In the wake of the 2008 global financial crisis, it was fashionable to discuss black swan events: those rare and catastrophic occurrences that few people predict in advance. Although black swans have major consequences, predicting and preparing for them can be highly impractical.
At the 70th CFA Institute Annual Conference, author Michele Wucker recommended financial professionals spend less time focused on potential black swans and more time addressing grey rhinos — the threats we can see charging right at us.
“The most obvious thing is what escapes us,” Wucker said. The elephant in the room is the glaring fact that no one acknowledges. The black swan is the low probability, high-impact threat that we can’t see, but the grey rhino is the clear challenge facing us head on.
Even though grey rhinos can cause serious damage, Wucker’s overall message about them was optimistic: We can see them coming, and we can decide how to react to them.
Learned a new risk term "Gray Rhino", we see but don't know how to deal w, they exist lurk until provoked. How do you hedge? #CFAedge— Christopher Ailman (@CJAtheCIO) May 21, 2017
Wucker likened the stages of the grey rhino threat to the stages of grief. Overcoming denial and admitting that we face a challenge is the first step. After the rhino is identified, we can develop a strategy for dealing with it, and then we can take action. Being honest about the scale of the threat and the difficulty of the challenge can help us accurately measure the success of our actions and adjust our process as necessary.
Wucker cited a few examples of grey rhinos specific to the financial services industry. In the United States, the Office of the Comptroller of the Currency ignored 700 cases of whistleblower complaints about Wells Fargo’s controversial sales tactics before the conduct of the bank’s employees made headlines. Globally, digital service providers and other technological advances are disrupting the entire financial services profession. Although the Wells Fargo scandal damaged consumer confidence, financial advisers can still respond to the ongoing evolution of financial services technology.
Once identified, a grey rhino may trigger panic. This panic is not completely negative, Wucker said. Panic can create problems, but panic applied constructively can offer solutions. The key lies in having a set of rules and priorities in place to help firms and individuals take appropriate action. Harnessing the benefits of diverse perspectives is critical to not only identify grey rhinos, but to develop strategies for dealing with them.
Wucker acknowledged gender diversity’s importance in generating better decisions, but she also noted that diverse perspectives are cultivated through more than just physical properties. Assembling a team of individuals with different levels of risk tolerance and different thinking styles can be a vital source of strength.
We all have our blind spots, and Wucker said that surrounding ourselves with people who can compensate for our blind spots can help us detect and deal with grey rhinos. On our own, we risk getting trampled.
This advice applies to individuals as well as organisations. Advisers in private wealth management can perform a valuable service by helping clients recognise their blind spots and develop ways to compensate for them.
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To follow coverage of the 2017 CFA Institute Annual Conference, visit annual.cfainstitute.org.