I receive an amazing number of calls from the major Investment Banks and Asset Managers pitching their latest and greatest investment products. All of the calls follow the same basic script: our smart guys have developed a new strategy, and if you had been doing this during “_____” (insert the name of the last crisis) you would have made big money.
One call last week outlined a derivative product designed to capture returns from market volatility while limiting an investor’s downside risk. This particular product stood out for a couple reasons: it was unusually complex (after 15 minutes, I still didn’t even understand how it worked) and it sounded remarkable similar to a product that had recently imploded and lost significantly all of the investor’s money (https://www.finra.org/newsroom/2016/finra-fines-merrill-lynch-5-million-related-return-notes-sales).
This is an extreme example but we see it every day with overly complex products (annuities, structured products, hedge funds and many mutual funds). They promise some form of excess return without the associated risk. The complexity serves primarily to differentiate the product (i.e., make it easier to sell) and rarely does what is supposed to do.
Professionally, one of the best pieces of advice I ever received was to keep it simple. Ultimately, we can only invest in a few things: equity (ownership), fixed income (lending) and resources (land, commodities, precious metals, etc.). Any additional financial engineering adds uncertainty and cost and reduces transparency; none of which are good for our clients.