The investing industry is like a foreign country; they do things differently there. For a start they operate by a completely different set of rules to other sectors; they enjoy average levels of pay most professions can only dream about; and the major players generate the same sort of media interest as celebrities do.
Then, of course, there’s the language barrier. From credit default swaps to yield curve roll-down, investment professionals love their gobbledygook. Indeed it’s strangely addictive. Investment journalists, for example — the very people who are supposed to explain investing to the layman — pepper their copy with the same convoluted and often meaningless phrases the so-called experts use.
So, what is it that makes this industry so reluctant to use plain English? All right, showing you know your hurdle rate from your compound annual growth rate does lend you an air of sophistication. But there are two bigger and more sinister reasons for the liberal use of investing jargon.
First, using language that the vast majority of people don’t understand adds to the complexity of investing. Managing other people’s money is extremely lucrative. Those that earn a living from it know that if investors discover the truth, namely that successful investing isn’t actually rocket science at all, they may well choose to dispense with their services. Their technical jargon and protracted terms and conditions help those intermediaries to justify their existence.
Secondly, and more importantly, gobbledygook is part of the sales pitch. Josh Brown summed it up perfectly when he wrote:
That explains the use of phrases like risk parity, absolute return, upside capture and, my particular bugbear, downside protection. These terms are not just meant to confuse; they’re used to mislead. The truth, quite simply, is that investors are rewarded for the level of risk they take. If you take more risk you can expect greater returns; if you want less risk, you’ll have to accept lower returns. It’s blatantly dishonest to suggest that investors can somehow enjoy the best of both worlds by using an expensive fund or strategy that sounds sophisticated but in fact just offers a different balance of risk and return.
It’s time the regulators were much more insistent on the use of plain English. In the UK, for example, the rules of the Financial Conduct Authority state that all customer documents should be “clear, fair and not misleading”. Most companies fail that test and yet go unpunished.
How refreshing, then, that the campaign group Fairer Finance has recently launched a campaign for simpler, clearer language in the financial sector. It wants the FCA to set higher standards and to hand out fines to companies that don’t comply. Please support the campaign if you can.
In the meantime, refuse to buy any financial product that isn’t explained to you in terms that you fully understand — and don’t allow technical jargon to lull you into a false sense of security. Remember the link between risk and return. If it sounds too good to be true, it probably is.
If you’re interested in investment industry doublespeak, I can highly recommend The Devil’s Dictionary by Jason Zweig from the Wall Street Journal. It’s available free on Jason’s website, and as well as being a useful resource for consumers, it’s also, in places, laugh-out-loud funny.