Investment Masterclass: The need for transparency

Ian King, Monday March 31, 2014

The financial landscape is awash with a plethora of complex concepts, products and solutions.  Much of that complexity has been created by the financial services industry, often in an attempt to confuse others and to give the impression of expertise! This complexity creates a lack of transparency for both investors and the public at large.

Complexity

So much of this complexity is not necessary and can, often with help, be stripped away.

We use a strict method when considering new concepts or solutions which means that whilst we may as financial services professionals understand the matter at hand, if we cannot explain this concept simply to our clients then we should not be seeking to employ it.

Common Questions

Some common questions which we ask include:

  • Are the risks transparent?  Every investment opportunity carries risk and we need to understand the specific risks of the concept and how these may interact with any particular client. We are always reminding ourselves that if something appears to be too good to be true then it usually is!
  • Is this process or the returns consistent and repeatable under different market conditions?  Frequently investment funds are promoted on the back of outstanding investment performance.  This investment performance is however over a relatively short timescale during which market conditions were particularly suited to this investment opportunity.  Commercial property funds during the mid 2000s would be a prime example of this.  The question we ask is if things changed what would the impact be upon this investment opportunity and how would this idea compare against other, more proven, opportunities.
  • Can it be easily understood?  We have a combined experience of several decades in the financial services industry but sometimes a concept is so complicated that it is difficult for us to understand its features and risks.  Ultimately, if the investment opportunity falls into this category then we discount it pretty quickly.
  • Can we explain it easily? We may be able to understand the concept, but if we cannot explain it to a client to whom it would otherwise be suitable we are very concerned about proceeding.  Naturally, this is very much dependent upon the knowledge and experience of the investor.  We do however tend to only discuss more complex tax planning solutions with those clients who have encountered such issues in the past.

Investment Process

No financial planner has perfect foresight or knowledge so it is vital that if the investor does not understand part of the investment process or product then they raise their queries or concerns.  Any good financial planner would be happy to engage with you in such a dialogue.

If you have any thoughts we would love to hear them.

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