I was driving with my father-in-law last weekend. The vehicle ahead had a strange license plate. It read “Code 4.” He explained in radio talk – ten code – it meant “All clear, situation under control.” Ten code was a method for emergency responders to abbreviate radio chatter and dates back to the 1930’s. However, various jurisdictions don’t use the same standard. If Code 4 has different meanings, imagine the added confusion in a big disaster with responders from several cities. More agencies have replaced their ten code with plain English. Rather than saying “Code 4,” they may say “All clear.” That makes sense.
Investors on Main Street may prefer plain English rather than financial jargon. What is a CDO, arbitrage, hedging, beta, and even risk management? What do they mean? As a product of financial reform, I’ll share an example of how “Plain English” may help (or not) the investor in making more informed decisions.
Suppose you’re looking for a financial advisor, or you want to keep tabs on the one you have. Generally, professionals providing investment advice must register with the SEC and/or state authorities. There are approximately 12,000 investment advisors (firms) registered with the SEC. Advisors file Form ADV, we’re required to update it annually, and it’s available to investors.
With the theme of greater transparency under the Wall Street Reform Act, advisors must now file Form ADV Part 2 – the Brochure – in a new format. It’s intended to help investors better asses the businesses and risk profiles of advisors. It includes expanded disclosure and shall be written in “Plain English.”
Wall Street might benefit by reading “A Plain English Handbook: How to Create Clear SEC Disclosure Documents.” In that guide, Warren Buffett voiced his approval for disclosure in plain English. His writing tip was “I pretend I’m talking to my sisters…Though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them. My goal is simply to give them the information I wish them to supply me if our positions were reverse.”
This world would be a better place with more straight arrows. Investors want their advisors seated on the same side of the table. I totally agree with full disclosure, identifying conflicts of interest, and how they are managed. Good relationships are based on good communication. Talking plain English makes a ton of sense.
However, I see some challenges after updating our Brochure. The old process was more “fill in the blanks/check the boxes” with some narrative; and the new one emphasizes the later. It’s similar to taking two types of exams – multiple choice vs. an essay. One has greater subjectivity. How will regulators apply consistency while reviewing thousands of disclosure brochures? And life may be more difficult for investors who are comparison shopping for advisors. The new plain English brochures are less like reviewing food labels, new car brochures, or other disclosures that are in a more standardized format.
May your financial life be Code 4.