One thing that is common with most financial planners 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 to give themselves an apparent 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. This ultimately means that planners run the risk of losing both their clients and their reputation. Complexity therefore ends up being the planner's worst enemy when working with clients. And the only way for planners 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 where planners make things complex, how they can be simplified, 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. Planners may make use of a wide variety of financial jargon when putting across their plans to clients. They do this 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 this 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.
Not just the communication of the financial plan, but the investment products included by advisors in the plan also lack simplicity. Planners 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 three cornerstones on which any investment portfolio should be built are simplicity, 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 unnecessarily complicate their portfolios. Such portfolios would 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. 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. For more on this, have a look at my earlier article Low Cost, Highly Effective Portfolios.
Planners may feel that recommending such simple portfolios to clients may mean that clients no longer feel the need for professional help. But planners 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. Planners 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 a financial planner. So in the long run, it would actually improve both customer satisfaction and retention for planners.
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. It must give clients greater clarity with regard to their finances. A simple financial plan and investment portfolio would achieve both these objectives for every client.
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 planner'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 planner. Simplicity should therefore be a key aspect of any financial planning engagement with clients.