Jargon: the language and vocabulary, peculiar to a particular trade, profession or group; unintelligible or meaningless talk or writing; gibberish
Have you ever heard words on a financial broadcast that you don’t understand? Has your broker or financial advisor spoken to you in what you thought was a different language? Chances are, you’re hearing financial jargon. As the above definition suggests, jargon can be vocabulary that’s specific to the financial industry. Words like basis points, Sharpe ratio and NAV are often used in print, online and oral communications with investors.
However, here is an underlying reason this jargon is used. Masterful salespeople use jargon to impress (and sometimes confuse) the investing public. Brokers use words that are over your head and can easily confuse or distract you before buying a product. Many of these products have lengthy disclosures, surrender charges and features that are difficult to comprehend (i.e. structured products like equity-indexed annuities and CDs whose returns are linked to the performance of the stock market).
According to a 2008 AARP survey:
- 52 percent of respondents made an investment mistake because they were confused or did not understand the investment;
- 54 percent responded they do not read financial literature because “it’s too hard to understand;”
- 70 percent said financial professionals use more jargon than their car mechanic; and
- 52 percent said financial professionals use more jargon than doctors.
Locally, LeConte Wealth Management’s own survey of East Tennesseans in 2009 found that investor’s financial literacy was noticeably deficient.
When it came to making important personal financial decisions, 33 percent of respondents either didn’t know who to ask or did nothing. Our survey also found that a financial advisor’s ability to explain advice in an understandable manner was one of the most important characteristics of a financial advisor. Respondents further noted that it was not important to speak with a financial seminar host, stockbroker or insurance agent (those who might be using this jargon) before making personal financial decisions. Yet LeConte’s research showed that East Tennesseans found it important to talk to someone they know or a banker, accountant or independent financial advisor before they made important financial decisions.
Both surveys reinforce the notion that retirees are confused by the financial jargon used by the brokerage sales force. This confusion has led to apprehension locally among investors and driven many of them away from industry professionals as they make important financial decisions.
Typically, the less liquidity an investment has, the higher the expenses. Private placements, Equity-Indexed Annuities and structured products such as market linked CDs have prospectuses as big as phone books, but high commissions to the brokers that sell them. Jargon is quite often used in sales situations to encourage you to buy something that may be more in the broker’s financial interest that your own. Always ask the salesperson to explain how a certain product will fit into your overall investment goals. It’s perfectly normal to question what you don’t understand. Don’t feel embarrassed to ask your advisor to repeat or rephrase what he just said, but take note to how they react. If they have problems clearly defining their jargon, you may want to walk away from that transaction and find a more qualified advisor.
Insurance agents can offer equity-indexed annuities with rates pegged to the performance of the S&P 500. These complex products are filled with jargon and can be offered by salespeople without an investment license. Others offer mutual fund and variable annuity products, but can’t make recommendations on stocks, bonds and ETFs because they don’t have their Series 7 securities license. This is where jargon can be used to confuse or distract from one’s qualifications. Many banks also offer fixed annuities as alternatives to CDs. Be careful in taking advice from bank personnel on these products as they pay high commissions to those that recommend them. Many fixed annuities also have teaser rates that reset to a much lower minimum rate after one year. Do you really believe that a bank teller is qualified to tell you where interest rates are headed in the coming years?
If you have fallen prey to these masterful salespeople, you probably accumulated a variety of financial products in your portfolio. Because these were suitable at the time of purchase and not strategically aligned with your investment goals, you may have what we refer to as a “collection of securities.” For example, if you have five different brokerage accounts, a 401k, an annuity and some investment real estate, who is advising you on your overall risk tolerance and investment plan? Who is working to help you make sense of it all? Does the insurance agent that recommended the annuity understand your asset allocation and retirement goals for your 401k? Has the bank teller that recommended the annuity asked the proper questions to ensure that particular product fits into your overall financial plan? These are important questions to ask when you’re buying a product from a salesperson, especially if they use jargon in recommending these products.
These sales pitches filled with jargon aren’t limited to the insurance products though. You may have encountered jargon from your stockbroker or financial advisor. Here is an example: Your broker proposes a fee-based account that will not charge you commissions each time you make a trade, but rather a quarterly based fee and your account. Ask the advisor if he or she will be taking fiduciary responsibility on the account. This responsibility encumbers the advisor to put the client’s best interest ahead of his own when it comes to recommending investments for their client’s portfolio. They are bound to act with a higher standard of care than a broker or financial salesperson. A fiduciary is bound to fully disclose all fees and avoid high commission based products that wouldn’t benefit the client. Will there be transaction charges on the trades that I make? Does the advisor have the ability to exercise discretion over this account? All of these questions are important to ask your financial advisor to cut through much of the jargon and understand what’s being proposed for your financial well-being.
It’s also important to differentiate between education and advice. A broker “educates” you on the merit of a certain product and why that product is suitable for you at that given point in time. A fiduciary advisor has the responsibility to ensure that your investments are not only appropriate today, but every day that you are invested in that advisory relationship. It’s sales versus advice, broker versus advisor, today versus tomorrow.
So if financial jargon is a necessary evil, don’t let it keep you from understanding your investments and why you own them. Here are three criteria that you can use to “compartmentalize” the terms you hear that you may not understand. In addition, any reputable advisor will be more than happy to fully explain the in’s and out’s until you’re both on the same page.
- Risk refers to the “down side” of a particular investment. Everyone likes to hear about great returns, but make sure you understand the risk, or how much money you could actually lose in a worst-case scenario. Also be aware of the factors that could impact performance.
- Liquidity describes how fast you can access your money if you want out of an investment. Beware of surrender penalties, sales charges and tax ramifications. Sometimes there are trade-offs, like a guaranteed return, but only if you hold the investment for an extended period of time.
- Expenses refer to how much you pay for an investment. Fees, both direct and indirect, should always be clearly disclosed, as well as when they are payable (upfront, back-end, on-going, etc).
But perhaps more important than any other factor is this: before committing to any investment, you should clearly understand how it will help you achieve your financial goals, and how it will fit in with the rest of your portfolio. This is the true difference between having a “collection of securities” and a “purpose-built portfolio.”
Jargon exists on financial web sites, television broadcasts and within political speeches. Don’t let these words prevent you from making informed decisions about your finances. Educate yourself, ask questions of your advisor or seek additional help from a trusted source to get the answers you need to make the right decisions.
So when you hear jargon coming from a salesperson, you’ll be able to understand not only what they are saying, but the financial incentives that are motivating them to say it. Listen to what you hear, watch what you sign and you’ll be better prepared to protect yourself from the risks of confusing financial jargon.
For an extensive glossary of investment terms and definitions, please click here.
