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Unscrambling Financial Jargon: The True Meaning Behind Financial Advisors’ Vocabulary

Jargon is typically thought of to increase the efficiency and clarity of communication.  Actors reference “exit stage left,” which is the performer’s left as they look towards the audience.  This specific phrase prevents uncertainty.  The performer doesn’t wonder if the instructions are the entertainer’s left or the director’s left looking at the stage (which is known as “exit house left”).

As a consumer interacting with professionals, it’s easy to feel as though you need to decipher a foreign, unknown language.  Mechanics outline engine problems as if the average person understands the relationship between a camshaft and a valve spring; doctors reference the glenoid socket rather than a shoulder.  Financial advisors are no exception to the fascination with jargon.

If Financial Jargon is Meant to Provide Clarity, Why Am I Confused?

While jargon can sound impressive, showcasing expertise and knowledge, unscrupulous advisors can use industry-specific terms to avoid answering direct questions.  Do not fall for this misleading sales technique.  Make sure an advisor can address your question in terms you understand.  If a strategy is too complex to be explained in simple terms, proceed with caution as you may be locking yourself into an expensive, non-traded, proprietary product.

While there are synonymous terms such as referring to a stock as an equity holding, calling a bond a fixed-income position or referencing funds as capital, there are a few key terms to keep on your radar.

Red Flag Financial Jargon Buzzwords, Proceed with Caution:

  • Guarantee: The very nature of investment markets precludes the certainty of a precise and predefined annual return percentage. If this term is being used, the advisor is presenting an insurance product such as life insurance or an annuity.  Annuities are often one of the most oversold financial products.  Typically, doom and gloom sales presentations are made to potential clients.  As the clients are nervous about pending disasters, the advisor presents a guaranteed return as a solution without the possibility of losses.  The catch?  Often, the guaranteed return is before fees or the “sales load.”  Make certain all fees are provided in writing and determine your return after the sales loads are taken out, which may be starkly different than presented.

 

Information from MorningStar.  Calculations are based on American Funds’ Growth Fund of American – A Share has a 5.75% sales commission versus a load waived share class. Past performance is not indicative of future results.
  • “A Share,” “B Share” & “C Share”: These share classes are signifying the type of compensation an advisor received for selling a mutual fund. “A Shares” are up front-loads, or commissions, received by an advisor, typically not exceeding 5.75%.  “B Shares” are back-end loads or deferred commissions received upon selling the mutual fund.  “C Shares” are level-loads or on-going commissions for as long as you own the investment.  By law, these commissions must be disclosed to an investor; however, they are typically disclosed in a lengthy agreement and not verbally discussed.  Share classes are outlined on your monthly/quarterly statement.  If you see any of the above share classes or “Class A, Class B or Class C” your advisor is likely receiving commissions for selling you a financial product, potentially in addition to an investment management fee.  To avoid this cost, seek an advisor who utilizes “No Load” mutual funds, i.e., the advisor does not receive commissions to sell a specific product.

 

  • Fee-Based Advisor: While the emphasis of this conversation typically related to the fact that a client pays an advisory fee, often, the investor is unaware that a fee-based advisor can potentially collect commissions on sales of insurance and investment products, as well as 12b-1 fees, administrative revenue sharing agreements, soft dollar compensation, etc. When working with a fee-based advisor, demand all conflicts of interest and fees are provided in writing.  Critically determine if the advice is being made in your best interest or the interest of the advisor’s compensation.

  • Team Approach: Many advisors tout a team approach, but most typically, a group of advisors mainly share office space and overhead. Do they collaborate or does the advisor unilaterally make all decisions?  Is there a succession plan?  What happens if your advisor retires or gets hit by the proverbial bus?  Seek a group of advisors that run a business, not a practice of siloed advisors all operating under separate strategies.

 

  • Independent: In an attempt distance themselves from a larger brokerage firm, many advisors setup “Doing Business As” often referred to as DBAs.  Advisors affiliated with larger brokerage firms often rebrand to “Smith and Smith Investments of _____” or “Smith Group Advisors an Independent Firm of ______.”  These firms may have slight differences from the home office shops; however, they still bascially must meet the franchise’s requirements such as utilizing approved investment offerings and potentially meeting specific sales criteria.  Ultimately, these practices are not free of the conflicts-of-interest like that of truly independent firms.  Ask a firm if they have any affiliation or direct brokerage requirements.

 

Financial jargon and the numerous investment specific terms are important to understand and discuss with an advisor. As you enter a relationship or are evaluating your existing relationship, the terms mentioned above will help you identify potential conflicts-of-interest and determine if you are paying unnecessary fees.  You hired a financial advisor for calculated decisions but always listen to your gut feelings.  Trust but verify.  If something sounds too good to be true, it likely is.  Ask for further clarification and always request information in writing.