Advisors know they operate in a sometimes difficult-to-understand industry, with its specialized products and the language that surrounds them. The average American doesn’t understand all of the lingo that pervades the financial services industry and it costs them time and money.
AARP Financial Inc. surveyed Americans about financial jargon and found that, among other things, more than half (52 percent) said they had made an investment mistake because they were confused or didn’t understand an investment. Fifty-four percent said they don’t read financial literature because it is too difficult to understand. More than eight out of 10 respondents said their car insurance policy was easier to understand than a mutual fund prospectus; 79 percent find it easier to read prescription drug inserts.
Fewer than 33 percent said they understood terms like basis point, expense ratio or index fund well enough to explain them to someone else, yet those are the terms used to describe financial vehicles. Maybe that’s why 67 percent gave the financial services industry a C, D or F grade when it comes to explaining saving and investing to consumers.
“The language of investing remains a foreign tongue to too many Americans,” says Richard Hisey, chief investment officer at AARP Financial. “We’ve made it incredibly easy for Americans to spend and create debt but unnecessarily difficult to invest comfortably and with confidence.”
What’s even more troubling than people not understanding the jargon is the fact that many of them think the use of confusing terms is intentional:
- Fifty-four percent believe a major reason for confusing jargon is to distract
- people from focusing on the fees they will pay.
- More than three-fourths believe the materials from financial companies are more about selling than educating.
- Sixty-three percent say a major reason jargon is used is to make a product or service seem more impressive.
- Just under half believe confusing jargon is used so the consumer feels less confident about handling his own finances.
Hisey calls the findings a call to action for the industry, saying no one benefits from the confusion. “What value does disclosure bring,” he asks, “if the average investor can’t comprehend it?”