Why Clients are Attracted to Complex Investments
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No one is bragging about the index fund they own to their friends.
Indeed, investing is challenging. Clients are often attracted to complex and costly investments, despite evidence that more straightforward and less expensive options provide better returns.
Is the problem with clients, financial advisors, or both?
The “value” elephant in the room
I know no other profession with as much difficulty justifying its value as the advisory profession.
According to research from T. Rowe Price, “assessing the value of financial advice has historically been challenging.”
That’s an understatement.
Maybe that’s why only 45% of retirees and a paltry 26% of employees pay for financial advice.
You can’t be faulted for being a little defensive about justifying your value.
In an article in Living Well Magazine, Rick Ferri wasn’t concerned about aliening financial advisors when he stated: “Investing your retirement savings is easy. You can do it yourself. All you need to be successful are a few broad market stock and bond index funds and you're done. This simple and extremely low-cost strategy will outperform almost all the strategies offered by professional advisors, who charge 1% or more of your portfolio and then underperform the markets.”
I made the same assertion when I wrote my best-selling book, The Smartest Investment Book You’ll Ever Read, in 2006.
Ferri stated the obvious but disturbing truth: “Complexity is job security in the advisor industry.”
I know a few advisors who recommend either one core fund or a few index funds to their clients. Most don’t because they believe it will undermine their value proposition. They may have other justifications, like superior performance over specific periods.
If you recommend complex investments to your clients, you will probably find a receptive audience.
The illusion of complexity
Confucius said, “Life is really simple, but we insist on making it complicated.”
The same can be said of investing.
The belief that complex things are more valuable than simple ones can be influenced by various factors, including societal norms, personal biases, and the perception of effort or expertise required to create or understand complex things. Here are a few reasons why this belief might exist.
Complexity is often associated with specialized knowledge or skills. When something appears complex, it gives the impression that a significant amount of time, effort, and expertise went into its creation. This perception may lead investors to value complex portfolios because they assume they require a higher skill level or intelligence to produce.
Rarity and exclusivity
Complexity can also be associated with rarity or exclusivity. If something is intricate or challenging to understand, it may be less common or accessible to the average person. This exclusivity can enhance its perceived value, as we often desire something unique or difficult to obtain.
A complex portfolio with many different holdings, including alternative investments (like hedge funds), makes your clients feel quite different.
Societal norms and cultural influences play a significant role in shaping our perceptions of value. In some cultures, complexity and intricacy are highly valued as symbols of sophistication, craftsmanship, or intellect. These cultural beliefs can lead us to associate complexity with higher value.
Perception of quality
Complexity is sometimes equated with quality. Something intricate, detailed, or multifaceted can be seen as having more depth or sophistication. This perception can lead us to believe that complex things are inherently better or more valuable than simple ones.
This combination of the unwillingness of some advisors to embrace uncomplicated portfolios, and the psychological propensity of investors to value complexity over simplicity, can have broad and adverse implications on long-term returns.
But this situation also presents an opportunity. The T. Rowe Price study found that advice beyond investment selection may be particularly valuable. There’s demonstrated willingness to pay for retirement planning, tax planning, asset allocation and rebalancing, goal setting, coaching, and estate planning.
What if you demonstrated your value in those areas and then told your clients:
More AUM. Better Relationships.
My micro-learning course will increase your AUM and deepen your relationships.
If not, I’ll give you a 100% refund of the $29.95 cost.
Volume discounts are available.
In addition to those services, I give you a portfolio you can easily understand that’s likely to place you in the top 5% of all professionally managed portfolios over the long-term and especially after taxes.
Clients will find that valuable.
Dan trains executives and employees in the lessons based on the research in his latest book, Ask: How to Relate to Anyone. His digital marketing firm, makes extensive use of artificial intelligence to help advisors increase their SEO rankings and improve their marketing and helps advisors integrate AI into their practices.