Confusion About Financial Jargon Preventing Decisions

One in six Americans have not signed up for their company’s retirement plan because they don’t understand how it works, and 44% don't understand how an individual retirement account (IRA) account works.

Partly due to this confusion, 19% of respondents to a survey of 1,203 adults by AARP Financial Inc said they are very confident they will have enough money to live comfortably in retirement.

More than half (52%) of the adults surveyed said they’ve made an investment mistake because they were “confused” by or “didn’t understand” an investment. The most common two mistakes cited were failing to or waiting too long to invest because of confusing information (cited by 30%) and making an investment they regretted because they didn’t understand it (28%).

Financial Services Industry Doesn’t Make the Grade
Two-thirds of survey respondents gave the financial services industry a “C”, “D” or “F” when asked to grade it on how well it explains saving and investing to consumers – worse than car mechanics and doctors. In fact, 73% of those surveyed believe financial professionals use more jargon than their car mechanic and 52% say financial professionals use more jargon than doctors.

Unfortunately, many Americans surveyed said that poor communication is intentional:

  • Over half (54%) believe that a major reason jargon is used instead of simpler terms is to distract people from focusing on the fees they will be paying;
  • 78% said they believe that materials from financial companies are more about selling than educating;
  • 63% say that a major reason jargon is used is to make a product or service seem more impressive;
  • 49% believe a major reason jargon is used is to make the consumer feel less confident that they can handle their own finances.

“These findings are a call to action for the financial services industry,” Richard Hisey, chief investment officer at AARP Financial said. “Ultimately, no one is well-served by this confusion — not the industry, not consumers and certainly not our relationship with the investing public. We talk a lot about transparency in this industry but not enough about simplification and understanding. What value does disclosure bring if the average investor can’t comprehend?”

Confusing Information Prevalent
Almost half (41%) said information from financial services companies is “not so” or “not at all” helpful. Also, more than half of those surveyed (54%) said they do not read financial literature because “it’s too hard to understand.”

Not surprisingly, half of those surveyed described themselves as “not so” or “not at all” knowledgeable about investing and less than one-third of those surveyed said they understood the terms “basis point,” “expense ratio,” or “index fund” well enough to explain them to a friend or co-worker. In comparison to other communications, 82% said their car insurance policy is easier to understand than a mutual fund prospectus, and 79% find prescription drug inserts easier to understand.