While attending the CFA Conference in Chicago a couple of weeks ago, I got to listen to one of my favorite financial voices, James Montier of GMO. In a conference heavy on academic presentations, it was refreshing to hear an investing practitioner hold forth. Presenting his white paper, “The Flaws of Finance,” he summed up the state of our business thusly:
This is how finance sees the world:
This is how my 3-year old daughter would see the same equation:
In the wake of the recent JP Morgan debacle it is even clearer that, in too many ways, finance has gotten unnecessarily complicated. From unexplainable derivatives to densely packed academic papers, we continue to try to hedge the un-hedgeable and explain the unexplainable.
Perversely, the complications have served the industry well over time. Many investors seem convinced (so far) that investing is a process so intricate that it is best left to those who trumpet their services most opaquely. And loudly.
That is not to say investing does not take skill. But it is too often forgotten that investing is sometimes as much art as science. And that risk, no matter how dressed up, is still risk. Modeling is fine, as long as it leaves room for human nature.
There is plenty of room to add value as financial professionals. Being a good steward of people’s hard earned money is a valuable service. But a confusing maze of unnecessary middlemen, combined with manufactured complexity of financial instruments, destroys rather than adds value.
During the CFA Conference, the President and CEO of the CFA Institute, John Rogers, issued a call to action urging all members to take the necessary steps to restore trust in the financial services industry. It was a timely message. Focusing on transparency and actual client needs are effective remedies for an ailing industry. And, best of all, they are not complex in the least.
Jim is Portfolio 21's Chief Investment Officer. He has more than 20 years of experience in socially and environmentally responsible investing.