You’ve talked to clients about diversification a thousand times, so you’re sure they know what it is. You might be wrong.
Financial planner and coach Rose Raimondo, owner of Calgary-based Raimondo and Associates, routinely needs to break down the concept to ensure clients understand that commonly used piece of jargon.
She knows clients don’t get it when they tell her, “I’m diversified. I deal with five institutions.” She explains that’s complexity, not diversity.
To help them grasp the concept, she draws a chart listing how a portfolio can be diversified. “I say, ‘For example, You can diversify by stocks, bonds and cash. You can diversify by management style. You can diversify by geographic location, or by passive versus active,’ ” she explains. Each individual term is defined first.
Likewise, when clients say they’re sick of investing in mutual funds, and want to invest in stocks instead, she explains how a mutual fund isn’t an investment per se, but a way of investing in the market. It’s a pre-built portfolio.
Terms like “mutual fund” and “diversification”—which advisors use every day—don’t actually mean anything to many clients. So it’s your responsibility to use them sparingly and back them up with explanations. And be alert for cases when clients misunderstand or pick up erroneous definitions of common concepts from mainstream media, says Lenore Davis, a registered financial planner and senior partner at Dixon, Davis and Co. in Victoria, B.C.
Davis constantly monitors the terms she uses to ensure she doesn’t slip into words clients won’t understand. Rather than shelter clients entirely from jargon, she turns technical terms like “capital gain” or “asset allocation” into words they know, like “earnings” and “how your money is invested.”
“They are going to be bombarded with these terms wherever they go, so they need to understand what they mean,” she says.
Write better emails
Not only can jargon taint client meetings, it can also infect your writing. Verbose emails can make you seem cold and inaccessible; worse, clients could misunderstand you. People appreciate plain language, so avoid flowery words.
|See to it|
|Sooner than later|
|At your earliest
|You are requested to||→ Please|
|In order to||→ To|
|Provided that||→ If|
Put jargon in its place
Instead of talking abstractly about the markets, tell a client what a technical phrase means in the context of his portfolio’s performance, says Davis. For instance, don’t say, “absolute return.” Instead, try “this is how much your account has made.”
One of her favourite analogies helps explain a laddered bond portfolio. She uses the image of a freight train with several boxcars to represent a portfolio made up of bonds of different durations. Opening the boxcars represents cashing in the bond or re-investing in another bond that matures later than the others.
“I talk to them about the fact that the longest period their money is tied up is during the journey of the freight train,” she says.
“When the train comes into the station, you can open the doors and pull out whatever money you need, or you can put more money in, and then you move the boxcar to the back of the train and you wait.”
Likewise, when explaining various types of investment accounts, she draws three boxes—red, green and purple—on her whiteboard to signify RRSP, TFSA and unregistered accounts. Then she and her client discuss what each box can hold, how clients can access money and the merits of each box. To reinforce their meaning, Davis says she often photocopies this diagram for clients to take home.
Raimondo says she keeps charts and diagrams on hand to convey the concepts she’s most commonly asked about, from cash flow to how retirement savings are affected by marginal taxation.
“If I’m talking about the tax rates, I will bring out tax tables and show how it’s progressive,” she says. Her clients tell her seeing the rates clarifies how RRSPs and other deductions work.