Simplicity in all aspects of our financial lives is the ultimate sophistication

Leonardo da Vinci & Paddy Delaney 🙂

Something a little different, and a lot shorter this week.

Far too often, when a prospective client asks me to run the rule over their financial affairs, I see complexity and sophistication, and resultant negative outcomes. It is not their fault, it is the fault of ‘experts’ plying their ‘sophisticated’ trade.

Sophistication in Financial Planning

Sophistication is everywhere in the pension and investment market in Ireland. I see it every week. 3 prospective clients already this year have come to me for help in unravelling the web of complexity that their existing advisors have put them into over years. Some examples of where complexity arises;

• Active and frequent trading by investment manager, with active re-allocation based on market movements and predictions
• Complex unregulated investment products
• Structured Investment Product with ‘capital protections’ after 3-5 years
• Multiple separate investment/pension accounts with multiple providers using different investment approaches in each
• High profile investment managers who sell the promise of over-performing market (alpha)

I understand why many financial planning and wealth management firms encourage clients to use complex and sophisticated approaches. Here are some reasons why a firm might suggest such routes;

• It might make them look smart to clients and peers
• It generates higher initial commissions
• It is easy to sell complexity to clients as ‘adding value’ or benefitting them (even if it doesn’t)
• They think that is what the client wants and will buy (but doesn’t need)
• They can charge the client more for it and lock them in for years
• The providers they use offer higher commissions/fees if they sell complex structures
• It gives the ‘expert’ more power if you the client don’t understand what is actually going on with your affairs
• They have convinced themselves that sophisticated approaches will be better for clients

You’ll see why many firms will encourage you, as a new or existing client, to add complexity to your pension and investment approach. The motivations and biases are rarely anything to do with improving things for you as the client, and all to do with furthering their own position. Unfortunately.

Why Sophistication Is Sub Optimal For You

The reality is that sophistication and complexity within your investment and pension planning, as Leonardo will have warned us, is not the ideal. Real world negative impact of some of the sophistication above that I have observed over the past few months alone;

• Underperformance of c15% over the past 3 years, costing the investor c€300k in returns
• Underperformance of c10% last year alone, costing the investor c€400k in returns
• Investor being locked-into structured investments that are underperforming, until c2028
• Investors worried, stressed and totally bewildered with the myriad of schemes they are left with by unscrupulous advisors and investment managers

It is the latter that often grates me the most. Missing out on investment returns is bad enough, but when the advice and ‘expertise’ also leaves an individual worried and totally unclear of their financial affairs is an even greater insult to their dignity.

A Move To Simplicity

I’m not being over-dramatic here, the above are real cases and real outcomes of complexity that I see on an almost weekly basis. And if they engage me to complete a full analysis and strategy, you can be sure that my priority is on ensuring we correct the under-performance but also to ensure they have a great level of clarity and comfort about what they are doing and how they are financially positioned from then onwards.

Why move to simplicity?

• Transparent and clear in terms of strategy, partners and service fees
• Evidence-based investment strategy that is consistent and delivers the returns that investors deserve
• Clarity on where an investors money actually sits and how it is protected and assured
• Peace of mind and confidence for the investor

Simplicity is the ultimate sophistication. Simplicity is the harder approach to ‘sell’ to investors because they have been conditioned for years to believe that it has to be sophisticated to be effective.

I’m delighted to report that there is a slow but definite rise in awareness of investors that simplicity is more effective for the vast majority of us. Knowing that a move away from sophistication is prudent, doing it is another thing.

Again, I’m glad to report that there is a growing number of professional advisors in Ireland that advocate for simplicity, who can and are helping investors to course correct before it is too late. Blog 225, 9 Important Questions to Ask About Retirement Planning, might help guide you to questions to ask yourself and professional advisors when doing due diligence on your approach

If you find yourself on the wrong route, take the less than easy decision to engage a professional who can and will show you the way to freedom and betterment.

I hope this helps.

Paddy Delaney QFA RPA APA