Financial research drives industry product development, but not necessarily toward the best interests of individuals
Personal financial decisions seem to have become very complicated. To add to the confusion, the financial services industry develops an unending array of supposedly innovative new products. However, a large part of the complexity that individuals face results from the proliferation of repetitive financial products in a myriad of flavors with different features and different financial trade-offs. What is “best” and “right” for individuals easily gets lost in the ensuing confusion.
Well-educated specialists in the financial services industry have been the primary non-academic consumers of academic research in finance.
Creative “sell-side” professionals select from this research to develop sometimes innovative, but most often simply repetitive financial and investment products for sale to “buy-side” institutions and to individuals. The institutional “buy-side” of the financial industry tends to be more knowledgeable and discerning consumers of these innovations, when compared to individuals. However, in turn, the institutional “buy-side” of the industry also develops innovative and/or repetitive financial products and services, and then offers them to individuals either directly or through the financial advisor network.
Along this chain, objective academic knowledge of what is “best” and “right” for individuals tends to morph into product development and sales strategies that appeal to people’s personal insecurity, greed, and ignorance. Sales messages pander to people’s frustrations and need for simplification of what the industry itself has turned into a highly complex subject. In addition, along this chain of financial product development, many offerings to individuals tend to pick up extremely undesirable characteristics, in particular, high risk and high costs. Furthermore, products and indexes may be developed to exploit erroneous investor beliefs, such as trend extrapolation related to superior historical performance.
The Skilled Investor believes that much of the financial product complexity that individuals face is unnecessary and can be dispensed with through use of scientifically based product screening criteria. Much of the complexity that individuals face results from the proliferation of repetitive financial products in a myriad of flavors with different features and different financial trade-offs. In an often highly arbitrary sales process, industry agents attempt to sell this vast array of financial products to consumers. Without doing highly personalized and sophisticated needs analysis, a thin veneer of ersatz financial planning is offered. This faux financial planning is followed rapidly by a “consultative” sales process that usually pushes excessively risky and costly [...]