President's Blog - Do Investors Know What You Are Talking About?


According to Investopedia, a separate account is “a privately managed investment account owned by an investor seeking to manage a pool of individual assets.”

But you know that already, don’t you?

Guess who does not know that.

Your clients.

Spectrem’s study on Millionaires and their knowledge level about investment terminology determined that a significant percentage of wealthy investors do not know the definitions of somewhat basic investment terms. In The Financial Literacy Gap Among Millionaires, investors with a net worth of at least $1 million were asked “which of the following is the best definition of a separate account?” and 51 percent did not know the correct answer.

Only 33 percent of the investors got the correct answer, which in the study was “an account managed by a professional advisor seeking to invest in a group of individual securities”. 

Does that surprise you? 

Establishing separate accounts is a significant portion of an advisor’s daily activity with clients. For advisors, it is a basic part of their normal performance.  

And investors know their advisors are performing that task. This is not a situation where advisors are conducting business without their clients knowing about it. 

The incorrect or “I don’t know” responses in The Financial Literacy Gap Among Millionaires may just be a matter of failed understanding of terminology. Clients may know what you are doing, they just may not know what it is called.

Does that matter? Investors obviously need to know what you are doing with their money, but do they need to know the industry term for what you are doing?

The answer to that question is determined by how advisors discuss investment decisions with their clients.

The investment terms “alpha” and “beta’’ are also basic words. Advisors use those measures every day to determine the best investment path to take. “Alpha” measures performance of on investment against a market index, while “beta’’ measures the volatility of an investment in comparison to the volatility of the market as a whole. 

And guess what? Many Millionaires do not know the definition of those terms. In The Financial Literacy Gap Among Millionaires, when asked to differentiate between “alpha’’ and “beta” based on the definitions of the two terms, more than half of Millionaires did not know the distinction.

Again, the question must be asked “Does that matter?” Do investors need to know when an advisor is applying “alpha’’ or “beta’’ measures to an investment decision? Or do they just want to know why their advisor makes the decision, and not care what that decision is actually called?

On the 23-question test in the Spectrem study, only 53 percent of Millionaires received what might be called a “passing grade” by answering at least 70 percent of the questions correct. A majority of the questions were definition questions, although there were also questions asking about basic investment and financial decisions, such as what age should an investor be to receive the maximum return on Social Security benefits.

The Financial Literacy Gap Among Millionaires also determined that only 37 percent of Millionaire investors have taken a financial literacy course – ever. In high school, college, for employment or personal financial purposes, only 37 percent have ever been taught basic economic terminology.

And yet these investors are Millionaires. 

Which again begs the question: Does it matter if investors know the account you are creating is known as  a “separate account”?
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