Securities Industry Lingo May Interfere With Financial Advising

Study finds investors are more willing to invest in what they understand

Imagine going somewhere people are supposed to help you, where you’re assured you will be in good hands. Imagine arriving there and realizing everyone speaks a language that’s completely foreign to you. According to a study conducted by Invesco Ltd. in partnership with a firm specializing in language strategy, this hypothetical situation may be similar to how investors feel when meeting with brokers about alternative investments. Brokerage firms have created billions in proprietary products to sell to Main Street. Now, they need a good marketing company to convince the average retail investor that this is what they want to invest in.

The yearlong study, titled The Power of Alternatives, found that certain buzzwords that are generally accepted in the industry, such as “alternative investments” and “derivatives,” may overwhelm investors and turn them off to potentially beneficial investments. According to the Wall Street Journal, only 23 percent of investors would prefer to invest in “liquid alternatives,” while 77 percent chose “alternative mutual funds that are bought and sold like any other fund,” despite the fact that both options mean the same thing.

In order to become certified as a financial adviser, many study terms like “derivatives” and “liquid alternatives” so extensively that such language becomes secondhand to them. When working at firms, it’s common for brokers to speak the same language, which means it can become easy to lose sight of the fact that not everyone understands what they mean when they ramble on about “non-traditional investments.”

According to the study, while the industry may default to the term “long-short equity fund,” only 11 percent of those surveyed selected that phrase, while nearly two-thirds chose “funds that focus on more consistent returns.”

Fortunately, the study not only identifies the problem, it also offers a solution. While it might be hard for financial advisers to break old habits, the study provides options for words and phrases that sound more like plain English to investors, making them more likely to pursue high-risk alternative investments with a misperception about the risks of these investments.

According to one Invesco strategist, instead of throwing unfamiliar lingo at customers, advisers may find it beneficial to “shorten the learning curve” by focusing on the way such alternative investments will impact investors’ portfolios and allow them to achieve their financial goals.

However, the study had many critics. According to the Wall Street Journal, some experts recognized that the study may be a marketing push from Invesco instead of a way to benefit and advocate for investors.

Speaking to the Wall Street Journal, Josh Charlson, director of manager research for alternative strategies at Morningstar Inc., said it is important that investment advisers do not oversimplify alternative investments, as they are still high-risk opportunities and their complexity may be off-putting “for good reason.” Charlson concedes that there is still a place for alternative investments in any portfolio, though, and that making them easier to understand could be beneficial to investors.

Our law firm has handled many cases involving alternative investments which were misleading, including 100% principal protected notes by Lehman Brothers, which weren’t actually collateralized and lost tremendous valve when Lehman Brothers collapsed. Wall Street routinely tries to mischaracterize the true nature of investments by offering safe or innocent names to many alternative investments. However, it is important to determine whether internally they are simply trying to put some lipstick on a pig.

When investors have suffered losses due to the misconduct of a financial advisor or brokerage firm, their only avenue to loss recovery is through securities arbitration. Silver Law Group is a nationally recognized securities arbitration law firm representing investors worldwide. We work on a contingency fee basis to recover investment losses caused by broker misconduct. Contact us today for details or to have your case evaluated by one of our experienced securities arbitration attorneys.