Cecily O'Connor
RedwoodAge.com
Can you explain the terms "basis point" or "expense ratio" to a friend?
If you're feeling tongue-tied about a definition, you're not the only one lost in translation.
Most retirement investors don't know what those terms mean, according to a recent AARP Financial survey. About two-thirds of respondents graded the financial services industry with a C, D or F when it comes to explaining saving and investing to consumers.
"The research shows that investing has become unnecessarily complex, confusing and, in some cases, intimidating," said Mac Hisey, chief investment officer at AARP Financial. "As a result, many American investors have saved too little - most with less than $50,000 for retirement - or are too intimidated to get started in the first place."What's most concerning is that investors may be making investing mistakes and missing opportunities because they find Wall Street terms to be too technical and confusing.
More than half of the 1,200-plus adults surveyed said they've made an investment in which they had a bad outcome - such as owing unexpected taxes or paying an early withdrawal penalty - because they felt "confused" by or "didn't understand."
AARP launched MoneySmarts.com with a basic glossary, financial quiz and a guide to five basic investing principles, among other features. The "jargonator" also defines terms in plain English, explaining, for example, that a basis point is 1 percent, a standard often used for such things as comparing mutual fund fees.
'Quality, Not Quantity'
The failure to communicate is often heightened around earnings season when
publicly traded companies report their latest quarterly financial performance
and jargon can run amuck. For example, anyone owning shares in Internet search
company Yahoo might be befuddled its report mentioning "TAC" or
traffic acquisition costs, which are payments to third parties that display the
company's advertisements.
Even so, a lot of what investors read comes from the financial services companies that manage their retirement accounts and other savings. Jargon is so prevalent in financial services communications that 73 percent of investors said the information is not helpful. When compared to other common communications, 82 percent said their car insurance policy is easier to understand than a mutual fund prospectus, and 79 percent find prescription drug inserts more digestible.
"Many people are more likely to read the nutritional information on a cereal box than read a mutual fund prospectus before they buy," Hisey said. "The recent efforts by the SEC to simplify the prospectus are a long stride in the right direction. Investors need quality, not quantity, of information."Less than one-third of those surveyed said they understood the terms "basis point," "expense ratio," or "index fund" well enough to explain them to a friend or co-worker.
Painful Consequences
The use of complex financial terms and jargon is not only causing a sense of
confusion, it is also costing money. One out of six Americans have failed to
sign up for a retirement plan at their job because they didn't understand how it
worked.
In fact, many Americans believe that poor communication is intentional: Over half believe jargon is used to distract people from focusing on the fees they will be paying.
Consider the following:
- 78 percent said they believe that materials from financial companies are more about selling than educating;
- 63 percent said jargon is used is to make a product or service seem more impressive;
- 49 percent believe jargon makes the consumer feel less confident that they can handle their own finances.
