Complexity of financial product

World is progressing towards making life simple. Wheel was invented to make travelling simple, mobile phones are for making communication simple. If you look at “anything” nearby you, that “anything” is much simpler than it was few days / month / year ago.

Only thing which is moving towards complexity is financial products. Stocks / shares were introduced so that one can simply take participation in the growth of a company. But people started trading in to it making it more complex. Derivatives were introduced to simplify fixings of future price, people started leveraged trading into it making it more complex. Mutual funds were introduced to simplify investment of pooled money collected from various investors with same objectives. Fund managers started taking their own call making it more complex.

Why do these experts make it complex?

There are two sides of it. First industry wants it that way and second investors wants it that way.

Why do industry wants it that way?

If they tell you, go and just buy simple investment products, will you pay them huge fees? Will you watch them on TV? Will you read their thousands of pages of analysis? Will they get huge salaries and bonus? Will they be able to go for Europe trip? Answer is simple “NO”. They can do all this because investors wants it that way.

Investors wants complex product even if it’s not in their interest. And why so?

Let me give you an example. You go out with your family for dinner in an expensive restaurant. Waiter advise you to have simple pure vegetarian food like roti without butter, vegetable with minimum spice, oil and masala, dal and rice and flash Rs. 5000 bill for this. You definitely will kill him. Because you have same kind of simple food at your home prepare by your wife and she doesn’t charge a penny for it. You know that this simple food is good for your health. But still you do not expect to pay Rs. 5000 in restaurant. You expect restaurant to offer you bit complex food i.e. masaledar sabji, with butter roti, extra spicy dal tadka with rice. Now even if you know it’s not good for your health still because it is more complex than simple home food, you would pay Rs. 5000 without hesitation.

If your adviser or fund manager give you simple financial products you will not be willing to pay fees. You may argue why would I pay if this is so simple?

So, these so called, experts or fund managers have to come out with complex product which normal investors don’t understand even if those are financially toxic products & not healthy for the wealth of investors. They also have to take out their family to expensive restaurants. They can, only if you get scared with complexity and pay huge fees.

Try to adapt to simple financial products like low cost index funds for your betterment.