If you’ve more than a few quid invested, chances are high that you spend more each year on the management of your investments than on anything else in your life – possibly all of those anything elses combined. Chances are also high that you are completely unaware of this.
The investment industry has ingenious ways of taking your money without you ever really understanding how much they’re taking nor what you’re getting in return. The best burglars operate in daylight: persuading you not only to hand over your valuables, but to thank the thief for the opportunity to do so.
‘It’s just so complicated!’
‘It’s also worth £10 million to you, Megan. I think for £10 million it’s probably worth at least checking to see if it’s really as complicated as you think it is. The payoff is wildly asymmetric. If it is impossibly complicated and scary, you lose nothing. And if it’s not, the gains could be gigantic.
As the sun is setting on my last weeks of providing financial advice to the always rich and occasionally powerful, I meet with my friend Megan, who’s finally worked out what I do for a living. Megan is in her early 30s, and business savvy. She’s also trembling. That she’s trembling because she’s got money rather than because she hasn’t may be odd, but it’s far from uncommon.
‘How long,’ I ask her, ‘would it take for me to learn how to do what you do? Software packages, sewing machines, whatever else it is you fashionable types need to know… not to be a pro, but to grasp the basics.’
‘Oh, I don’t know. A couple of weeks maybe.’
‘And were I to gain your professional knowledge, how much do you think that would be worth to me over the course of my life?’
‘I’m going to guess not a lot. I doubt I’d find enough regular uses to remember what you’d taught me, let alone get value from it… However, if you had my professional knowledge, it could be worth £10 million to you over the next 30 years or so. What other professional knowledge even comes close to those sorts of numbers?’
Most financial advisers are hired because clients fear missing out on an El Dorado of riches, and perceive the investing world to be a complicated and scary jungle and setting out without a guide makes it more likely they’ll be eaten than find their fortune. El Dorado and the chance of being eaten are real. But the perceptions of complications and scariness need not be. The potential value of great financial advice dwarfs even mind-bending numbers like Megan’s. But the real value lies in changing perceptions, cutting through illusions, not providing an expensive plan to deal with them.
However, when you believe your job relies on certain perceptions, you’ll sooner protect them than change them. If there’s one thing that characterises the work of the investment industry it’s dressing its world up to be as frighteningly complicated as possible. Fear sells, because people will pay – often blindly – for someone saintly to slay the dark dragons and make the fear go away. Competently cutting through illusions is just so much harder than keeping everyone in the dark. Especially when it’s easier for both the adviser and the client.
The exact things that make an adviser good make clients dislike them. Like a teacher that actually makes you do your homework, or a personal trainer that tells you the truth and forbids you cake. We want truth. Just not right now.
‘Do you know how much you spend each year?’
‘About two and a bit grand a month, with holidays on top’, she says, with the air of someone whose parents inculcated a strong sense of fiscal responsibility, but who’s also never had to pay rent.
‘So somewhere between 25 and 30 thousand a year, give or take?’
‘Something like that.’
‘I can show you bank statements if you don’t believe me’, Megan says with a smirk.
‘Oh, I believe that’s on those statements. It’s what not on them I was thinking of. As far as I can tell from the stuff you showed me from your adviser – and these things are designed to make that ultimately impossible – you are paying somewhere between £34,000 and £60,000 each year for the privilege of owning your investments and having someone talk to you about them. This is real money. It’s money you pay that I wouldn’t if I owned what you own. And each and every year when your other expenses are going up by inflation, this chunk is going to go up by inflation plus about 5% or so – and way, way, more if you keep making regular additions to the pot from your earnings.’
‘Quite. And because of the magic of compounding, over the time until you may actually come to do anything with it all, you’re £10 million – £10 million!! – down on where you could have been, without in any way harming your chances of decent investment returns,’ I say, pondering the quirk of our evolution that makes us incapable of appropriately scaling up from salient numbers such as our annual expenditure to the almost unbelievable consequences of this compounded over a few decades.
‘How does this happen, though? I thought these finance guys were smart. The idea that they’re doing nothing is surely a bit of an exaggeration?’
‘They’re very smart, Megan. But some of the biggest margins in business and relatively lax qualification demands can channel cleverness into weird places.’
The numbers are only part of the story, however huge they are. When you spend more on a single thing than everything else combined, it should be unthinkable that anyone would be in any doubt about what they’re getting in return. And yet almost everyone is. As Rory Sutherland explains, ‘There are often two reasons behind people’s behaviour: the ostensibly logical reason, and the real reason.’[i]
The ostensibly logical reason is ‘to make my money grow faster than it would in cash, which is far too complicated to do without professional help’. The real reason is ‘to sell me certainty and appease my need to feel as though I’ve done something in the name of sorting out my finances.’ As if that weren’t hard enough, you’ve then got to work out if an adviser’s means of delivering this is worth the cost, is better than the alternatives. Because no one understands precisely what they’re paying, what they’re getting in return, or what other options there are, this is, of course, impossible. Clearing up this confusion is the subject of Parts Two and Three.
‘Tell me, Megan, what do you feel you get in return for those chunky fees?’
‘I don’t know. I’m still trying to get my ahead around how chunky they are. And from what you said about the returns, it sounds like nothing. It’s not like I enjoy sitting through those boring meetings pretending to understand what my adviser is on about.’
[My silence says: ‘you don’t get away that easily.’]
‘It probably sounds silly, but mostly I get to not have to think about it.’
‘Does that work? Do you not think about it?’
‘Sort of. Except for when they send me stuff, or when I meet with them, I guess. And talking to my mum, who mentions her investments way too often. Or when money stuff is on the news – which always seems to be bad news… Actually, now you’ve asked, I think about finance stuff quite a lot… just not very deeply, because I don’t know anything about it.’
‘All this thinking about it – and it’s certainly more than I could recommend! – is it a positive experience?’
‘Hell no. Of course not. But it’s better than I’d feel if I had to do it all on my own.’
‘And your time – is that worth something?’
‘If these interactions with your investments aren’t positive, do you ever think of factoring the time they take up into the return? Feels like an important cost to me. Like, if your job took up twice as long each week, you’d probably wonder if there were a better way to earn money.’
‘No. Really, though, who does that?’
‘Sometimes when we pay people so we don’t have to think, this is very wise. Researching exotic ailments on the internet when we’re hungover, for example: probably a really bad idea. But if we’re paying someone to think for us, they should probably be incentivised to want what we want (or at least not incentivised to want something else) and it should probably actually stop us ruminating on the topic.’
‘More to the point, the reassurance you get is exceptionally valuable. And if it cost less than everything else you spend put together each year, and millions in foregone future returns, it may not be too bad an idea to just carry on. However, it’s unnecessarily expensive at best and downright dangerous at worst. It’s North Korean reassurance: enshrine the belief that the outside world is a terrifying place, and you’ll pay with your life to be guarded from it.
But what if this stuff weren’t all that complicated? What if you could confidently manage it all in 10 minutes a year before going back to something more interesting? What if thoughts of money were rare, calm, and positive? What if, in short, you could change your relationship with money so that its role in your life was one of realising – in both the sense of making real, and of becoming aware – a sustained sort of flourishing happiness?’
‘You’ve been hanging out with the hippies again, haven’t you?’
‘Naturally. But what if–?’
‘You think that’s really possible?’
‘I know it’s possible. It’s my job. I’ve seen it happen. But it doesn’t happen by changing money. It happens by changing minds. No one is incapable of understanding this. In fact, it’s entirely natural. The hard part is believing it. Which isn’t helped by a traditional preference for being ripped off over discovering you’ve been ripped off for years, and by the industry in the best place to help wanting you to believe something else. Investing can certainly be scary. There is an intimidating amount that it looks like a layperson would have to learn – and continue to learn – just to know where to begin, let alone prosper. For lots of people, learning new things is always a bit scary. But if ever there were the incentive to do a bit of homework, learning the secrets of financial advice probably possesses it. Monsters under the bed are also scary. They are not real, but the fear of them is. Turn on the lights and they go away. When you’re being robbed in daylight, you can’t turn the lights on, but can take your hands off your eyes.
Fortunately, all the actually complicated stuff is completely irrelevant for you. Few children relish the first day of school. But then someone teaches you how to fish, and it all gets better. The only difference in learning about finance is that rather than giving you a textbook, you’re given a blindfold, told that the fish are sharks and are then charged a fortune for keeping Jaws away from your ankles.’
 Detailed maths footnote to come
 There’s obviously a lot more to it than this; we’ll get to the details later.
 It could have been a lot worse. Megan’s investments are in a very typical portfolio put together and managed by a very typical adviser, who means her no harm. They just don’t mean her enough help.
 What sort of reward was Megan getting? In investment-management terms, likely less than nothing. The typical adviser-driven portfolio reliably underperforms the default buy-everything-and-forget-about-it option. If it weren’t for the fact that most people use a different default of ‘nothing’ or perhaps ‘cash’, then these typical advisers would’ve had to drastically change their business models a long time ago.
[i] Rory Sutherland, Alchemy