It’s no wonder that our clients look slightly dazed when they leave a meeting with us.
This article originally appeared in the October/November 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
In the financial industry, we’ve gained a reputation for talking in a way that no one outside the industry understands. We’ve developed our own little language—a sort of gibberish. In fact, I would venture that we often don’t fully understand much of what we’re saying.
This idea came up in a recent conversation with a nonfinance colleague. She has a Ph.D. from Harvard in computer science, and Fast Company named her one of the most creative people on the planet. Translation: She’s really smart. I was showing her the S&P Persistence Scorecard, and we came across this phrase: “Random expectations would expect a rate of 6.25%.”
She asked me to explain. I responded, “Of course, I know what it means. I just have no idea how to explain it.” She asked another colleague, a statistics guy. He managed to explain what it meant, but then pointed out that in the real world the notion of “random expectations” doesn’t really make much sense.
Now, please don’t get caught up in this one example. You may know exactly how to explain the idea of random expectations of 6.25%. However, this experience got me thinking of all the other words and phrases we use, such as “risk management,” “standard deviation,” and even “volatility.” Would you like to be talked to like that? It’s no wonder that our clients look slightly dazed when they leave a meeting with us.
Here are the problems: First, if we really don’t understand the terms, our explanations to clients may be less than accurate and lead to some serious problems. Second, even if we do understand them, other people’s understanding of those words may not line up with what they really mean. When we say “risk,” we’re probably referring to randomness within a set of defined boundaries. When my mom thinks of risk, she’s just as likely to equate it to what we might call “uncertainty.”
To solve both these problems, we need to start by making sure we know what we’re talking about before discussing it with a client. Then, we need to make sure that the client thinks the same thing.