August 16, 2011
‘Finglish’ Is the Problem
All the headlines about “financially illiterate” Americans miss something important. The language financial professionals use can be incomprehensible.
In this humorous video, David Saylor, whose job is basically “word consultant” for Invesco Van Kampen Consulting, walked around downtown Chicago and asked people to define industry terms such as “dollar-cost averaging” and “beta.”
One person got one answer right. (After watching the video, readers may need to consult Saylor’s glossary, below.) Even a seemingly simple concept – “transparent fees” – was misinterpreted. It means that fees are fully disclosed but was interpreted to mean “invisible.”
No wonder people are confused by the “Finglish” – financial English – thrown around by their mutual-fund companies, 401(k) managers, and other investment professionals, Saylor said.
Turning the tables on the industry
His work also explores the subtle distinctions people make when the industry attempts to use familiar terms, such as “guarantee” or “nest egg.”
“In some cases,” he said, “investors hear the opposite of what we are saying. It’s not what we say, it’s what people hear.”
He has learned, for example, that individuals have a healthy skepticism when they feel as if they’re being sold. They prefer that investment professionals talk about portfolio “diversity” rather than “predictability,” which they view as implausible. “Guaranteed lifetime income” is also dubious, but “protection” seems like a realistic goal.
Saylor “tests” different words by putting 30 people in a room. He employs a technique first used by politicians to register how people feel when they hear certain words. When a speaker uses an investment term that generates an emotion, participants turn a dial toward zero for negative emotions and toward 100 for positive emotions; 50 is neutral.
These tests also have found that people prefer “strategy,” which implies that the professional is working with the client, over “solutions,” which implies that the professional will try to dictate what should be done. But people like the term “investment income” because it implies they earned the money. But scratch the pervasive “nest egg.”
Saylor said one woman in a focus group asked, “What am I? A bird?”
The investing public seems savvy after all.
- beta: compares the volatility of an investment to the volatility of a benchmark, such as the S&P 500 index. A beta of 1.0 means the investment has gained or lost as much as the benchmark, while a beta of 0.5 means the investment has a history of half the gains and half the losses, and is more stable.
- bottom-up analysis: rather than starting at the macroeconomic level and drilling down through the industry to the company’s stock, bottom-up investing is based on analyzing the underlying strength of a company’s markets, prospects, and finances.
- dollar-cost averaging: investing incremental amounts in a stock or mutual fund in order to reduce risk by purchasing the security at various market prices.
- large-cap value: “blue chip” companies with stock prices that are low relative to the value of the company itself.
- open architecture: investors are not locked into a few proprietary products offered by their financial company and can choose from a variety of outside products.
- transparent fees: full disclosure of investment management, service, and other fees.