Three-quarters of investors struggle with technical terms, according to consumer testing carried out by the IA in partnership with The Wisdom Council.
Savers said they had difficulty understanding a range of commonly-used terms, with less than half able to correctly explain income, return, growth and yield.
Despite half of savers citing risk as the most important factor when selecting a fund, the IA’s research revealed that the risk was perceived negatively and the link between risk and reward was not well understood.
There were also wide discrepancies between what savers typically regarded as short, medium and long-term time horizons for holding a fund.
Petronella West, chief executive officer at Investment Quorum, said: “Our clients are pretty sophisticated but they find the language used in the investment world indescribable and incomprehensive, especially when they have to try and understand smart beta, asset allocation, geographical sector, the language that we use.”
However, she added: “The rise of the robo, and the language used on Moneyfarm or Nutmeg works – we have to find ways to cater to customers to make it more appealing and less scary and anything the fund management industry can do to make it clearer is great.”
Increased regulation partially to blame
Adrian Lowcock, head of personal investing at Willis Owen, said: “Part of the problem is the increase in regulation over the past 10 years has made it harder for companies to feel confident producing documents that a typical investor would first understand and secondly actually find interesting.
“The challenge is much greater than most in the industry realise; for example we mix up simple terms, referring to investors as both savers and investors which itself can confuse people.
“There is a massive gap when you first start investing between an investor’s knowledge and what is required to be a successful investor. Basic principles of investing such as diversification, risk and portfolio construction are too often assumed to be known or just never explained.”
Likewise, West agreed and said regulation is partially to blame as managers try to ensure they are abiding by the requirements.
She said: “For example, how funds are ranked as high risk and low risk. Equity funds are deemed to be high risk which is ironic in today’s world because equity funds are probably lower risk than bond funds. But, [the industry] uses colours like red and high risk, and the reality is that real assets are the only way to make money.
“So, we have this contradiction between trying to make things describable and trying to protect ourselves against the regulator. Don’t get me wrong, I think we have the regulator we deserve because we’ve been crap at it as an industry, but I think the investment world needs to talk to the plain English world.
“The way the language is used by modern apps, the way the millennials are talking, and we’ve got to work out what they want to hear rather than what we want to say.”
To tackle the ongoing issue, the IA has provided a series of recommendations to help fund managers address these issues and provide greater clarity when communicating about their funds. These include looking at a number of key regulatory disclosure components and the aim is to reflect IA interpretation of the relevant legislative provisions.
It also aims to reflect the findings from the consumer research, in particular, what it says about customer understanding and considers the thought process firms should go through when writing for retail customers.
The trade body said as well as using plain language, it is recommending fund managers use terms consistently across their communications and listing some examples of words and phrases that customers struggle with so savers are able to compare products more easily.
Lowcock said Willis Owen launched its Starter Portfolios last year which would be accompanied by a series of educational emails. “Each one gives an explanation of some jargon or theory such the difference between active and passive, what is diversification,” he said.
“Such educational support in the industry is rare as there is a lot to explain and it isn’t always easy to do so. I think this [IA] initiative is a good idea as the gap between industry speak and what investors are familiar with has only been growing.”