funds, which includes the retail investors.”
Banerjee concludes by urging IROs to re-examine how they’re telling their stories. “One of the reasons why Warren Buffett is so popular with retail investors is that he distills information to the very basic core of an argument. People can relate to him and what he says better than a typical financial report,” says Banerjee. “Information is commoditized nowadays. If an IRO can provide some colour in a candid manner, it’s really paramount.”