The Road Not Taken
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;
Then took the other, as just as fair,
And having perhaps the better claim
Because it was grassy and wanted wear,
Though as for that the passing there
Had worn them really about the same,
And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way
I doubted if I should ever come back.
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.
A parable on the investment industry:
Client: “I want to start investing but I am a little behind on the planning side so basically I need to invest in something that will make me a lot of money over a very short space of time. I have R100 000 in cash which represents my life savings so far. My bank does not seem to want to pay me any interest. What should I do?”
The Salesman response:
“Sure no problem I understand fully and the great news is that I have just the product for you. Property returns have averaged 30% over the last 10 years. My compliance team says I need to tell you that past performance is not a guarantee of future performance but let’s be honest – As long as cash rates stay as low as this, and global central banks just keep printing money, then property has got to go higher. I think it’s a great option for you and we will make sure that you are diversified across at least two property funds to lower your risk as you should with diversification. “
“Check out this graph that show’s you how you will benefit relative to cash.”
“Hey by the way, since you said you understand that you are a bit behind, and therefore have a super high risk appetite, I have a limited amount of a new unlisted protected property-linked product that is currently returning 25% a month but you must invest now as there is a limited amount available. Basically if you invest your R100 000.00 in this product today then in a mere two years time you will have approximately R 21 175 823.68. The best part is I won’t even charge you anything for providing you with this once in a lifetime opportunity – the company that provides the product will give me 15% cash upfront for every client I bring them and we will only charge you 5% of the value of your funds each year thereafter. That will be like a drop in the ocean to you in 2 years time anyway. Check out this graph that shows your potential returns.”
The prudent planner response:
“I am happy to hear that you have decided to start saving for your future. Unfortunately you are in the majority when it comes to being behind in your planning process but you have taken the first crucial step which is important.”
“We will have to conduct a full needs analysis to establish what your current financial situation is and what resources you have at your disposal to begin to invest for your future. You may want to start by confirming that your monthly income exceeds your expenditure and that you have no short-term debt that is compounding at ‘wonga-esque’ type rates?”
“Once we have a better grasp of your current financial situation, and understand what your investment objectives are, we can construct a plan that will try to meet those objectives within the confines of your willingness, ability and requirement to take on risk.”
“There are unfortunately no easy paths to creating wealth and you will need to follow a slow, steady and disciplined approach to get yourself back on track. Equities will typically provide you with the best returns over the long run (Average is 12.5% per year for the last 100 or so years) but they can also suffer the biggest losses over shorter time periods so you need to be planning greater than five years ahead at least. Cash investments provide lower returns than inflation so you essentially lose purchasing power in this asset class over time. We will only leave as much as you will potentially need for emergencies in cash assets.”
“We will put you in products that will give you the best chance of achieving your goals in the most cost effective manner. Fees can have a very significant impact on the success of your plan long-term and should not be underestimated. We will also consider the tax implications of your strategy – paying less tax or deferring your tax payments through the utilisation of retirement allowances and focusing on the long term so as to attract capital gains rather than income tax are prudent approaches to your planning process. “
“We will charge you an upfront advice fee that will be disclosed and agreed upon before the commencement of any work but you will have to implement and monitor the plan over the long term yourself. Trust me it may seem expensive on the face of it but you will really benefit over the long term both in terms of money in your pocket and your own knowledge accumulation. If you prefer to have someone keep an eye on it for you we can do this but will have to charge an ongoing fee which will significantly increase your costs over the life of your plan.”
The client response:
“This is quite an easy decision! The salesman’s proposal does not require any of my time to set up, it promises to deliver the sorts of returns I am counting on to get me out of a bit of a pickle and according to him it is not going to cost me anything because it’s all included in the products anyway….”
“That other fellow wants me to disclose lots of personal information upfront and requires me to spend time filling in forms and understanding the strategy. A major negative is that he will also charge me a fee for the service which makes it a bit like going to the doctor, lawyer or calling in the plumber. Added to which, I will have to spend a few hours each year monitoring the progress of my strategy which is unattractive even if it will significantly enhance my potential returns and boost my chance of success.”
This story is obviously somewhat tongue-in-cheek but it does highlight some of the reasons why the job of improving the financial services industry for the investing community at large will require much more work to be done by ALL parties.
There are two main areas that would make significant progress in this regard, Ethics and Financial Literacy . Both require that investors and service providers take the road less traveled.
Members of an ethical industry would challenge themselves to ensure that every product and service they provided was suitable and had a fighting chance of helping clients to achieve their goals. Focusing on the best interests of the client is often more of a marketing mantra than an actual corporate cultural belief embedded in the products and services on offer.
Members of an ethical industry would simplify their offering. The complex nature of the thousands of product choices out there makes it nearly impossible for the so called experts to get to grips with, never mind Joe Public.
Members of an ethical industry would provide services at a reasonable and transparent cost. There are huge costs involved in providing quality investment and financial services to the public and the public should be happy to pay for service. However, an industry with high fee structures that hide behind complex products and absorb 25% to 50% of the final value of client returns, is simply morally and ethically short of where it needs to be.
But the blame does not rest solely at the door of financial service providers. Joe Public also needs to accept the role of his own ethical behaviour when seeking an improvement of the industry overall.
During the financial crisis when the hatred towards banks was at its peak there seemed a distinct lack of willingness on behalf of the public or mortgage owners to admit or acknowledge their role in the calamity. Yes the banks were unethical, had poor risk management policies and were in some cases even incompetent, all in the name of greed. But were the public not equally guilty of the same greed if they took out a loan they knew they could not afford so that they could leverage up and buy a house that would make them rich overnight? After all it was a well known fact that house prices only ever went up…..
The end consumer or investor deserves better from a more ethical industry but they need to accept their role in the process. Clients must support firms that offer honest, value for money propositions, which are based in reality and not those firms that serially over promise and under deliver to get business in the door.
Of course many clients that fall foul of the industry are not chasing unreasonable returns, they simply do not have the background knowledge to understand what they are signing up to. They do not know how to identify false promises or whether the product they were buying is in fact able to address their needs.
We have very little financial education in our younger years and society at large seems to adopt an attitude of buy now and ask questions later. A better informed and educated client base would demand a better product and service from those who seek to earn money from them. If clients had a better understanding of finance then they would be able to identify when the industry and its cohorts of salesmen were over promising and under delivering. They would support the prudent service provider in the scenario above because they could appreciate the common sense and honesty in the plan. They could vote with their feet (and assets) and force the industry into line.
Of course it is all good in theory but it costs (time and money) to educate a client base and let’s face it not everyone wants to learn about finances and managing their money better despite the benefits. This is no quick fix but each role player can do their part in making a difference and changing the industry for the better.
By better financial literacy we do not mean becoming professional investors with a degree in advanced quantitative techniques – We mean getting to grips with the basics. Understand the relationship between risk and return. Understand the fees charged and how they impact you. Understand the concept of inflation and real returns. Understand what returns are reasonable from the different asset classes you can invest in. Be reasonable in your expectations and ruthless in your savings. Spend some time reading the personal finance sections of your news paper and dip into the wealth of information available on the web.
In other words, take the road less traveled – it may just make all the difference.