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Don’t Talk Down to Investors

Depending on which study you read, it is easy to build a pretty woeful picture of the average investor. A study by the SEC, the “Study Regarding Financial Literacy Among Investors,” issued in 2012 as a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, reviewed numerous other quantitative surveys on the financial literacy of U.S. retail investors. The data indicates”…investors do not understand the most elementary financial concepts, such as compound interest and inflation.” Further, when it comes to other investment information, such as the need for diversification, the differences between stocks and bonds and investment costs and their impact on returns, most investors do not grasp the concepts. Since that study, not much appears to have changed, and while higher-net-worth clients are generally more investment savvy, we have found that there is still a large knowledge gap.

All too often, unfortunately, lack of knowledge can be confused with inability to understand. This can lead to marketing and education that may appear patronizing (“everything is fine, don’t worry about it”) rather than informative (“let me explain what I think you should do and why”). In the post-financial crisis era, many investors want to be more involved and understand why certain ways of investing may benefit them. For example, an explanation of why diversification may benefit an investor, why alternatives may be an asset class to consider or why fixed income is still an important part of an asset allocation strategy goes a long way toward allaying potential concerns during times of challenging market environments. Investing is an area where informative and educative communication is critical, during good times as well as bad. The key, of course, is to strike the right balance between jargon-heavy communications that may overwhelm your audience and overly simplistic information that may be perceived as condescending.