Investing and financial planning, like other fields, have their own buzzwords and terms. Those of us in the profession use those terms so often that we don’t always stop to think that some of them might be unfamiliar or confusing to our clients. We also don’t always remember that some terms might have slightly different meanings to us than they do to the general public.
Unfortunately, financial professionals don’t always remember to explain the words they use. It’s easy to forget that clients aren’t necessarily familiar with terms such as asset protection, standard deviation, diversification, and asset allocation that are everyday language to an advisor.
Just as unfortunately, clients too often hesitate to ask professionals to explain unfamiliar words. My years of experience as a financial planner have taught me that almost all new clients come in with some embarrassment or shame about their finances. One source of that feeling is a belief that they ought to know more about investing than they do.
If you think “everyone else” knows the meaning of asset allocation or the difference between bonds and stocks, then you probably will be hesitant to ask an advisor to explain those terms to you. You will probably be even more hesitant to ask questions if the advisor does explain, but you don’t understand the explanation.
Remember, though, that helping you become more comfortable with the language of the financial profession should be part of an advisor’s job. Asking for—even insisting upon—clear definitions is part of your job as the client. After all, it’s your money that’s under discussion. If you interpret a particular term one way, and your advisor means something quite different by it, the consequences of that misunderstanding could be cold, hard financial ones.
One useful strategy to help ensure that you and a financial advisor understand various terms in the same way is to reflect back what you think you’ve heard the advisor say or what you think a statement means.
Suppose, for example, a financial planner has suggested you need to consider some asset protection strategies. The word “assets” to you means primarily the money in your investment portfolio, and of course you know generally what the word “protection” means. To you, then, “asset protection” might mean “making sure my investments are safe.” You could respond to the advisor with a statement such as, “What I hear you saying is that I should change some of my investments to funds that have less risk. Is that right?”
This would give the advisor a chance to explain no, that isn’t what he meant at all. Then he could clarify that “asset protection” to him meant making sure you wouldn’t lose everything you owned in case someone sued you after slipping and falling on the steps of the rental house you owned. He might be suggesting you form a corporation or limited liability company that would then own the rental property.
It may seem simpler just to ask the advisor directly, “What do you mean by asset protection?” The disadvantage of this approach is that his answer might use additional terms you don’t understand, so it still might be confusing. After two or three such questions, you might be too embarrassed to ask further.
Reflecting back what you think you heard, however, helps the other person know more precisely what you understand or don’t understand. It can be an efficient method of clarifying a potentially confusing topic. It’s an effective way to make sure that both you and your advisor are talking about the same thing or trying to solve the same problem.