What is it with the complex jargon whenever people talk about ETFs (exchange-traded funds) or CDOs (collateralized debt obligations)? Do those in the financial world just want to confuse investors even more with the language? No one likes to be fooled when it comes to their money and future.
Well, obfuscation in finance is a real issue. This is when institutions make information unclear or difficult to understand so it is obscure to the clients. Firms may get an unfair advantage by overcomplicating the process in investing by not fully explaining the story. Some financial companies could deliberately make rules and regulations difficult for outsiders so the firm benefits the most. Their top priority may conflict with the best interest of their clients.
Just like with all the financial terms, if people did not know what they meant, this can make it hard for those that want to invest to be able to trust advisors with their hard-earned money. People want to be kept safe and sound, in other words, informed about their options in financial decisions. Being kept in the dark on what is actually going on behind the scenes can have a negative impact on both the firm and the client in the long run.
Back to the past
There have been many cases in history and in recent times where financial managers get rewarded the most while investors have had to undertake the risks involved with investing. For instance, fee structures have had investors paying a lot of money and not getting much out of it. Management fees can take away incentives for actual performance to do well since managers are already paid even if the funds underperform. Fees are overpriced without clients realizing it until it is too late when they do not get what they expect.
After the Great Recession, MBSs (mortgage-backed securities) and other derivatives saw their downfall as these risky investments were combined with obstruction in the financial industry. Investors did not stand a chance against the Wall Street institutions at the time that collapsed when the bubble burst due to the corrupt practices of the financial giants that did not put their clients’ interests first.
As highlighted in the documentary “The Inside Job,” the systematic practice back then of mortgage-backed security led to one of the main causes of the financial crisis that affected the world. Studies also show that the bigger the firms are, the more likely they are to obfuscate to attract more investors. They plan on making information more challenging to understand which completely takes advantage of new investors’ limited knowledge of the financial markets.
Lessons learned
We, of course, do not want the 2008 global financial meltdown to happen again due to “too big to fail” institutions failing to inform their clients of the potential risks in their investments. Being vague in financial advising by only telling clients specifically what they ask and not anymore as discussed in “The Inside Job” can lead to massive consequences.
The financial industry has the reputation known to outsiders as misleading clients by clouding the information given to gain from the transactions. With complexity in the options given to potential investors, this threatens the stability of the entire financial sector. As in the instance of the financial crisis, many of the actions taken before and after were concealed from the public to hide the wrongdoing of numerous people working for or with the big institutions. Many times, the continuous practice of making sure potential investors do not get the upper hand in financial decisions by obfuscating information has diluted the trust aspect of the business relationship.
What sets us apart
Here at M3, we will always put you as our priority. We believe that investing is a simple process of setting your goals that define the duration for your investment, understanding your unique risk tolerance to determine the range of ups and downs that you can take and stick to your program, then matching all of that with the right mix of stocks bonds and cash which is your asset allocation. We find that complicated products sound exciting, but they are hard to understand and usually have higher fees. Therefore use model portfolios from leading firms like Vanguard, State Street, BlackRock and Fidelity to provide easy to understand, low-cost investments that may address your needs. There will not be obfuscation when dealing with your finances because we know that managing money is an important job and we take it seriously. There are no hidden risks when you go with us.
We believe that investing should be simple and straightforward without the complexity of obfuscated information. Our low touch, automated investment processes offered 24/7 can help you get the best value in financial planning to reach your goals. To see our straightforward process in action, click here to set your goals and experience the M3 difference.