Complicated and Expensive – The Three Rules

ComplicatedOne of the tried and true tactics of traditional financial services firms is to make everything overly complicated. The more opaque, the better it seems as they hide costs and expenses behind this obfuscation. The unnecessary complication, replete with industry jargon that is even more difficult to decipher serves their purpose, not yours.

 

The Three Rules

Complicated investments usually make it easier for investment salespeople (ahem..advisors) to sway investors their way. The complicated products come with a built in narrative that sounds great and difficult to resist: something like, “all the upside of being in the market without the downside risk”. Now that sounds alluring indeed. This brings us directly to Rule # 1: The investments that sound the best may be the worst to actually invest in.

When I started out as a broker 35 years ago, the firm I worked for (Bache, Halsey, Stuart, & Shields), ran advertisements touting the availability of over 800 different investments. Today, there are over 12,000 mutual funds alone and thousands of other more complex financial products. This becomes Rule # 2: There are too many investments on the market and this makes choosing difficult.

Seeking complexity often has an ugly flip side…increased activity. Many financial services firms want to demonstrate that they are “doing something” by continuously changing investments, allocations, structures and strategies. This leads to Rule # 3: More activity does not usually equate into better results. Changes come with transaction costs, taxes and yes, even more complication.

 

You Get What You Don’t Pay For

The adage “you get what you pay for” has broad application in our daily lives, but investments may be a distinct exception. John Bogle, the famed founder of Vanguard says, “We investors as a group get exactly what we don’t pay for.” Investment costs are a very reliable predictor of overall investment performance but in an inverse manner…the higher the costs (disclosed and hidden), the lower the long-term returns are likely to be.

Accepting the returns offered by the market seems simple enough and it really is – save the complication of our human emotions. Our emotions can unravel even the most well conceived financial plan. There are no absolutes, no guarantees of how the markets will perform this week or next year. Complicated strategies and complicated financial products don’t erase this truth. Ready for a real conversation?

 

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