Investment jargon debunked: beginner investors are overwhelmed by complicated fees, jargon and choices

Published by Edmund Greaves on 26 February 2019.
Last updated on 27 February 2019

Jargon busting: Do financial firms deliberately confuse customers?

Beginner investors are put off investing because companies make it too hard to understand key terms, fees and choices.

Earlier in February, city watchdog the Financial Conduct Authority (FCA) castigated fund managers for not use more "consumer-friendly" language in fund literature. 

As a result, Moneywise conducted a poll among its readership.

Astonishingly, of 1,225 respondents just under seven in 10 (68%) said they found investment information either sometimes or regularly difficult to understand.

And Moneywise readers are not alone.

Just 14% of people feel confident opening an investment account, according to research conducted by financial advice website Boring Money.

Holly Mackay, chief executive of the site, says: “When it comes to investing, confidence remains rock bottom, driven by short-term nerves about market uncertainty but also longer-term issues created by a lack of understanding.

“The industry’s failure to provide clarity on both what the objectives and characteristics of investments are, and what the costs involved are, means it is shooting itself in the foot.”

Boring Money also found that just one in three (34%) of stocks and shares holders felt confident that they knew what charges they were paying to hold the account.

This is set to change from April 2019 as regulation under wide-ranging EU directive ‘Mifid II’ is set to implement new rules to make providers show investors what they are being charged annually in pounds and pence instead of percentages.

Anthony Morrow, chief executive of  advice site OpenMoney, comments: “For most investors, this will be the first time they have received a detailed breakdown in pounds and pence of all the fees they pay for their investment each year – and the total amount may come as a surprise to many.

“There is always a cost to investing, but any charges you pay can have an impact on the size of your pot and the compounding effect of fees over time can make a big difference in the long term. Cheapest isn’t always best, but it is important that you feel you are getting value for the money you are spending.”

And Investment Isa provider Scottish Friendly recently asked regular savers (those who regularly saved at least £100 a month) what put them off investing.

It found the plethora of choices for what to invest in was dissuading many from investing at all, with 35% of regular savers saying this has put them off investing.

One in three surveyed (31%) said they would prefer a choice of fewer than 50 funds, much less than the thousands of funds widely available.

Kevin Brown, savings specialist at Scottish Friendly, says: “Many potential investors are telling us that too much choice can be off putting and confusing. There are thousands of funds on offer to UK investors at the moment, so it’s no surprise so many people feel confused.”

Moneywise curates a guide to 50 easily accessible, top-rated investment funds ideal for beginner investors who want to build their own portfolios. See the Moneywise First 50 Funds for more.

Jargon busted

Unfortunately, the FCA did not include an addendum in its statement about investment fund jargon to clarify what kind of language it wanted to cut out. 

So Moneywise has compiled its own list of key terms to help beginner investors:. 

Active management: Investment funds that are actively managed (as opposed to passively - see below]), are looked after by a fund manager who picks stocks to hold in a portfolio with the goal of growing their investors money or providing an income.

Bond: A bond is a type of debt that companies take on in order to fund expansion or other activities or that the government issues (often called gilts). Investors who buy bonds are lending money to the company or government, which will pay a regular income over a fixed period. Bonds are generally considered a less risky investment than stocks and shares. 

Compound interest: When you save money, as well as earning interest on your initial savings, you can also earn interest on the interest earned, which is known as compounds interest. For example, if you have £100 in a savings account paying 10% a year, after one year you will earn £10, leaving a balance of £110. In the second year you will earn £11 in interest as you are earning interest on the first year’s interest.

Dividend: This is the sum of money that is usually paid annually by a company to its shareholders out of its profits or reserve.

Dividend yield: This is the annual dividend expressed as a percentage of a company's current share price.

ETF: Exchange-traded funds or ETFs invest in a portfolio of assets in much the same way as funds. Unlike funds, they can be traded throughout the day.

FCA: The Financial Conduct Authority is the independent regulator of the UK’s financial services industry. It does not investigate individual complaints.

Fund: A fund is an investment vehicle that invests in a portfolio of assets. They are managed by a fund manager and individuals can buy into the fund through a stockbroker. Some funds target growth in value, while others deliver a regular income to their investors. Funds can come in the form of OEICs, investment trusts or ETFs (see below). 

Gearing: Gearing refers to the amount of loans or debt that a company takes on relative to the value of its shares. Gearing can be used to boost a company's cash flow so it can invest in new assets. High levels of gearing can indicate a high level of borrowing and debt a fund manager has undertaken.

Investment trusts: Companies which invest in a portfolio of assets. These companies are listed on the stock exchange. Individuals can then buy shares in each investment trust. Unlike funds, there are a finite number of shares available in each trust – this is called being ‘closed-ended’.

OCF: Ongoing charges figure, or OCF, gives  the annual cost of investing in a fund or investment trust as a percentage so that investors can have an idea of annual running costs. So if a fund has an OCF of 1%, for every £1,000 you invest, £10 goes on costs. This differs from the fee charged by the investment platform you use.

OEIC: Open-ended investment companies, or OEICs, are also funds that investors can buy ‘units’ in, but unlike Investment trusts, it can continue to grow in size.

Passive investing: Rather than using a fund manager to actively manage your funds, passive investors use tracker funds, which move in line with an index, such as the FTSE 100. They are usually cheaper than actively managed funds.

Robo advice: A form of advice that uses computer algorithms to recommend products or create investment portfolios, based on your stated financial attitudes and circumstances. Robo advice is generally cheaper than traditional alternatives.

Stocks and shares: Also known as equities, these allow you to invest in individual companies. The value of your shares will rise or fall depending on the performance of the company. You may also receive an income from the shares if it pays a dividend.

Stocks and Shares Isa: A tax-efficient savings vehicle that individual investors can use to build an investment portfolio. The annual limit allowed by the government is £20,000 for the 2018/19 and 2019/20 tax years.

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Leave a comment

"So if a fund has an OCF of 1

"So if a fund has an OCF of 1%, for every £1,000 you invest, £100 goes on costs."

Oh, really?

How did that rather glaring error get past the proofreaders?

Hi Michael,

Hi Michael,

Apologies and thanks for flagging that typo. It has now been corrected.

Best,

Moneywise Edmund