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In investment world, all that Latin is just Greek to customers
ARE you frequently frustrated and perplexed by the modus operandi of financial companies? Perhaps your friends and family have reached a consensus view that financial advisers, wealth managers et cetera are personae non gratae.
You probably noticed the Latin references in that paragraph, but how many did you spot? In fact, there are four - consensus isn't often thought of as a Latin term.
The British prime minister may well have spotted them all, having drawn on his Classics degree throughout his political career. In the past year, Boris Johnson has dropped into ancient Greek during a speech to the UN, told the radio station LBC that his favourite politician was Pericles, and referenced the Roman emperor Augustus after removing the whip from 21 Tory MPs.
As a Classics graduate, I confess to enjoying these references. But I also think they are simply a way of showing off and should be reserved for Downing Street dinner parties.
You may think dropping a Latinism makes you look clever, but when trying to communicate with the public, it is not a clever thing to do.
There's a reason why we call them dead languages - for most people they don't resonate at all.
Why, then, do so many firms in the investment industry insist on using Latin and Greek terms?
There is already concern about the level of jargon and acronyms in the financial world. Not everyone speaks fluent investing, yet some of the language used implies some secret world that only an elite subset can navigate.
One example is the widespread use of ex-ante and ex-post charges disclosures, referring to expected and actual costs and charges respectively. For those not familiar with Latin, ex-post means "after the fact", as opposed to ex-ante, which means "before the fact", or pre-sale.
They both feature in regulations called Mifid II (which stands for the second part of the Markets in Financial Instrument Directive - ironically, this regulation is designed to increase transparency in financial markets across the EU).
Mifid II requires investment firms to explain - and I quote - all annual ex-post costs and charges related to both the financial instrument(s) and also investment and "ancillary" service(s). And yes, there goes another Latin term - this time at the hands of regulators.
Caveat emptor (let the buyer beware) is frequently used when talking about the level of responsibility that consumers take for their decisions. And it often makes its way into headlines of articles about investing intended for public consumption. I might even have been guilty of this myself, too. But what's wrong with a simple "buyer beware"?
Meanwhile, the Greek letters alpha and beta are two commonly used measurements to gauge how fund managers perform, relative to their peers.
HORRIBLE FOR CLARITY
Alpha is the excess return (also known as the active return) that a fund gives above a market index or benchmark that represents the market's broader movements.
Beta is a measurement of the volatility of the fund (how its performance moves up and down) compared with the market.
If that's all Greek to you, I wouldn't be surprised. They are widely used and yet the names do nothing to aid our understanding.
Some fund managers have been spotted putting performance into the context of an annus horribilis (horrible year) for most asset classes (Michael Browne of Martin Currie in 2018), or for their fund (Personal Assets Trust said 2013 was an annus horribilis due to its large holdings in gold).
Using such references may impress peers in the investment industry. But for the customers whose money is invested, it's excluding and unnecessary.
Too many firms in financial services persist in this habit. And the use of one term, ad valorem - which I've spotted being used by some advisers, accountancy firms and wealth managers, sometimes even in the name of the firm - raises an important question. When companies use Latin to describe how they will go about charging you, are they just trying to sound clever in a bid to distract you from paying higher rates?
Ad valorem is defined as being "in proportion to the value". It goes up and down as the value of the goods (that is, a portfolio of shares and funds) on which it is charged goes up and down.
When used as a charging basis on investments, ad valorem means that the greater the value of your investment, the more you will pay for receiving advice on it. Note that you're not paying more because the product or service you're paying for is bigger or better. It's the growth on your own capital that you're paying extra for.
In some instances, that might be tolerable. The fund manager deserves some credit when our investments rise in value - but how much of this growth was down to their skill and judgement? And what about the long-term impact of how it affects the actual value you get from their service?
The answer is that it acts as a drag on growth, especially when the effect of those fees is compounded over many years of saving.
However, it appears that few people understand this. According to research carried out on behalf of Interactive Investor this month by Opinium, only 17 per cent of over 2,000 UK adults surveyed knew what ad valorem meant. By extension, that means a lot of people may not understand the charges they are paying on their investments and how they add up.
The alternative is to pay fixed fees in pounds and pence on your investments - intriguingly, there's no equivalent Latin or Greek term for this that I've heard of.
The investment platform that I work for charges a fixed monthly fee and you'll find fixed annual fees of £500 (S$898) to £1,000 on offer from a minority of financial advisers - but plenty of platforms and advisers charge a percentage of your investments.
For investors with smaller sums to invest, paying fixed fees could be more painful at the outset as the charges may be higher than percentage fees. But for those with larger portfolios, fixed fees are likely to be more cost effective, as well as providing a better basis for comparison.
Regardless of the fee structure, all investment firms should speak to their customers in everyday conversational language. And I would also throw in the challenge that everyday language should be used within the industry too. Anything that's a barrier to understanding internally must be stopped; it either feeds through to external customer communications or there's the danger that it might. Once you normalise the use of Latin and Greek terms within the workplace, they are more likely to creep on to the website, into brochures and email newsletters.
We're a jargon-rich industry already. Plain English is what investors deserve. FT
- The writer is head of personal finance at Interactive Investor and a former winner of the Wincott Personal Finance Journalist of the Year award.