Why parts of the investment industry want to screw you over

Why parts of the investment industry want to screw you over

Who wants to screw you over?

When you’re first introduced to investing, there are so many points to consider. It’s information overload. Not to mention that investing is one of those areas where it’s really hard to work out just who is coming out ahead: you or them. Who is trying to screw you over, and by exactly how much?

There is an entire investment market out there that is constantly bombarded with information: some of it helpful, some of it useless, some designed to make you money, much of it designed to enrich the people giving the advice. It’s like an extortion bonanza: so many people want to suck your money out of your wallet and into their third yacht.

If you line up over here, there’s someone selling dud property deals: ‘Just buy this great property from us in the middle of nowhere (because it is near a train line that will be built in 20 years time) and you’ll make a killing!’ Over there Wall Street has a fund they want you to invest in, and they’ll only charge you 2% of all your money in there, and 20% of any profit, if there is a profit.

How about those shady advertisements that pop up in the first three hits when you google ‘investment’. ‘Come invest with us!’ They say. “Forex trading”, “binary options”, and “contracts for difference” are all such great “investments” that you’ll be better off backing the miniature pony to win in a horse race.

Confusion by design

It’s irritating, confusing and bewildering. And that’s because it’s designed to be. The people selling them have a vested interest in making you confused.

Using other people’s money to make more of your own is big business. Have you ever looked at the towering skyscrapers of banks in major cities and wondered just what it is they do there? Grumbled at the terrible service you get from a bank to fix the simplest administrative problem, yet been amazed at their interest and dexterity when you apply for a loan? Been angry at the large pay-rates and golden handshakes?

And how about those finance documents? When was the last time you read terms and conditions, a privacy policy, your credit reporting rights, a product disclosure statement, or even the account from your superannuation fund? If your answer is ‘never’ or ‘hardly ever’, you’re in the majority.

In many cases, you and your money, are the investment. Their investment. They sell you the idea that simple investments (like shares, index funds, and bonds) take too long to make enough money. How?

Recipe

Here’s your recipe:

Method:

  1. Take a simple concept and repackage it as something more complex
  2. Wrap it up in several layers of legal sounding financial jargon
  3. Give it a nice title, one that suggests quick wealth
  4. Produce a website showing off photos of people looking happy at an exotic beach
  5. Ensure you barely meet legislative regulations, just enough to cover yourself when it all goes wrong
  6. Create a glossy brochure with graphs, lots of graphs ,with cherry picked data that show your great returns (you know, that one year you got 20%)
  7. Add in a hearty helping of fees and commissions that make you richer. Bury them down at the bottom of the financial statements so no one knows they’re there (they’ll never read the fine print).

If you follow these steps, you too can create a product that people will purchase in the hope it will make them a little richer. Especially if they don’t understand it.

Understanding the system

In investing, if you don’t know what you’re doing, you’re almost entering a casino.

So how do you cut out the jargon? A common investing maxim is ‘don’t invest in what you don’t understand’. But I suggest you take this much further. You need to know the difference between:

  • what you don’t understand, because it’s a gap in your financial education; and
  • what you don’t understand as it’s marketing bullshit and financial gobbledegook.

You owe it to yourself to get a basic investment education: what is the stock market, what are shares, what are bonds. For an example of what may be a gap in your financial education, many people aren’t familiar with index funds. Yet they generally make for good investments (I’ll be covering this in a future post, and there are several excellent books on this subject).

On the other hand, not understanding something because it’s marketing nonsense is more straightforward. Here’s an example of the marketing about a ‘structured product’: ‘this product allows an investor to purchase a single instrument, gaining exposure to a range of underlying assets, designed to either reduce exposure to falls, while retaining potential for returns, or to maximise the benefit from a flat or rising market.’

Do you know what they invest in? Yeah, me neither.

The next time you find your eyes glazing over on financial literature, remember to ask yourself: is this something I don’t know, or is this meant to be confusing? Am I investing, or are they investing in me?

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