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Financial Complexity Is Killing You

Yes, quite literally!

It's a well established principle in psychology that complexity contributes to mental illness. As we voluntarily pack more and more into our lives, our capacity to manage obligations suffers. Our day to day of pointless work meetings, endless emails we think need to be handled, and never ending kid's extracurricular activities cause small amounts of cortisol (the stress hormone) to drip into our system throughout the day.

Cortisol, when appropriate, is good for us. It's what kept us alert and alive 25,000 years ago when a saber tooth tiger was trying to eat us. Too much of it, too often, means we're walking around on constant heightened alert. The result is short attention spans, unproductivity, irritability, and general dysfunction.

Our two most popular remedies for dealing with chaos are alcohol and our phones. Every time you get a text "ding" or a Facebook "like" our brains release a hit of dopamine (the feel good hormone). Mmmmm. But are these actually effective methods to cope?

Our devices and vices are really just ineffective band aids on a bigger problem, which brings us back to complexity. There's too much going on in our lives, and it's driving us batshit crazy. It's not that we're incapable. It's just difficult to recognize when too much becomes too much.

As a financial planner, I see complexity overload as it relates to money all the time. Here are a few of the telltale signs of financial complexity.

Portfolio Complexity

A more complicated portfolio does not equal a better portfolio. It doesn't take 30 mutual funds to achieve global diversity. Tactical rotation in and out of market sectors as the economy changes might win over a short period of time, but how confident are you that some genius can do it decade after decade? Convoluted withdrawal schemes from illiquid products doesn't guarantee more retirement income over long stretches of time, like a retirement for example. If you believe these things, you have been conned.

The investment industry is filled with charlatans peddling this stuff. It all sounds good on the surface, but there is extremely Limited Evidence that fund managers can beat their benchmarks over long time horizons. Despite chronic underperformance, financial advisors continue to sell exotic, complex, and unproven investments.

One of my early mentors used an acronym that stuck with me through the years. KISS- Keep It Simple, Stupid! A simple basket of boring index funds that's occasionally rebalanced is the most proven method of getting the best bang for your buck.

Cash Flow Complexity

Imagine 10 different accounts at 3 different banks. Each spouse owns a checking account. Then there's joint checking. Mix in several savings accounts, each designed for a different purpose; one for bills, another for next year's vacation, a 3rd for car payments, and a 4th for miscellaneous stuff you haven't thought of yet. Cap it all off with a few CDs and a dedicated emergency fund account, and you've built yourself a hot mess.

To make it worse, each month you have to log in at various banks so you can parcel out your freshly deposited paychecks to their desired destinations. If this is you, have you ever screwed up a transfer amount and had to figure out where you went wrong and then recalculate the whole process?

There is a better way.

Outside of my business checking account, my wife and I share a single bank account. It earns interest at 1.15% and functions as a hub for all my needs. It auto pays off my credit card in full each month. It houses my cash for future tax payments. It includes a big part of my emergency fund. When it becomes bloated, it funnels contributions into my 401(k). I only look at it once or twice a month to ensure we're within our budget as well as spot check for fraudulent charges. Time spent per month, ~ 10 minutes.

Insurance Complexity

Salespeople (read: most financial advisors) like to sell cash value life insurance. The pitch touts the product as insurance plus savings. That savings can be used for emergencies, paying for college, retirement, etc. The problem is that funding and accessing that cash value comes with all kinds of conditions. Put too much in too quickly and the tax advantage disappears. Take too much out too fast and the death benefit collapses. There are also several layers of expenses, some increase over time, some that remain static.

Cash value life insurance can serve as a useful tool in a few scenarios, but normally, life insurance is a temporary need when your family is depending on you. This means you should buy term insurance, which covers you through your working years. You probably don't need a fancy cash value policy. All you need is what your employer offers and a supplemental policy to fill in the gap.

Estate Planning Complexity

Like life insurance salespeople, estate planning attorneys love to push more complicated strategies. Instead of an impossible to understand cash value policy, you often get an impossible to understand trust recommendation. Here's an example of what I commonly hear when I sit in on estate planning meetings:

The probate court system in Colorado is relatively inexpensive and highly efficient. But instead of filing a simple will through probate, I think you would be better off with a trust. It's what most of our clients choose based on their preference for privacy.

While it's true that trusts are private legal arrangements that protect your wishes from the public, they tend to be complicated and lengthy. They often have their own tax ID, which means you have to file a separate tax return. Once you create a trust, it's nearly worthless unless you actually go through the hassle of re-registering your assets like your house and brokerage accounts as well as updating the beneficiaries on all your accounts.

There are times when trusts are appropriate such as when you have a special needs family member, significant real estate holdings, or when you're charitably inclined. However, most of us don't fit into those categories, so the need to complicate our lives with trust planning isn't always better.

You need a will, a medical power of attorney, a willing , and a durable power of attorney. Once you've created these legal documents, all you need to do is explain to the person(s) you've granted authority over your assets and health what they are responsible for and give them a copy of the governing document.

The Knowledge Gap

Most financial advisors have at least a small knowledge gap over their clients. However, that doesn't mean we should continue hyping complex strategies. Any idiot can complicate something!

Why can't we recommend simple & effective strategies? Is it that we're afraid we'll be perceived as less effective as advisors by our clients? In my experience, it's the opposite. I've had several clients say they our fee was worth it based on reducing complexity alone!

The best financial advisors are those that can listen and understand what's truly important, then distill a mess of a financial situation down to simple recommendations clients will actually follow.

If you don't execute everything your advisor recommends, ask yourself why that is? Don't be afraid to tell them you're overwhelmed. There is no shame in admitting this. Just ask for a prioritized game plan and a little help.

Make sure to bring up complexity at your next review. Aim to center yourself, financially that is. Get organized!

In the meantime, you just might also benefit from turning off push notifications off on your phone, taking a hike in the outdoors, and even ditching that social media account that starts with Face and ends with Book. Your brain will thank you.


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