Money Management Lingo
Jargon is everywhere. Whether it is mechanics performing a tune-up, or lawyers preparing briefs, language specific to an industry can be found just about anywhere. Financial advisors are no different, and we think it is important from time to time to explain just what words we are using and what we mean by them. After all, if you aren’t clear on what we are saying, our conversations won’t be as meaningful for you. Below, you will find a few of the most common terms related to money management.
Your assets are like the organs that sustain your financial being and feed your financial worth. Cash is the consummate asset, because you can do just about anything you want with it. That said, cash is not expected to generate future income unless you invest it in other assets, such as stocks, bonds, commodities, real estate, and similar holdings.
A fiduciary is a person who acts on behalf of another person, or persons to manage assets. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other’s best interests. A fiduciary might be responsible for general well-being, but often it involves finances — managing the assets of another person, or of a group of people, for example.
Certified Financial Planner™
A Certified Financial Planner™ (CFP®) is a formal recognition of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement. Owned and awarded by the Certified Financial Planner™ Board of Standards, Inc., the designation is awarded to individuals who successfully complete the CFP Board’s initial exams, then continue ongoing annual education programs to sustain their skills and certification. Earning the CFP designation involves meeting requirements in four areas: formal education, performance on the CFP® exam, relevant work experience, and demonstrated professional ethics. A CFP® is obliged to uphold the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence as outlined in CFP Board’s Code of Ethics. Further The Rules of Conduct require CFP® professionals to put your interests ahead of their own at all times and to provide their financial planning services as a “fiduciary”—acting in the best interest of their financial planning clients.
Mutual and Exchange-Traded Funds
You might own some assets directly, such as shares of stock, a rental property, or a gold bar. For efficient investing, it’s common to own shares of mutual funds, exchange-traded funds (ETFs) or similar structures, which in turn hold batches of these underlying assets on your behalf.
Fund managers such as Dimensional Fund Advisors or Vanguard provide and manage the mutual funds and ETFs in which you invest. Each manager typically offers a varied “family” of funds representing different batches of assets – such as funds for investing in domestic, international or emerging markets stocks; funds for investing in short-term bonds; funds for investing in Real Estate Investment Trusts; and so on.
Investment accounts are “containers” for holding your mutual funds, ETFs and various types of individual assets. Accounts are typically “regular/taxable,” or “tax-advantaged,” with different tax treatments depending on the type of account. Taxable accounts are basically any accounts that are not subject to special tax treatment. Tax-advantaged accounts include structures such as IRAs, Roth IRAs, HSAs, 401(k)s, and 529 plans.
Your Custodian and Broker/Dealer
Custodians hold your investment accounts on your behalf. If they are also a broker/dealer, they execute transactions upon your direction, such as adding or removing money into or out of your account, or buying or selling holdings within it. Your custodian also periodically reports account activities to you, typically monthly. Here at Garcia Wealth Management Group, Schwab typically serves this essential role, including submitting their independent reports directly to you for your review.
Investable assets are assets that are already part of, or readily available to add to your investment portfolio. Money currently “tied up” in your home, business or similar ventures is certainly of worth to you, but it’s not considered an investable asset when it’s already being used to fulfill other important roles. Future income from your career, the future sale of a business, or similar sources of expected income are not yet investable assets either – not until you’ve received the money, and set some of it aside for investing.
Your Investment Portfolio
Combine all your accounts containing all your investable assets (no matter what kind they are or where they’re held), and that’s your investment portfolio.
Assets Under Management
For some of your accounts, our services are twofold: We advise you on how to invest the assets within your total portfolio, plus we serve as a liaison with your custodian to facilitate account management – such as set-up, closure, transfers and trades. For these accounts, we include their assets in your Assets Under Management (AUM), upon which our advisor fees are typically based. For other accounts, such as your company 401(k) or a direct-sold 529 plan, another provider may already be managing account transactions for you. We still include these assets in our ongoing advice, portfolio management, performance reports, and financial planning services. But they are typically excluded from your AUM totals.
Want To Know More?
As a fiduciary advisor, responsible for serving investors’ highest financial interests, we consider it our privilege and duty to not only help you manage your money but to help you actually understand what we’re talking about when we do. Please reach out to us if you come across more jargon or concepts you are unfamiliar with, and we will be happy to add to our list.