7 Terms Advisors Use That Make Clients Go “Huh?”

You speak. Clients nod.

Sometimes they nod with a twinkle in their eye, thinking “Wow, it all makes perfect sense. I feel great about this.”

Sometimes they nod with a blank stare and polite smile, wondering “What the heck does THAT mean…”


Don’t leave your clients in the dark. Here are 7 financial terms you use, but clients actually don’t understand, and how to rethink each one.

“Alternatives”

This word is often used to describe a wide range of financial instruments, outside stocks or bonds. It can refer to the instrument itself, such as a future or a swap, or it can refer to the underlying assets such as commodities and real estate. The logic behind grouping all these instruments in one category is that they usually represent a small part of the client’s portfolio. The problem is that the category is very vague and confusing to a client that doesn’t know about these instruments.

For the purposes of describing a client’s asset allocation, what clients care about is the underlying assets, rather than the instruments themselves. “Alternatives” should be split into more specific categories that describe what the client is exposed to, such as commodities, real estate, currency, asset backed securities, etc.

“Diversification”

Everyone involved in finance knows that diversification is essential for all clients regardless of their risk aversion. However, this simple concept has been complicated with the infinite number of index funds available. The fund classifications might make sense to you, but the jargon will confuse your clients. In addition, some pooled investments contain a mix of bonds and stocks that change in value on a daily basis. Some advisors make the mistake of listing the names of the funds a client is invested in, without giving an overall breakdown.

It’s important to break down your client’s current asset allocation in a way that they can understand. For example, the percentage invested in particular asset classes, such as stocks and bonds, would be more meaningful to a client. Luckily there are tools to help you do this. A benefit of account aggregation is that it combines and summarizes the data from all of a client’s holdings. Combined with a client portal, this allows both you and your client to see how the client’s investment is allocated. It can be broken down by asset class, industry and company, and is updated as market values change.

“Momentum”

This is a word that is loved by technical analysts. However, the physics term can cause confusion when used in a financial context. Momentum is used to predict an object’s movement based on its mass and velocity. However it’s a fallacy when used in finance, since stock performance alone won’t predict future returns. Whilst it’s true that in the short term prices will react to irrational behaviors, in the long term “momentum” means very little.

Ultimately it’s important to make sure your clients understand that past performance doesn’t guarantee future returns. When doing a commentary on a portfolio’s performance, it’s better to focus on company, industry and market performance, rather than the price performance on individual investments.

“Hidden fees”

This phrase is usually used as a marketing ploy when describing the fee structure of the competition. However, instead of re-assuring the prospective client that their money is safe with you, it has the opposite effect. Clients want to feel secure when investing in the financial markets, instead of feeling like they will be ambushed by advisory fees.

The best thing to do here is to avoid the phrase altogether. It’s also wise to examine your current fee structure. Fee structures vary between practices and can sometimes be complicated. If you’re unable to explain how your fee structure works within a short paragraph, you might want to re-examine how you charge your clients. You don’t want someone else accusing you of charging “hidden fees”.

“Compound rates”

This concept applies to money market funds, deposits, and anything where the yield is reinvested. However, the concept doesn’t apply to other kinds of investments. Yes, earning a positive rate of return in succession on a stock portfolio can mimic the compounding effect. But since returns fluctuate and can be either positive or negative, stock portfolios don’t benefit from compounding.

When reporting a rate of return, avoid getting confused between different measures. When looking at past performance, an average rate of return is a more appropriate term. When looking ahead, the rate of return that you need to meet to achieve a client’s goal is essentially a benchmark. Analysts can also devise an expected rate of return on an investment. The bottom line is that although compounding is a great theory to teach your clients, the reality is that very few investments benefit from compounding.

“Headwinds”

This is a word to describe tough economic conditions on a portfolio. But describing economic conditions in eloquent language is often unnecessary, and can confuse clients rather than educate them.

There’s no need to embellish how a portfolio is performing. Instead, focus on your economic outlook and how you are managing the economic conditions. This shows that you’re addressing the issue rather than providing an excuse.

“Alpha”

This is a useful measure of excess return over averages or benchmarks. However, it can sometimes imply what a client can expect as a return for your advisory services.

To avoid a misunderstanding, be careful how you report your alpha. It’s okay to use it as a measure of past performance, but again be sure to explain to clients that past performance doesn’t guarantee future returns. Some advisors like to report alphas to differentiate themselves from other advisors. But remember there are plenty of ways to differentiate yourself from the competition.










confused face

Notice another word that gives clients this face?

Post it in the comments!

Jason Williams Jason is an aspiring finance professional, working towards a BSBA in Finance. Currently an Intern at Blueleaf, Jason’s interest in the financial industry comes from a strong ability in analyzing and planning for the future, as well as a general appreciation of how markets work. Feel free to connect with him on LinkedIn!
  • Marty Morua

    “Please Mr. Advisor, stop trying to impress me”

    So its 1996, I get licensed, begin working on the trading desk and start taking calls entering trades for RIA’s (financial advisors) and answering their questions.

    Maybe they were trying to impress me with their ”know-how” fancy-shmancy words.

    As I got to know them I started asking “Is this how you speak with clients?”

    Gently I began suggesting they tone down, use easier layman’s language because most of their clients (the people who’s money they manage) just don’t speak Wall-Street. Sure, it shows industry savvy but its intimidating and…………in some cases a turn off.

    Good work with the article Jason!

    ………….. just my .02 cents here………

    • Jason Williams

      Thanks Marty! Glad you can relate with the article.

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  • Neal Merbaum

    Good article, Jason. One comment about momentum: It’s now considered by many to be a factor along with size and style, and there’s much academic research to support this view. See “Fact, Fiction and Momentum Investing” by Clifford S. Asness et al.

    • Jason Williams

      Thanks for the comment Neal. This is very true. I should clarify that I’m not against momentum as a method of investing. But when you talk about momentum with clients, you might insinuate that past performance can lead to returns, which is not always the case. Even when you are using a four-factor model (recently upgraded to a five-factor model), you use all the factors to screen for investments, not momentum alone. Momentum is a legitimate concept, just be careful how the term is used in front of clients.