It is a reality of our daily lives that many of our endeavors are shrouded in jargon, complexity, and mystery. This is of course a natural and necessary byproduct of living in a complicated world. The terminologies for discussing computer programming, performing medical procedures, or flying an airliner (just to name a few) must be unique to themselves.
The world of finance and investing is no exception. Jargon looms at every turn: P/E ratios, Book Value, EBITDA, PEG Ratio, TTM, MRQ, Earnings Per Share (EPS), Diluted EPS, Exchange Traded Fund (ETF), Closed End Fund, No-Load Fund, and on and on and on. The mind reels at the prospect of understanding it all. It comes as no surprise then that many people hire someone to manage investments for them. But this raises a critically-important question:
Does the customer clearly understand what the person they have hired is actually doing?
If the answer is “no”, then there could be problems. This may seem contradictory. How could the customer understand what the advisor is doing if there’s so much complexity and specialized knowledge involved? After all, he’s the expert. While this is true enough, it is nonetheless my contention that the spewing of jargon can act as a smokescreen for investment professionals — or for any professionals, for that matter. If customer John Doe is overwhelmed by the sheer complexity of an advisor’s proposed plan and awestruck by his technical prowess, John may be less likely to question the process and more likely to doubt whether he can grasp the subject or have any useful input. This of course plays nicely into the hands of the professional. Needless to say, however, it’s totally wrong.
The details of investing might be complex, but the strategic overview should be transparent, rendered in plain language, and clearly understood. A deep resonating gong of “common sense” should resound in a client’s mind as an advisor is talking: “These are the portfolio strategies we are implementing…” GONG. Yes, I understand them.
“This is how we plan to implement them with your portfolio…” GONG. Yes, that makes sense to me.
“Here is how we get paid for managing your account…” GONG. Yes, that’s totally clear.
And so on and so forth for every question a client might have about how their money is going to be managed. Is it liquid? Can I withdraw funds at a moment’s notice? What are the investment expenses? How is progress monitored and reported? All these and more should have clear, unambiguous, common-sense answers.
All the best,