If you have been reading my blog for any length of time, then you know that I am tough on my own industry. Although it is not my intention to criticize other advisors, I feel as though our industry has earned its reputation through plenty of corruption and self-serving advice.
This entry is going to be a bit different. It is actually TARGETED towards other advisors and it is an attempt to help them. Keep in mind that my writing is only my opinion, so if you disagree with me, please feel free to keep doing things your way.
Many advisors I know like to use industry jargon when they speak to investors. When this happens, it creates a few dynamics that are difficult to overcome. They are:
1. The investor’s eyes glaze over
2. They feel intimidated because they think they SHOULD know the terms
3. They stop listening to your presentation
4. They lose whatever trust they had for the advisor
5. They will not remember anything you said
You see where this is going….it is not good. If this sounds like you, then you are confusing people and are giving them facts and figures that they do not care about or understand. If they wanted to know every single detail, then they would not be sitting in your office asking for your help. They would not NEED your help…..they could do it themselves and save money.
Why would advisors do this? Is it because they want to sound smart? Maybe it is unintentional. Maybe not. It takes someone of average intelligence to do what we do…that is all. AVERAGE. So, it doesn’t really matter if your IQ is 137 or 100 because the clients do not care about that….they want to know that you CARE about them.
If you speak to them in language they understand and/or use analogies that they can relate to, they will learn more, trust you more, and ultimately will feel more comfortable referring their friends and family to you.
The following are terms or phrases that I try to avoid, along with how I try to communicate the same thing in layman’s terms. The CONCEPTS are important to teach, but you do NOT need to use the actual words….Feel free to steal my ideas or create your own.
ASSET ALLOCATION: This means how much of the money should be put into each TYPE of investment. The phrase “don’t put all of your eggs in one basket” ought to do the trick, but if you are too smart to use something that simple, try “Mrs. Waters, because of your medium tolerance for risk, I am recommending putting ___ percent of your money into ______. If you were more aggressive, we would put more <here>…if we go more conservative, more would go <over here>” Just explain WHY you are putting money in each asset class and explain that asset allocation never guarantees a profit or protects against a loss.
DIVERSIFICATION: Once the allocation has been determined (WHERE to put the money), then diversification means WHAT to buy within each category. The thought is that when one thing does poorly, there will be another investment that will do well and this will help offset the negative performance. This reduces risk. One way I explain this is to say “We have determined how many baskets we will use for your eggs, and we know how many eggs we will put in each basket (Allocation), but now we need to determine WHAT type of eggs to put in these baskets.” Should we use white eggs, blue eggs, rainbow eggs, hard-boiled, scrambled, etc……?*
RATE OF RETURN: Some people understand percentages, but many do not. Do you think those people are going to look you in the eye and say “I don’t know what you are talking about” when you are explaining that Investment A has averaged 6.78% per year? Instead of overwhelming them with percentages, try something like “Mr. Russo, if you had invested $10,000 in this investment 5 years ago, today it would be worth $13,882.” Easier to understand.
While I am on the percentage kick, I will also comment on using percentages to explain the loss potential of an investment. Don’t do it. Instead of “this option declined by 28% in 2008,” say “if you had owned this investment in 2008, your $100,000 would have dropped to $72,000.”
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS: Even though this seems intuitive to people in the investment business, the general public stops listening when they hear the word INDICATIVE. Instead, try “It rained 18 days last month. How many times will it rain next month?” After they realize that one has NOTHING to do with the other, they connect the dots: “so, just because this has averaged 6.78% per year DOES NOT mean it will do that going forward. Understand?”
BROKERAGE/NON-QUALIFIED ACCOUNT: These are technical terms for an investment account that is taxable. I like to go with “this account is like a savings account that allows you to buy investments. At the end of the year, we will send you a 1099 just like your bank accounts do.”
LIQUID: This one was even a surprise to me….many people do not know what this means. This is one term that I have had a hard time “kicking.” While liquidity means level of accessibility one has to their money, I have recently switched over to “you can get to your money easily.” Or, if something is illiquid, then it is “tough to get to without penalties or fees.”
DOLLAR COST AVERAGING: If you believe that the average investor can explain what this is, then you, sir, are delusional. Please do not mention this term unless you say something close to “we are going to invest your money over a longer period of time because usually this is a good idea. If the market goes down, we are buying more shares at cheaper prices. If the market goes up, we are buying fewer shares at the higher prices. This is NOT a fool-proof way to invest your account, but it is the more prudent option since I am not a master market timer.”**
If you use the term DCA, they are going to see a room full of statisticians with calculators…
There are dozens of terms that I try to refrain from using when speaking to the public, and to write about each one of them would take a full day. I wish I had realized earlier in my career that I needed to speak to people in language that THEY use and understand.
The point of this article is not to tell you how to deal with your clients, but rather to make you realize when you use industry jargon, and to encourage you to find an alternative way to communicate the same point.
Until next time.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
*Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.