Published September 15, 2005

During the last century, one of the major accomplishments in the United States was the completion of the intercontinental rail system. There were many obstacles to this project, not the least of which were the formidable mountains of the West.

The engineers had to decide to go around, over, or through them. Going through them was no easy task. I am told that crews would begin tunneling on each side of the mountain and as each crew neared, they would set off explosions and take seismic readings to assure that the two routes were coming together. Failure simply meant that they would have two tunnels.

These seismic tests are a good metaphor for communication. Send a message. Receive the message. Check for accuracy. Proceed. Send again. Receive. Check. Proceed.
This process is essential when it comes to your money and investing. In our “politically correct” society, everyone doesn’t always mean what they say or we don’t hear what they mean. I call this the “He-said-he-heard-he-really-meant” problem. I would like to try a few examples, mostly with tongue-in-cheek, but see if you can see some of yourself in the humor.

Let’s start with the stock market. Broker says, “Your stock has experienced a market correction.” Investor heard “Correction! I just lost 40 percent of my investment.” Broker meant, “Don’t gripe at me. You should have known that this stock was a high-risk investment.”

Broker says, “If your portfolio is properly allocated, then it is said to be totally efficient. This means that your holdings are negatively correlated and that when the Sharpe ratio and the standard deviation are aligned you should optimize your total return assuming the Betas are consistent.” Investor heard, “if your portfolio is blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah.” Broker meant, “Don’t keep all your eggs in one basket.”

Broker says, “Our research department is forecasting a significant upside potential for this stock.” Investor heard, “This stock is a high-risk flyer,” Broker meant, “Our firm has taken a large position in this stock and I need to sell my quota.” You get the idea?
In the interest of fairness and a little fun, there is so much politically correct gobbledygook in the financial services industry, I can’t help but poke some fun at financial planners too.
Financial planners say, “Most people don’t have the time or expertise to coordinate all of their financial affairs.” Client heard, “I’m no rocket scientist, but this stuff isn’t that difficult.” Financial planner meant, “If I can convince him that this sounds like rocket science maybe I can make my rent payment this week.”

Financial planners say “Your stockbroker or insurance agent is not trained in all the disciplines of financial planning.” Client heard, “This guy must be a genius.” Financial planner meant, “If I can convince him that I am a genius, maybe I can pay my BMW payment this week.”

Financial planners say, “A comprehensive financial plan consists of an income and cash flow analysis, investment review, including a detailed portfolio analysis, a thorough estate plan with tax projections, and estate-tax-reduction strategies, an income tax review, a complete insurance audit, and more. All this is yours for only $450.” Client heard, “A comprehensive financial plan blah, blah, blah, blah, blah, blah, $450!” Financial planner meant, “I’ll plug in a few numbers and let the computer spit out a lot of boiler plate.”

How about the accountants? Accountants say, “You’ve got a rather complex tax situation here.” Client heard, “Oh, no. I’m gonna be audited by the IRS.” Accountant meant, “I’ll have to run a couple of extra tax schedules.”
Accountant says, “This area of the law is not clearly defined.” Client heard, “I wonder how much it’s going to cost me to get the definition.” Accountant meant, “I don’t know the answer, I’ll have to look it up.”

Life insurance agents are not immune. Agent says, “The policy contains many wonderful features. It has excellent loan provisions so that when you factor in the earnings on the accumulation portion and subtract the accrued interest, the net cost is minimal. It also includes waiver of deposit, a very reasonable target premium, the internal mortality company is AAA-rated and has a very low debt to equity ratio when you include our junk bond and mortgage numbers. The premium is only $312 per month.” Client hears, “Blah, blah, blah, blah, blah, blah, blah, blah, blah, $312!” Agent meant, “It’s a good policy that meets your needs and budget.”

I could go on about bankers, estate-planning lawyers, trust officers, charitable planners and many others in the financial services field.

The bottom line is if you are not sure what your financial advisors really mean when they are using jargon or politically correct sounding phrases, ask them to stop and explain it in terms that mean something to you. What he said may not be what you heard or what he meant.

Tom Mills & Jonathan Gates are partners in Mills, Parker & Gates LLC, a registered investment advisor. If you have questions or topics, you may call or write Tom or Jon at 809 Broadway Sonoma CA 95476 (707) 996-7800, FAX (707) 938-8668 or e-mail
suntrm@aol.com.