The Need for More Effective Communication in the Investment Business

In one of my favorite psychology books, Mindless Eating, there are a number of interesting studies that show how the way food is presented or described can have a huge impact on they way it’s viewed or rated.

For example, a group of researchers took two pieces of day old cake. One was simply labelled “chocolate cake” while the other was given the much fancier title of “Belgian Black Forest Double Chocolate Cake.” They were exactly the same, but when given the choice, a majority of people chose option number two with the fancy name. Not only did they choose it more often, but they actually rated that it tasted better too.

This is why restaurants are always trying to come up with new and exciting ways to describe their menu options, even though the food is mostly the same in many places. The financial industry tries to take a similar approach by using complex jargon to get people to invest in their products or services.

According to a new study, it turns out this is the wrong way to go about this. Finance people love to push complexity, but what people crave is simplicity, especially in how something is presented or explained to them. Yesterday the Wall Street Journal highlighted a study undertaken by Invesco Ltd. about alternative funds:

The findings seem to show a preference for simplicity over jargon. For example, the study found that investors respond better to the phrase “alternative mutual funds that are bought and sold like any other fund” instead of “liquid alternatives,” even though they are technically the same thing.

This is like a version of the chocolate cake study turned on its head. The research focused on liquid alternatives, a fast growing segment of the fund management industry that can be confusing for both clients and the advisors or consultants trying to sell them. Here’s a nice graphic from the same story that shows the words to avoid when talking about these products:


We’re still in the early stages of liquid alt funds. The fund companies are still trying to figure out the correct message to attach to this group. Advisors are looking for ways to comfort worried clients by providing access to different portfolio strategies. I’m sure there are a number of advisors out there using these products who don’t understand the risks involved. Investors are always searching for solutions to a potentially difficult market environment. Many of these investors will end up investing in products they don’t understand or shouldn’t be involved with in the first place. There will be growing pains.

One of the biggest reasons I think non-finance people have a difficult time with the markets is because it’s rare that those in the industry can explain how it all works in plain English. Part of this is because many on Wall Street are incentivized to sell a seemingly endless supply of new products to unsuspecting buyers. It’s not in their job description to tell the truth. But another reason for this disconnect is the fact that communication is generally a skill that’s lacking for those who aren’t part of the sales or marketing department.

Plenty of finance people assume their clients or potential clients are looking for proof of their brilliance, so they shower people with jargon to try to impress them. In the process most end up talking over the head of the person they’re trying to impress, leaving everyone worse off. Little do they realize that what their clients really need is for someone to tell them the truth in a way that actually makes sense and resonates with them. Clients don’t help themselves in this respect because many are looking to be sold something that just doesn’t exist, so both sides are at fault here.

My friend James Osborne says the era of “trust me” finance is dying. I hope he’s right, because that style of advice does no one any good on either side of the aisle. I think to get there we need to have more people in the industry who are willing and able to effectively communicate in an honest and transparent way. I may be biased by my surroundings but I’m definitely seeing a push for this in a majority of the younger up and comers in the world of finance that I interact with. Most of the people I talk to don’t like the old way of doing things that is shrouded in sleight-of-hand sales tactics. I’m hopeful more people will see that there’s a better way of doing business.

When you mix good client communication skills with people who are looking to do right by their clients, everyone wins.

An Alternative Investment by Any Other Name is Still… (WSJ)
Mindless Eating

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. jz commented on Aug 11

    I read your friend’s essay. a few comments
    — the paternalism / autonomy parallel between medicine and financial advising is strong. I’ve found that a strong materialistic hand works best for many. People talk autonomy. They won’t admit it, but when they’re scared they want someone else to make the decisions.
    –Eric Topol is the best.
    –my daughter uses Henrietta Lacks’ cancer cells in her research ; no shame there at all.

    • Ben commented on Aug 11

      I’m not familiar with Topol so I guess I’ll have to check out his book. I agree with you that many people need the guidance of others. Lots of people know what they’re supposed to do, but just can’t change their habits (or they need an expert). Very cool that your daughter does cancer research. I work at the Van Andel Institute where that’s one of our scientist’s main research focus areas.

      • jz commented on Aug 11

        the VAI influence shows. You have a wonderfully scientific mind.

        • Ben commented on Aug 13

          Thanks, I’ll take it but I don’t have anything to do with the science work there. But the scientific method is a great starting point for many other fields.

  2. Mark Zoril commented on Aug 12

    As usual Ben, thoughtful piece. (How do you produce all this stuff week in and week out?) Unfortunately, I am too cynical about this. After 20 years in the business, I think much of the complexity in communication is intentional and necessary to support fees and revenue. I have worked hard to try and distill our messages to clients and prospects in a simplified way. It has really improved my job satisfaction and I can tell that the people I work with find it refreshing. They like “getting” it. When you go to the other side and eliminate all the nonsense as you work with investors and consumers, it is very liberating. Unless they are true believers in the complexity, I am sure many industry practitioners would be relieved to talk with their clients in far simpler terms.

    In fact, a few years ago I was at a conference and the speaker, Mitch Anthony, was sharing how, as he worked with advisers, one of the common themes he heard from them was, over time, how they dreaded their client reviews because they would go over the same market, performance, economic nonsense. A part of his guidance was to help them steer the conversation in another direction.

  3. Jarrett Płonka commented on Aug 13

    Interesting! I second Mark’s comment pondering how you can come up with so many interesting pieces every week.

    Just to add to that thought, in my profession (law), the process and procedure is complex and bewildering to people without that experience, even if there’s usually a method to the madness. The rules developed after many years of experience (consider it an example of the Chesterton’s Fence Paradox), so I always try and explain it to clients as though I were only able to speak in “Wikipedia Simple English”.

    As far as I can tell, clients appreciate the demystification.

    • Ben commented on Aug 13

      Makes sense. I’ve heard similar things from doctors about their bedside manner with patients. It can make a huge difference, but it something most people don’t think about enough.