Jargon Watch: 9 Buzzwords to Avoid
In order to be more transparent, financial advisors should strive to eliminate jargon when conversing with clients, argued Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif., in a recent Financial Planning column. Among the offenders she cited: adding alpha, yield curves, basis points and efficient frontiers.
We asked a few advisors to add the buzzwords that they thought confused clients -- and to offer us alternative phrasings where possible. Click through to see their list, or read Foss’ full column here. -- Kayan Lim
Volatility has a negative connotation and probably does not mean much to a client, says Steven Geri, a financial advisor for Savant Capital Management and head of eSavant Advisor, based in the San Francisco area. He prefers to say
the inevitable ups and downs of the market.
'Equities' tends to confuse people, says Andrew Todd, an advisor with Asset Management & Planning in Columbia, S.C.
I prefer [to use the word] 'stocks' for most clients because that's a term they have grown up with and can understand.
The notions of active and passive management tend to confuse clients, Foss finds.
If I asked a prospect with little financial background whether she would prefer active or passive investment management, she’d likely choose active, Foss writes.
Why? The word active implies that the investment manager is positively engaged with the portfolio, working for you, while passive suggests a manager who is disinterested and perhaps even lazy.
But the truth, Foss notes, is that active managers often fail to beat their benchmarks -- and then take extra fees for doing it. Rather than skipping the terms altogether, she says,
I go to the data here, reviewing historical active versus passive performance.
Advisors tend to throw around terms like large-cap, mid-cap and small-cap without explaining the basic principle of market capitalization, says Matthew Taddei, President of Taddei, Ludwig & Associates in San Rafael, Calif. It's
overused, not always understood, and makes us sound like we are selling and fitting hats, he says. Better to clearly explain the measure -- the number of a company's outstanding shares multiplied by the share price -- and simply explain that it's a way to classify companies by size, Taddei says.
Even though these terms are becoming more commonplace, some clients don't quite understand the concept, says Todd.
For many investors, we also take the time to explain that mutual funds and ETFs aren't investments per se but just vehicles with which to access multiple stocks at one time, he explains.
This word can cause confusion, especially in the context of references to non-correlated asset classes, Geri says. His alternative phrasing?
We invest in a variety of different funds that tend to do well at different times. It's not as specific, Geri concedes, but it emphasizes an approach that avoids putting all of a client's eggs in one basket.
This one is not so much jargon as a misnomer: These two are anything but simple, says Rosalyn Davis, another advisor at Taddei, Ludwig & Associates.
They do not follow same guidelines as an IRA, nor do they follow the guidelines as a 401(k). Not simple!
You may be better off just referring to
risk, Geri suggests.
Although people can likely understand that less is better, standard deviation is a fairly abstract concept, he says.
[I] prefer to either show the percentage of quarters with a negative return -- what clients generally worry about -- or a distribution of quarterly returns so the client can see graphically what historical returns have been.
The industry is rife with acronyms that can fall into what Taddei calls
the advisor's alphabet soup.
To the novice, it must all look like an eye chart, he says. Rather than falling into the acronym trap, he says, explain what each stands for at the outset of a conversation.
We asked advisors to share the buzzwords that they thought confused clients -- and to offer us alternative phrasings where possible. Click through to see their list.