Ignorance is Bliss … for Your Sales Guy

Before my children understood what a lollipop was, it was very easy to swap it out with an apple slice. I was looking after their best interests, after all. But what if I wasn’t a concerned mother? What if I were a manipulative saleswoman needing to hit a certain commission level on apples that month to stay employed; or worse, to win a crystal paperweight and bragging rights among my very competitive colleagues?

My example may seem strange, but if we apply this to personal finance, and not apples, the sad truth is this is how the brokerage world operates; and it may as well be rotten apples they are selling.

Perpetuating confusion is easy when you have created your own terminology. Most adults feel very childlike in the presence of polished and seasoned salespersons who throw around terms that are never explained. It is not uncommon for investors to sign on the dotted line, heads bobbing while thinking, “How embarrassing! I feel so stupid.  How do I not understand this?”

The answer: You’re not supposed to.

Early in my career, I managed to get a full-time gig writing at an investment firm when I understood very little about that world. The one thing I did know is I didn’t speak the language. And, language is everything, if you expect to understand the world you’re in.

It wasn’t until I felt confident in the land of “financial speak” that I asked the head of Marketing why we couldn’t just write these brochures using plain English. His reply explained exactly why the terminology was intentionally so foreign: There is money in confusion.

“I don’t know anything about cars,” he said. “And, when I see an ad talking about torque and turbo charge, I know I need to speak with a professional who can explain this to me. We want the investor to realize he can’t do this on his own so that he goes to his broker.” Good for the company. Good for the broker. But, good for the investor? Not so much.

Let’s see. If you didn’t know that a Class A share mutual fund carries a sales charge that can reduce your initial investment by as much as 8.5% before it even buys one share, you have a problem.

If you didn’t realize that a Class B share will deduct a sales charge if you sell shares before a set period of time, you have a problem.

If you didn’t realize that Class C and Class D shares will carry high annual fees (because they are not charging an up-front sales charge, like the Class A share; or a back-end/deferred sales charge, like the Class B share), you have a problem.

And, if you didn’t realize that all funds can carry a myriad of fees (sales loads, redemption fees, exchange fees, account fees, purchase fees, management fees, distribution/service (12b-1) fees, “other expenses” – and that there are options with no sales charges and low management fees – you are easy to fleece.

A great source of information on fees is the U.S. Securities and Exchange Commission website.

According to the S.E.C., “Fees and expenses are an important consideration in selecting a mutual fund because these charges lower your returns. Many investors find it helpful to compare the fees and expenses of different mutual funds before they invest.”

FINRA, the Financial Industry Regulatory Authority finds this topic important enough that they have a Fund Analyzer on its site so that investors can compare the costs of funds, which is very helpful.

Clearly, these agencies are aware that investors are typically ignorant and are not fluent in the language of sales charges and fees.  I knew this already from the many investors my husband and I meet with at our fee-only fiduciary Registered Investment Advisory Firm, ATI Investment Consulting, Inc.

“Nothing. I don’t think I pay anything.” We are often told this before we review the prospective investors’ existing portfolios. Clearly, if they really believed that everything was copacetic; they wouldn’t be looking to change advisors, would they?

Without too much effort, we can scan a statement and give a pretty good idea just how much they are paying; I can assure you, it isn’t “nothing”. In fact, it’s usually egregious – like 3% a year, not counting the sales charges.

Ironically, the do-it yourself investors who realize that their portfolios are in need of more professional management have come to us having inflicted little damage to themselves. In being suspicious of the brokerage industry, they did themselves a favor and opted to invest directly in no-load, low-cost mutual funds, and didn’t blow themselves up. Of course, these fund families tend to adopt a user-friendly, “plain English” philosophy because they do not have sales people to convince an investor to buy shares. These investors may not have sophisticated portfolios that balance the risks they are taking with their time frame, goals and returns; but the most important base is covered. They are not being bamboozled.

Not speaking the language is as good as wearing a “Kick Me” sign. Make sure that you work with someone who wants to explain everything to you before you invest and avoids confusing you or distracting you with jargon. Then you will know that you have chosen the apple slice because it was good for you, not because someone was paid to trick you.

Authored by: Anthony Dina Isola

Dina Isola, President of Real$martica, Inc. - COO and Director of Investor Relations, ATI Investment Consulting, Inc. Following a successful career in marketing communications in the financial industry, Dina and her husband, Anthony, founded a registered investment advisory firm, ATI Investment Consulting, Inc., and ultimately the idea for the educational company Real$martica, Inc. was born. In dealing with investors and hearing their concerns, she spearheaded ATI’s investor education efforts, coordinating with local libraries and townships to offer free investor education seminars. She has volunteered her time, writing financial articles and has conducted investor education classes geared to family financial matters. She is President of Real$martica, Inc. and is COO and Director of Investor Relations for ATI Investment Consulting, Inc. and personally handles all communications for both firms. She is active in her local business community and serves on the Brookhaven Business Advisory Council and is a member of the Three Village Chamber of Commerce. She earned a BA in English and Communications from Fairfield University. She is a registered investment adviser, and is a licensedreal estate salesperson in New York State.  Prior to founding Real$martica, Inc. she was a Vice President in charge of marketing communications for a privately-held investment management company in New York City.  She has worked in the financial industry since 1987. thumb_tony_isolasAnthony T. Isola,  President, ATI Investment Consulting, Inc. Anthony has married his passions, investing and education. He is President and founder of ATI Investment Consulting, Inc. (“ATI”) a registered investment advisory firm. His vast knowledge in matters of finance brings a well-rounded perspective to all that he does. As an educator, he has a natural ability to explain complicated economic and financial concepts and make the practical application of these concepts come to life. In working with clients, he recognized how overwhelming building a financial plan can be, especially when most investors are vulnerable due to their ignorance on financial matters. He prides himself on empowering investors to understand how to look out for their interests and not fall prey to financial arrangements that will take them off goal.  In addition to managing assets for clients, he has counseled investors on social security benefits, retirement income assessments, and college planning. He teaches history at Plainview Old Bethpage Middle School and oversees students’ participation in The Stock Market Game and financial literacy for the Plainview Old-Bethpage Central School District. He has taught financial related courses to children, parents and staff members in the district, as well as to Long Island residents. He holds a New York State Permanent Certification (in Social Studies). He earned a BA degree in Economics from Boston University and a MS degree in Secondary Education from Hofstra.  Prior to teaching, he worked as a foreign currency trader in New York City for large international banks.

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