Complexity Sells, Simplicity Works

One thing that is common with most advisors today when they work with their clients today is the level of complexity that has crept into everything they do. Right from using complicated jargon when imparting advice, employing apparently sophisticated but ultimately inefficient investment strategies, to recommending investment products with a number of nuances that are hard to understand. They do this because most clients view complexity as a mark of the advisor’s professional competence. Advisors therefore tend to make use of complexity to give themselves a sense of job security.

But as with everything else in the world of finance and investing (and probably every other aspect of life) : complexity sells, but simplicity works. And when complex advice sold to clients does not work for them, they would naturally look elsewhere to have their needs fulfilled. This ultimately means that advisors run the risk of losing both their clients and their reputation. Complexity therefore ends up being the advisor's worst enemy when working with clients. And the only way for advisors to work around this fact is to embrace simplicity in every aspect of their operations and interactions with clients.

So today, I am going to highlight the areas in an engagement where advisors make things complex, how these areas can be made simple and how the shift to simplicity would benefit both advisors and their clients.

The foremost area where advisors tend to make things complex is in the communication of the broad financial plan developed for a client. Advisors tend to make use of a wide variety of financial jargon when putting across their plans to clients, in an effort to make themselves sound smart and knowledgeable. But, the client is one who ultimately implements the plan. So the key objective that must be achieved when a financial plan is communicated to the client is that the client fully understands the plan. And the use of jargon only makes the achievement of this central objective all the more difficult.

Therefore, use of financial jargon must be avoided as far as possible when laying out financial plans for clients. Where the use of jargon is unavoidable, advisors must make the effort to explain each bit of jargon used in simpler terms to make it easy for clients to digest the jargon. For example saying "Have six months worth of expenses available in cash and near cash assets to serve as an emergency fund.", sounds complicated. The message would therefore not be effectively understood by the client, lowering the possibility that the client would actually implement the advice.

On the other hand, saying "Have six months worth of expenses available in cash and savings bank deposits to tide through unexpected shocks life may throw at you" conveys the same message a lot more simply and effectively from the client’s perspective, automatically boosting chances of the advice being implemented. A few more terms and bits of jargon have been broken down in the graphic that follows. (In the Indian context, the term IRA given below is similar to EPF and/or NPS accounts that most income earning individuals would have.)

Not just the communication of the financial plan, but the investment products included by advisors in the plan also lack simplicity. Advisors tend to recommend the idea of gaining limited exposure to a wide variety of products. These include products like stocks, bonds, actively managed mutual funds, investment cum insurance products such as whole life, endowment or unit linked life insurance policies and even Portfolio Management Services (PMS) products and Alternative Investment Funds (AIFs) in the case of larger clients. To my common sense, the two cornerstones on which any investment portfolio should be built are diversification and low costs.

And such piecemeal exposure to such a wide variety of products neither diversifies a portfolio effectively (owing to over diversification) nor keeps investment costs low. All it would do for clients is to generate returns that are no more than negligible after accounting for costs and taxes. In fact, such portfolios are highly likely to lead to situations where clients are so confused with the products they are dealing with, that they don't follow a well defined investment behaviour.

They may also delay or completely forego timely action in their portfolios. And this is the worst possible result. Advisors must realise that once clients have :

1. 3 savings bank accounts (one salary account, and one account each for investments and spending - to serve as a cashflow management system)

2. Emergency fund (6 to 24 months' expenses in cash and savings deposits to tide through the financial implications of unexpected shocks life may throw at them)

3. Term life insurance

4. Comprehensive health insurance

5. A low cost portfolio of index funds and ETFs;

they can say no to almost every other financial product. It is in fact possible to build a robust, low cost portfolio diversified across asset classes with just a handful of index funds and ETFs. I will cover this topic in detail in another newsletter edition in the near future.

Advisors may feel that recommending such simple portfolios to clients may mean that clients no longer feel the need for professional help. But advisors must look at themselves more as educators and less as salespeople when working with clients. They must look to educate and empower clients on every major aspect related to their money. Advisors who strive to impart their knowledge to clients, automatically empower clients to make their own financial decisions. And financially empowered clients are the key indicator of success as an advisor. So in the long run, it would actually improve both customer satisfaction and retention for advisors.

The ultimate objective of sound financial planning for clients is to create a money management structure that is easy for the client and everyone in their family to implement and follow over long periods. A simple financial plan and investment portfolio would achieve this objective for every client. Moreover, investing and money management are not activities that can be taken up as hobbies. They both come with significant implications for the financial health of clients and therefore should be undertaken with a lot of focused effort. Financial planning is effective only when it delivers a set of tangible results for clients that make a material difference to their financial well being.

Complex approaches divert clients' attention from the issues that really matter and create confusion. This does not allow them to achieve the results they wish to from their financial plans, destroying their trust and confidence in the advisor's methods. A simple approach on the other hand cuts the unwanted confusion out to allow clients to focus on what really needs to be done. This automatically makes the process a lot more result oriented and significantly improves clients chances of enjoying the desired results from their financial plans, which naturally reflects favourably on the advisor. Simplicity should therefore be a key aspect of any financial plan prepared by advisors for clients.