I was reading Josh Brown’s post over on thereformedbroker.com about “three edges” and (as Josh put it) “incorporating them into one’s practice and philosophy can lead to a great deal of job satisfaction and lifestyle improvement.” There is so much more I can say on this, I’m going to break this up into a few posts.

Josh wrote about being boring (keeping things simple), and that’s good guidance. Every day – yes, every single day – we get cold emails or a cold call here at the office from some investment firm pitching us on the merits of “alternative investments” or “structured products” for our clients. Alternative investments (aside from the boring stocks, bonds and ETF’s) are often pretty complicated.

And while improvements happen every day in the industry, I will admit I have felt so badly burned by some exotic strategies in my past life as a broker, in good conscience I can’t talk seriously about a client owning them.

In my opinion, more than ninety percent of the investing public can do just fine without alternatives and structured products. Perhaps ninety-five percent of the public can get along without these complicated schemes. Yet, at the office, we get approached every single day.

“Hey, I’m going to be in your area on Tuesday. can I swing by for fifteen minutes to talk about alternative investments?”
“Next week I’ll be seeing other advisors near your office discussing a new structured product, can I stop over and show you the benefits of investing in them for your clients?”

We used to politely decline these calls. And I used to not respond to their email requests. Then I started marking their emails as junk and deleting them from my inbox. But they persist. Think about that, why would they persist in trying to move the product? What is in it for them? Now I tell them on the phone (or write back) “we are simply not a good prospect for you.”

Why? Their products are inappropriate for most individual investors. These products carry high fees, they often do not behave the way we expect them to act and they are not always liquid.

But more than anything else, they are hard to explain.
boring
At the request of a new client of ours, we recently reviewed an account at another firm. I asked him if he had seen or read the prospectus for a particular structured product he already owned. The underlying investment (a structured note from a well-known investment firm) had a projected yield which was promised to be a fraction of the total return of the EuroStoxx Index.

This investor (without disclosing his age, is well beyond the date he’d begin taking required minimum distributions from his IRA), did not even know what the EuroStoxx 50 index was, having never heard of the index.

Look, whether you are the investor or the advisor, if we cannot explain our investments and our strategy to fifth graders, it’s probably not necessary. And may be inappropriate. This is where serving as a fiduciary comes into play. It has to be the right thing. Even if it is boring.

A quick anecdote to share:
Back in the 1980’s, I had an accountant I had recently met send me a referral. I was so excited, and showed his client (at the time) a structured proprietary mutual fund. The client was a house painter who spoke broken English and had inherited some money. This proprietary fund did not perform anywhere near expectations. I thought I did a good job explaining the investment to Dante, but in the end, he closed his account with a small loss and took the money to the bank. The accountant told me later “you could have put that money into a money market fund.  That would have been an exotic investment for him.” Suffice it to say that was the one and only referral I received from that accountant.

Boring is good.
Boring works.

Now Go Talk About It!