TheChek News Flow

DAX:

MDAX:

SDAX:

The industry needs to mind its language and adopt plain English

Are you frequently frustrated and perplexed by the modus operandi of financial companies? Perhaps your friends and family have reached a consensus view that financial advisers, wealth managers et cetera are personae non gratae.

You probably noticed the Latin references in that paragraph, but how many did you spot? In fact, there are four — consensus isn’t often thought of as a Latin term.

Our prime minister may well have spotted them all, having drawn on his Classics degree throughout his political career. In the past year, Boris Johnson has dropped into ancient Greek during a speech to the UN, told the radio station LBC that his favourite politician was Pericles, and referenced the Roman emperor Augustus after removing the whip from 21 Tory MPs.

As a Classics graduate, I confess to enjoying these references. But I also think they are simply a way of showing off and should be reserved for Downing Street dinner parties.

You may think dropping a Latinism makes you look clever, but when trying to communicate with the general public it is not a clever thing to do.

There’s a reason why we call them dead languages — for most people they don’t resonate at all.

Why, then, do so many firms in the investment industry insist on using Latin and Greek terms?

There is already concern about the level of jargon and acronyms in the financial world. Not everyone speaks fluent investing, yet some of the language used implies some secret world that only an elite subset can navigate.

One example is the widespread use of ex-ante and ex-post charges disclosures, referring to expected and actual costs and charges respectively. For those not familiar with Latin, ex-post means “after the fact”, as opposed to ex-ante, which means “before the fact”, or pre-sale.

They both feature in regulations called Mifid II (which stands for the second part of the Markets in Financial Instrument Directive — ironically, this regulation is designed to increase transparency in financial markets across the EU). 

Mifid II requires investment firms to explain — and I quote — all annual ex-post costs and charges related to both the financial instrument(s) and also investment and “ancillary” service(s). And yes, there goes another Latin term — this time at the hands of regulators.

Caveat emptor (let the buyer beware) is frequently used when talking about the level of responsibility that consumers take for their decisions. And it often makes its way into headlines of articles about investing intended for public consumption. I might even have been guilty of this myself, too. But what’s wrong with a simple “buyer beware”?

Meanwhile, the Greek letters alpha and beta are two commonly used measurements to gauge how fund managers perform, relative to their peers.

Alpha is the excess return (also known as the active return) that a fund gives above a market index or benchmark that represents the market’s broader movements.

Beta is a measurement of the volatility of the fund (how its performance moves up and down) compared with the market.

If that’s all Greek to you, I wouldn’t be surprised. They are widely used and yet the names do nothing to aid our understanding.

Some fund managers have been spotted putting performance into the context of an annus horribilis (horrible year) for most asset classes (Michael Browne of Martin Currie in 2018), or for their fund (Personal Assets Trust said 2013 was an annus horribilis due to its large holdings in gold).

Using such references may impress peers in the investment industry. But for the customers whose money is invested, it’s excluding and unnecessary.

Too many firms in financial services persist in this habit. And the use of one term, ad valorem — which I’ve spotted being used by some advisers, accountancy firms and wealth managers, sometimes even in the name of the firm — raises an important question. When companies use Latin to describe how they will go about charging you, are they just trying to sound clever in a bid to distract you from paying higher rates?

Ad valorem is defined as being “in proportion to the value”. It goes up and down as the value of the goods (that is, a portfolio of shares and funds) on which it is charged goes up and down.

When used as a charging basis on investments, ad valorem means that the greater the value of your investment, the more you will pay for receiving advice on it. Note that you’re not paying more because the product or service you’re paying for is bigger or better. It’s the growth on your own capital that you’re paying extra for.

In some instances, that might be tolerable. The fund manager deserves some credit when our investments rise in value — but how much of this growth was down to their skill and judgement? And what about the long-term impact of how it affects the actual value you get from their service?

The answer is that it acts as a drag on growth, especially when the effect of those fees is compounded over many years of saving. 

However, it appears that few people understand this. According to research carried out on behalf of Interactive Investor this month by Opinium, only 17 per cent of over 2,000 UK adults surveyed knew what ad valorem meant. By extension, that means a lot of people may not understand the charges they are paying on their investments and how they add up.

The alternative is to pay fixed fees in pounds and pence on your investments — intriguingly, there’s no equivalent Latin or Greek term for this that I’ve heard of. 

The investment platform that I work for charges a fixed monthly fee and you’ll find fixed annual fees of £500 to £1,000 on offer from a minority of financial advisers — but plenty of platforms and advisers charge a percentage of your investments. 

For investors with smaller sums to invest, paying fixed fees could be more painful at the outset as the charges may be higher than percentage fees. But for those with larger portfolios, fixed fees are likely to be more cost effective, as well as providing a better basis for comparison. 

Regardless of the fee structure, all investment firms should speak to their customers in everyday conversational language. And I would also throw in the challenge that everyday language should be used within the industry too. Anything that’s a barrier to understanding internally must be stopped; it either feeds through to external customer communications or there’s the danger that it might. Once you normalise the use of Latin and Greek terms within the workplace, they are more likely to creep on to the website, into brochures and email newsletters.

We’re a jargon-rich industry already. Plain English is what investors deserve.

High level of uncertainty over whether bank will cut rates in Mark Carney’s swansong

Investors are facing one of the most uncertain Bank of England rate decisions in years, with markets split over whether policymakers will cut interest rates for the first time since 2016.

The nine members of the monetary policy committee must judge whether the economy has enjoyed a strong enough post-election bounce to justify keeping rates on hold, or whether continued Brexit uncertainty amid a period of weak growth justifies decisive action now.

“The Bank of England is the most interesting of the central banks in the G7 right now,” said Fabrice Montagne, chief UK economist at Barclays. “Unlike the other G7 economies, the UK is facing fundamental challenges and choices that could have a variety long lasting effects on the economy.”

Traders see Mark Carney’s last policy meeting as a cliffhanger, and are pricing in a 45 per cent chance of a cut to 0.5 per cent, prices in swaps markets showed as of Wednesday afternoon.

Market expectations have been on a wild ride: they rose from as little as 0.5 per cent at the start of January to as high as 70 per cent, before cooling in recent days.

“It is rare for market pricing to be so equivocal,” said economists at Goldman Sachs, who think the decision is “hanging in the balance”.

Dovish comments from several rate-setters set off the expectations, and while recent economic data — including labour figures and PMI surveys — have shown signs of improvement there has yet to be a definitive swing in either direction.

“Some degree of post-election bounce is evident and in our view it might be prudent to see more data before acting as soon as January,” said HSBC’s chief European economist Simon Wells. The bank expects a cut in May, rather than January.

In contrast, Deutsche Bank is expecting a move this week thanks to entrenched uncertainty over the UK’s future relations with the EU and the fact UK growth has been below potential for the past two years.

“Ultimately, we expect the MPC to favour a risk management approach to monetary policy, pulling the trigger on a January rate cut,” the bank’s UK economists wrote in a note to clients, noting that evidence of a post-election “Boris bounce” has been mixed.

Mr Carney could choose to ease pressure on his successor Andrew Bailey by pushing for a cut now, said Mr Montagne of Barclays, who noted that falling oil prices could weigh on inflation and create a fresh headache for the bank.

“Against that backdrop, a rate cut in January would clearly make it easier for incoming governor Bailey to ease into office. Mario Draghi set a precedent recently at the ECB by cutting just before handing over to Christine Lagarde,” he said.

The previous rate changes under Mr Carney had all been priced in, leaving an unusual level of uncertainty over this week’s decision, said Mike Riddell, head of UK fixed income at Allianz Global Investors.

“We believe the market has moved too aggressively to price in UK rate cuts, and anticipate the BoE will hold steady,” he said.

* Air France-KLM Raised to Outperform at Bernstein