So as not to confound clients, financial adviser Adrian Mastracci tries to steer clear of much of the jargon so pervasive in his industry. “Monte Carlo simulation,” for instance.
The term conjures up the image of a roulette wheel – “and you don’t want to think of a roulette wheel with your money,” he says.
When others in Mr. Mastracci’s line of work tell him about all the alpha and beta they can generate, “I say if I talked like that to my clients, they’d fire me.”
(He translates: Monte Carlo simulation – an analysis that tells you how likely you are to reach your goals. “You set the assumptions, ‘I want 80,000 bucks a year for the rest of my life,’ and the analysis says you are 75 per cent likely to get there.” Alpha – picking investments that outperform. Beta – extra return for taking on more risk.)
“When investors try to understand what can be a fairly complicated subject, it is too much to ask them to learn a new language as well,” says Mr. Mastracci, portfolio manager at KCM Wealth Management Inc. in Vancouver.
Financial advisers do clients a disservice when they speak what one U.S. investment firm describes as “finglish” (financial English), using such terms as equities, fixed income and asset allocation instead of the more commonly understood stocks, bonds and diversification. Recent research conducted by Invesco Van Kampen Consulting, a unit of fund manager Invesco Ltd., found that investors do not like – and frequently do not understand – the jargon their advisers throw around.
If there is a general lack of financial literacy, the incomprehensible language routinely used in the financial services industry is partly to blame, says Invesco’s executive director, David Saylor, who conducted a light-hearted “finglish challenge” on the streets of Chicago last year, asking passers-by if they knew what was meant by the terms transparent fees, beta and dollar-cost averaging.
Beta – “like a VCR tape or something?” asked one man interviewed by Mr. Saylor in a video posted on Boston College’s financial security project Web page.
In the course of research conducted with 15 focus groups and surveys of 4,500 investors over the past five years, Invesco Van Kampen found that 90 per cent of investors prefer such language as “making sure I have enough money for as long as I live” to “managing longevity risk.” Most favour the plain English “regular monthly investment” to “dollar-cost averaging.”
It’s easy for financial advisers to slip into terminology that’s “just everyday language” in their field, says Barrie, Ont.-based financial adviser Gwendolyn Kavanagh of Raymond James Ltd. “I always tell my clients, ‘If I use a word or say something you don’t understand, stop me.’”
Clients come in the door with varying needs and different levels of sophistication. But unless invited to do so, they will not necessarily press for explanations of terms and concepts they do not understand. “I think a lot of people are intimidated and will not ask the questions they should,” Ms. Kavanagh says.
“I don’t think clients are impressed when professionals use the buzzwords,” Mr. Mastracci says. “If they lose you in your first few words, and they tune you out, you haven’t done your job.”
The financial services industry is making an effort to demystify the jargon – for instance, most major banks, insurance companies and investment houses have investor education portals on their websites, complete with definitions and glossaries.
“But we still have a long way to go. And the acronyms, oh my God, people glaze their eyes over at this stuff,” says Mr. Mastracci, who has compiled an alphabet soup of acronyms that investors have to deal with, including: DPSP, EPSP, IPP, LIF, LIRA, LRIF, LRSP, PRIF, RDSP. (Meaning Deferred Profit Sharing Plan, Employee Profit Sharing Plan, Individual Pension Plan, Life Income Fund, Locked-in Retirement Account, Locked-in Retirement Income Fund, Locked-in Retirement Savings Plan, Prescribed Retirement Income Fund, Registered Disability Saving Plan.)
“And, of course, when you say MER [management expense ratio], you need to spell that out,” adds Ms. Kavanagh, referring to the percentage of a mutual fund’s assets that goes toward fees to operate the fund.
The U.S. Securities and Exchange Commission has been on the clear-language soapbox since the early 2000s, when it hired a linguistics professor to help write its Plain English Handbook as a handy guide to the writers of financial documents. It’s about clarifying the message to investors, not dumbing it down, the SEC notes.
“Plain English writing does not mean deleting complex information to make the document easier to understand. For investors to make informed decisions, disclosure documents must impart complex information. Using plain English assures the orderly and clear presentation of complex information so investors have the best possible chance of understanding it,” the SEC says in its handbook.
“While your audience will include analysts and other industry experts, you may want to keep in mind that your least sophisticated investors have the greatest need for a document they can understand.”
Ms. Kavanagh says advisers “just need to get a feeling for the person they are talking to.
“I have always been very conscious of the fact that there are a lot of people out there who have just never been exposed” to financial complexities.