Simplicity is not just a business and regulatory imperative. Investor revulsion at the global financial crisis has led to a renaissance for simplicity. Certainly the complicated mathematical models so beloved in some quarters of finance have lost significant credibility by failing to predict the crisis. With our strapline as “simply asset management”, Aberdeen believes that “keeping it simple” needs to be embraced by financial services as a whole.
Addressing fellow central bankers at Jackson Hole in August 2012, Bank of England director Andy Haldane noted that while explaining the science behind catching a Frisbee may require a doctorate in physics, the act itself is something the average dog can master. The secret of the dog’s success, he argued, is keeping things simple – and therein lies a lesson for everyone involved in financial services in the 21st Century.
After a decade in which complexity, over-engineering and a lack of transparency almost led to the downfall of the global banking system, people want financial expertise they can see and understand. In a word, they want simplicity yet, alas, that is easier said than done. “Simple can be harder than complex,” Apple co-founder Steve Jobs once observed. “You have to work hard to get your thinking clean to make it simple.”
It would appear this is the sort of work too few people in modern finance have felt inclined to undertake – and indeed some doubt the collective will even exists to try. “In finance we love to complicate,” behavioural finance guru James Montier of GMO has said. “We love to overcomplicate. We rely on complexity to baffle, bamboozle and generally thwart human understanding.”
Increasing complexity may define elements of the modern financial services sector, but investor revulsion at the global financial crisis has led to a renaissance for simplicity – both as business proposition and regulatory imperative. Certainly the complicated mathematical models so beloved in some quarters of finance have lost significant credibility by failing to predict the crisis.
More than 50 years ago, legendary value investor Benjamin Graham reckoned the more elaborate the mathematics used in the stockmarket, the more uncertain the conclusions that may be drawn. “Whenever calculus is brought in, or higher algebra,” he added, “you could take it as a warning signal the operator was trying to substitute theory for experience and, usually, to give to speculation the deceptive guise of investment.”
Nor is it just in relation to market behaviour that the finance industry has done too good a job convincing people success requires an understanding of highly complex matters. There is not the space here for a full roll-call of failed financial products but in recent decades they might run from Long Term Capital Management and late-1990s technology investments to the more recent alphabet soup of CDOs, CDSs, CLOs and so forth.
For financial columnist James Saft, complexity, whether in strategies or financial products, leaves investors vulnerable to being overcharged, to misunderstanding risks and to being unable to exit positions easily and economically. “Unfortunately,” he adds, “complexity, when accompanied by its inevitable handmaiden, the ‘expert’, is even more dangerous.”
In his book Simplicity, lateral thinker Edward de Bono suggests complex matters offer a position for interpreters of that complexity while simple matters remove that role. This has echoes of the view of the UK financial services regulator the Financial Conduct Authority, which maintains: “Complex products are more likely to be mis-sold because they provide a greater opportunity to exploit consumers’ limited knowledge or understanding of risk.”
De Bono is not specifically referring to financial services but, to some extent, he is pointing out the role of intermediation in building products at a high cost that might not be understood by their buyers. Simplicity, he adds, is not to be confused with simplistic – “simplicity before understanding is simplistic, but simplicity after understanding is simple”.
In his Jackson Hole speech, Haldane concluded modern finance is complex but so is the regulation of modern finance – a dangerous combination. One should not, in his view, fight complexity with complexity, because complexity generates not risk but uncertainty. Haldane’s vision for modern finance involves a regulatory response that acknowledges that less – and simpler – may signify more.
It is an idea that Aberdeen, which expresses its own proposition as ‘Simply asset management’ – a bold but authentic claim that instantly imparts what the company does, what it values and what makes it powerfully different as an investment partner – believes needs to be embraced by financial services as a whole. There is no doubt it will take effort and yet, for the sector, simplicity is not just a business and regulatory imperative, it is, to complete Steve Jobs’ earlier quote, “worth it in the end because once you get there, you can move mountains”.
