A complicated investment is any one that the client doesn’t understand – and that can result in more downside than upside, writes Markus Muhs
IF YOU’RE like me and don’t have an assistant acting as the gatekeeper for your phone calls, you’re probably being inundated with calls from fund wholesalers at this time of year, as well as from sellers or promoters of various other investments. Unless you’ve found a way to completely tune them all out, it can be a challenge to listen to all their ideas and keep yourself from buying what they’re selling, only to see your book of business become a jumble of hundreds of different fund codes that are impossible to keep track of.
Simultaneously, we might also find ourselves being pulled into the realm of complicated investments by our clients, if they perceive – or we perceive that they perceive – that complex investment strategies add value to the relationship.
So what do I consider a ‘complex strategy’ or ‘complicated investment’? I tell my clients that complicated investments are any investments that they themselves don’t understand. Even if I’m advising them and recommending something to them, I want to be sure they understand what they’re investing in. To some, owning anything beyond a simple mutual fund or ETF may be overly complicated. If it is, then there’s absolutely no need to go further. Investing doesn’t need to be complicated in order to achieve the desired result, and making things too complicated can result in more downside than upside.
The core reason why we invest is to help transform liquid currency that we earn today – which loses a bit of its value every year – into something that can help us meet our long-term objectives. It’s not to gamble. It’s not to tempt fate and hope to strike it rich.
The stock market has provided an unbeatable vehicle for achieving our longterm objectives, and product innovation – from the first mutual funds to ETFs to discount brokerages – has democratized investing to the point where anyone can instantly buy a tiny share in more than
1,000 companies with just one trade order, or have their money put into a diversified portfolio automatically via a ‘robot.’
It seems to me that, more often than not, the simple portfolio (one with just a few basic indices, or some broad-based longonly mutual funds that don’t try anything fancy) beats the complex one full of exclusive hedge funds, alternative investments or ‘stories.’ It is possible for someone to achieve their retirement goals by simply putting all of their money into one global all-cap fund of some sort, just shovelling more money into it every week/month/year and not looking at it until retirement.
So where do advisors come in? We add a bit of complexity to our clients’ portfolios when we go beyond just owning one global fund. We add other asset classes to diversify because a particular client’s time horizon might not be 30 years or longer. We may also diversify by adding different investment styles.
Importantly, as advisors, we also ensure that our client’s investments are compatible with their own psychological risk tolerance, and coach them through inevitable market events, which could trick the investor into making mistakes that could cost them dearly, such as selling at lows or even just abandoning contribution strategies.
A professional advisor can add way more value to a client’s financial well-being by crafting a detailed financial plan and coaching them through market fluctuations than by flogging a variety of complex investments. Fee disclosures under CRM2 have made it all the more important for advisors to demonstrate their true value to their clients. If, as an advisor, you believe the only way you can demonstrate value is through security selection and building complex strategies, then I think you have an uphill climb ahead of you.
This article is solely the work of its author, a registered investment advisor at Canaccord Genuity Wealth Management. The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord Genuity Wealth Management. The information contained herein is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author or Canaccord Genuity Wealth Management assume any liability. Canaccord Genuity Wealth Management is a division of Canaccord Genuity Corp. Member – Canadian Investor Protection Fund.
Markus Muhs is an Edmonton-based investment advisor with Canaccord Genuity Wealth Management. He provides financial planning services and values independence and the ability to put his clients’ interests before all else.
Simultaneously, we might also find ourselves being pulled into the realm of complicated investments by our clients, if they perceive – or we perceive that they perceive – that complex investment strategies add value to the relationship.
So what do I consider a ‘complex strategy’ or ‘complicated investment’? I tell my clients that complicated investments are any investments that they themselves don’t understand. Even if I’m advising them and recommending something to them, I want to be sure they understand what they’re investing in. To some, owning anything beyond a simple mutual fund or ETF may be overly complicated. If it is, then there’s absolutely no need to go further. Investing doesn’t need to be complicated in order to achieve the desired result, and making things too complicated can result in more downside than upside.
The core reason why we invest is to help transform liquid currency that we earn today – which loses a bit of its value every year – into something that can help us meet our long-term objectives. It’s not to gamble. It’s not to tempt fate and hope to strike it rich.
The stock market has provided an unbeatable vehicle for achieving our longterm objectives, and product innovation – from the first mutual funds to ETFs to discount brokerages – has democratized investing to the point where anyone can instantly buy a tiny share in more than
1,000 companies with just one trade order, or have their money put into a diversified portfolio automatically via a ‘robot.’
It seems to me that, more often than not, the simple portfolio (one with just a few basic indices, or some broad-based longonly mutual funds that don’t try anything fancy) beats the complex one full of exclusive hedge funds, alternative investments or ‘stories.’ It is possible for someone to achieve their retirement goals by simply putting all of their money into one global all-cap fund of some sort, just shovelling more money into it every week/month/year and not looking at it until retirement.
So where do advisors come in? We add a bit of complexity to our clients’ portfolios when we go beyond just owning one global fund. We add other asset classes to diversify because a particular client’s time horizon might not be 30 years or longer. We may also diversify by adding different investment styles.
Importantly, as advisors, we also ensure that our client’s investments are compatible with their own psychological risk tolerance, and coach them through inevitable market events, which could trick the investor into making mistakes that could cost them dearly, such as selling at lows or even just abandoning contribution strategies.
A professional advisor can add way more value to a client’s financial well-being by crafting a detailed financial plan and coaching them through market fluctuations than by flogging a variety of complex investments. Fee disclosures under CRM2 have made it all the more important for advisors to demonstrate their true value to their clients. If, as an advisor, you believe the only way you can demonstrate value is through security selection and building complex strategies, then I think you have an uphill climb ahead of you.
This article is solely the work of its author, a registered investment advisor at Canaccord Genuity Wealth Management. The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord Genuity Wealth Management. The information contained herein is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author or Canaccord Genuity Wealth Management assume any liability. Canaccord Genuity Wealth Management is a division of Canaccord Genuity Corp. Member – Canadian Investor Protection Fund.
Markus Muhs is an Edmonton-based investment advisor with Canaccord Genuity Wealth Management. He provides financial planning services and values independence and the ability to put his clients’ interests before all else.
