Basic financial concepts are not difficult and can be understood by most people—with some guidance. In spite of that, finance has earned a reputation of being too complex for, and beyond the grasp of, the average person. As investment professionals, we do the industry and ourselves a great disservice when we fail to counter this myth. We make finance seem more complicated than it really is when we overuse financial jargon, acronyms, and other technical terms without considering our audience and making sure they understand these terms. While all the jargon may be fine when used among the inner circle of finance practitioners, remember that those outside our area of specialty, who don’t live and breathe that particular niche of the market, may have a hard time following the conversation—other finance professions included. We take for granted our daily exposure to, and experience with, industry terminology and assume others are equally familiar with it. It’s enough to intimidate even the most sophisticated investors, let alone the layperson. Clients come from a variety of backgrounds and have different levels of investment knowledge. Some clients think they know more than they actually do; others feel they know nothing. Whatever the case, we need to ensure investors are well informed and have the confidence to be engaged in their investments. Our industry, as a whole, can do a better job communicating with clients, and that applies both to the institutional and to the private client side of the business.

The Investor Education Fund, an Ontario Securities Commission initiative, released a report in 2014 titled “Insights on Canadians and online investor education.” The report concluded that, “On average, the top barriers to investing confidence include too much conflicting information, a lack of investing knowledge, and an inability to find an unbiased source of investment knowledge.” Interestingly, respondents from different age groups reported different primary challenges:

• Under 30: Lack of knowledge – This group doesn’t understand most of the terms that financial advisors and experts use (64 percent versus 49 percent across all ages).
• 30s and 40s: Lack of time – This group, most with full-time jobs, doesn’t have enough time to focus on their investments (57 percent versus 45 percent overall).
• 50 and older: Lack of trust – This group has conflicting information from too many sources, doesn’t know what to believe (40 percent), and is unsure where to find unbiased information on investing (36 percent).

In general, people are skeptical of what they don’t understand, and this is just as true in the investment landscape. Financial resources and advice are essential in building confidence and trust. Investors often feel overwhelmed by the sheer volume of information, and, according to Capital One ShareBuilder’s Financial Freedom Survey, “61 percent would like financial tools that offer step-by-step guidance.”

Effective communication and setting expectations also play key roles. Depending on their investment needs, investors will require, and should receive, pertinent information. An investment committee that is responsible for the financial assets of a foundation faces different objectives and constraints than an individual investor. It’s important for investors to understand that their portfolios are constructed with specific risk and return characteristics in mind. Having a discussion around what is expected of the portfolio and how it may behave in different market environments is crucial. No one likes surprises, especially on the downside. Managing client expectations for the portfolio and clearly communicating those expectations are key ingredients for a successful working relationship.

Informed clients are empowered investors. They’re more confident and tend to have more focused long-term objectives. They’re less likely to be distracted by noise in the market and less concerned by short-term disruptions. Encouraging open dialogue and presenting investment themes in a simple and concise manner allow clients educated decisions, which builds their confidence and leads them to a higher level of trust—both of markets and of advisors.

Financial literacy and, more specifically, investment education are more important than ever. New products are coming to the market every day. Investors must stay informed, and they look to us, the professionals, to provide them with timely, accurate, and appropriate information. Let’s keep it simple. Let’s keep it interesting. Let’s keep educating.

Please visit cfainstitute.org/investorrights for more information on CFA Institute’s Statement of Investor Rights.