One of the most frequent sales tactics that is used by financial advisors is convincing you they are financial experts. This is a critical step in the sales process because advisors know you do not question the advice of experts. You will buy what they are selling because they are experts.
What if the advisors were not financial experts? How do they convince you they are experts? Another popular tactic is to use words they believe you won’t understand. After all, one definition of an expert is a person who knows more than you do on a particular topic. The use of confusing terms helps advisors convince you they are financial experts.
For example, rather than tell you a portfolio is high risk they refer to it as high beta. Stocks and bonds are not securities they are asset classes that have different performance and risk characteristics. And, diversification is based on Modern Portfolio Theory. Relatively simple concepts become complex when you do not understand the terms that are used by advisors.
There is a simple solution. You could reject prospective advisors who use terms that are designed to impress. This is not an effective form of communication and who wants to meet with advisors who provide confusing, difficult to understand information. You may terminate a current advisor for the same reason.
There is another alternative. InvestorWatchdog (www.InvestorWatchdog.com) has built a Dictionary that is based on terms that advisors say confuse investors. The service is free and no registration is required because it is accessible on our external site. Go to the website, click on Get the Facts, and click on Dictionary. There you will find definitions, in easy-to-understand language, for more than 1,000 frequently used terms. In some cases, the definitions also tell you why the information is important. For example:
- Financial fiduciaries are people who hold positions of trust. They are held to the highest ethical standards in the financial services industry.
- Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) are permitted to provide financial advice and ongoing services for fees. Non-RIAs and IARs are limited to selling investment products for commissions.
- Most RIAs and IARs charge fees for investment services that are a percentage of assets. For example, a 1% annual fee on $500,000 of assets is $5,000.
- Most RIAs and IARs charge hourly and fixed fees for planning services which is the same way CPAs and attorneys charge for their specialized knowledge, advice, and services.
- Diversification is a strategy that allocates your assets to several types of investments (domestic stocks, bonds, foreign stocks, REITs, and money market). The role of diversification is to reduce your risk of large losses.
- A wrap fee is also called a bundled fee. For example, the fees charged by advisors, managers, and custodians are wrapped into one fee that is usually billed quarterly in advance.