We could revolutionise the finance industry simply by explaining it in plain language, says AUT’s associate professor Aaron Gilbert.
Finance, like many industries, has developed a language of its own.
This jargon lets financial experts understand each other quickly and easily, using as few words as possible – but most ordinary people find these words confusing.
Research shows that if people are confused about what they’re hearing, it can make concepts much harder to understand.
You might switch off when you start to hear things you don’t understand. And if you don’t understand important things around your investments and money, such as your KiwiSaver scheme, this could affect your financial decisions.
Confusion over KiwiSaver
Jargon in KiwiSaver documents is a big problem for many people.
We found that this was the case when we did a study at AUT’s Auckland Centre for Financial Research, where I work as an associate professor.
Of the 48 people who took part, only 11 thought there was the right amount of jargon. Jargon was such an important issue that most people said they wanted to see definitions.
Our greatest concern, though, was that although many people wanted to engage with their KiwiSaver accounts, they couldn’t understand the information they were given.
this meant people simply put KiwiSaver decisions in the ‘too hard’ basket.
One word in eight was jargon
We also did a study on the main document required by KiwiSaver providers – something called a product disclosure statement, or sometimes called a ‘PDS’.
In this document, our research showed that 12.5 per cent of the words used in a PDS were jargon –that’s one word in eight.
We found that people needed to understand more than 100 different finance terms used in the PDS. That’s a lot of jargon to know and understand!
It’s no wonder many people feel confused about their KiwiSaver accounts, when the information they’re given can be so complex.
How did this jargon come about?
Jargon has often come about through history. Take the investment term, ‘coupons’.
Before computers, people who bought bonds were given a physical certificate that came with actual coupons. These coupons needed to be clipped off the certificate and sent in, so the investor could get their interest payment.
So, the term ‘coupon rate’ came to refer to the regular payments from a bond or other debt product. For most people, the term ‘interest rate’ makes more sense and, in fact, it can be used instead.
To keep track of these specialised terms, Campbell Harvey, a professor from Duke University complied a finance glossary of more than 8000 entries. That’s a lot of financial jargon. It’s no wonder we can’t keep up.
Jargon is useful when one financial expert is communicating with another person in the finance industry, because this ‘code’ lets them communicate precisely and efficiently.
For instance, the investing term ‘selling short’ has a specific meaning, which a simpler term like ‘selling’ doesn’t fully explain.
But issues arise when finance professionals communicate with everyday people, who aren’t used to hearing these technical terms.
Take the term ‘risk’. It’s a word that in our day-to-day lives tends to be a negative, used to explain activities that are dangerous.
But ’risk’ in finance simply refers to an opportunity, and finance operates on the principle that higher risk gives you the potential to make more money.
It’s very easy to see how misunderstandings arise, given how different the definitions of these common words are.
Pushing the plain English messages
Law-makers are trying to take the mystery out of finance by encouraging people to use plain English.
In 1998 in the United States, the Securities and Exchange Commission started to push for plain English disclosure.
Back in New Zealand, it’s clear that the Financial Markets authority (FMA) also supports clear communication that people can understand.
Documents that explain financial products should be presented in a “clear, concise and effective manner” and offer information for a “prudent but non-expert”, guidelines say.
What’s the bottom line?
There are many important reasons to demystify finance:
· If we want well-developed markets.
· If we want people to actively engage with their KiwiSaver schemes; and
· If we want people to have enough money to live comfortably in retirement.
Let’s start with the language we use.
Bonds: A bond is a fixed-income investment in which an investor loans money to a body (typically councils or the government) for over a timeframe for an interest rate.
First published 15 August, 2018.
Story by Aaron Gilbert.
Aaron Gilbert is an Associate Professor in Finance at Auckland University of Technology. He researches in a wide range of areas to do with the financial markets, including law and finance, corporate governance, and KiwiSaver.
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.