Glossary

12b-1 FEES

12b-1 service fees/shareholder servicing fees are fees charged by a mutual fund to cover marketing expenses.  Many times these fees may be used to pay the broker or other distributor of the fund.  These fees also cover the costs of delivering prospectuses and other materials.  12b-1 are currently a source of great debate and the disclosure of these fees is becoming increasingly transparent.

401(k) PLAN

The most commonly offered type of employer provided retirement plan.  A 401(k) plan allows employees to defer part of their salary tax-free until retirement.  Many times the employer will match the employee contributions to the plan up to a certain percentage.  The employee chooses how the funds are invested generally among mutual funds chosen by the employer.  This is a type of defined contribution plan.

ACCREDITED INVESTOR

An accredited investor is one that earns at least $200,000 per year and/or has at least $1 million of net worth.  This is a term defined by the SEC that allows certain types of investors to invest in investments that are generally identified as more risky and are not subject to many of the same rules as other investments.  These investments may include hedge funds, private equity and venture capital arrangements.

ADVISOR DEPENDENCY

Defines how much an individual relies upon an advisor.   The following categories are used by the research on this website:

Self-Directed – an individual who makes all of his or her investment decisions without the assistance of a financial advisor and transacts on his or her own

Life – Event-  an individual who will turn to a professional for advice upon the occurrence of a significant life event such as retirement, marriage, death of a spouse, divorce, etc.

Advisor Assisted – an individual who will consult with one or more financial advisors but make the final investment decision on his or her own

Advisor Dependent – an individual who relies entirely upon a professional advisor to make all investment decisions

ALTERNATIVE INVESTMENT

An investment other than traditional stocks, bonds and mutual funds.  Loosely defined it can include art, wine, collectibles, etc.  Generally it includes investments such as commodities, private equity, venture capital, hedge funds and financial derivatives.  These investments are generally not regulated by any entity and are often assumed to hold a higher degree of risk.

ALTERNATIVE MINIMUM TAX

  An income tax imposed by the federal government on individuals, corporations, estates and trusts.  It is 26% or 28% for individuals and 20% for corporations.    It is imposed on top of the regular income tax.  Each year a taxpayer must pay the greater of an AMT (Alternative Minimum Tax) or the regular tax.  Rates and exemptions vary based on status.

CERTIFIED FINANCIAL ANALYST  - “CFA”

The CFA designation is a qualification for finance and investment professionals, particularly in the field of portfolio management, financial analysis and other areas of finance.  The CFA is awarded upon completion of three six hour exams.

CERTIFIED FINANCIAL PLANNER – “CFP”

A certified financial planner is an advisor that has passed a series of exams required by the International Board of Standards and Practices for Certified Financial Planners.  Generally they understand estate planning, tax preparation, insurance and investing.  Usually they are compensated on a fee basis and not on a commission.

COLLECTIVE FUNDS

Collective Funds are pooled funds, similar to mutual funds, that are offered by bank trust departments.  They are most commonly used in defined contribution and defined benefit plans.  While similar to mutual funds, they are not subject to the same types of regulation and reporting as mutual funds.  Thus, their fees are much lower than those of mutual funds.

 DEFINED BENEFIT PLAN

Defined Benefit Plans are the traditional type of “pension plan” offered to employees, generally from large employers.  In a defined benefit plan, employers fund a plan that guarantees an employee will have a certain monthly  payment based upon years of service and salary at retirement.  Most companies have terminated or frozen their defined benefit plans.

DEFINED CONTRIBUTION PLAN

Defined contribution plans are retirement plans offered by employers that allow employees to make contributions to the plan from their own salaries on a tax deferred basis.  Often the employer will match the contributions in accordance with a formula or will give a contribution to the plan if the company is profitable (“a profit sharing contribution”).  Defined contribution plans are currently the most common type of retirement plan.  401(k) plans are a type of defined contribution plan.

EXCHANGE TRADED FUND- “ETF’

A fund that tracks an index but can be traded like a stock.  Their value, however, changes moment to moment just like a stock.  They have become increasingly popular in recent years.  They are more tax efficient than mutual funds and have lower fees.

EXCHANGE TRADED NOTE - "ETN" 

 An ETN is a debt product enabling a financial institution to borrow money from investors. In exchange, the firm promises a return linked to the performance of an index or other pre-determined asset, less fees. The ability to pay upon the maturity of the note depends on the financial strength of the firm issuing the debt, so investors take on the credit risk of the issuer when they buy an ETN.

FAMILY OFFICE

An office that exists primarily to oversee the investments and activities of a wealthy family.  There is significant variance in the size and level of expertise of these offices.  Some will include professional asset managers, accountants and lawyers while others may merely consist of an accountant, bookkeeper and other support personnel.  In many cases the family will not realize they have a “family office”.

FIDUCIARY

A fiduciary is a legal relationship where someone has agreed to act for and on behalf of another in good faith.  The fiduciary is always acting for the sole benefit and interests of another, whether it is the beneficiary of a trust or a client.

FULL SERVICE BROKER

 A financial advisor that provides a broad array of services, including investment research, trading, advice and tax tips. Generally a full service broker is paid on a commission basis but this may be changing in  the future.

HEDGE FUND

An investment fund only open to a limited range of investors who pay a performance fee to the fund manager.  Generally hedge fund undertake a wider range of investment and trading activities than other traditional funds.  They are also established to hedge risk.  These funds are not currently subject to as much regulation as more common funds.

LOAD

Commission paid to a broker.

INDEX FUNDS

  An index fund is a mutual fund that invests only in companies that are part of a major stock or bond index.  The assets of an index fund are supposed to mirror the performance of a published index such as the S&P.  Index funds generally have lower expenses and fees than other funds.

INDIVIDUAL RETIREMENT ACCOUNT – “IRA”

An individual retirement account is a savings vehicle that allows an individual to contribute a certain percentage of his or her income into an account and allow the account to grow tax free until retirement.  A “contributory” individual retirement account allows individuals to place assets into the account, if they do not exceed certain income levels and if they are not part of an employer sponsored plan.

INVESTMENT MANAGER

One who provides the professional management of various securities and assets to meet specific objectives on behalf of the investors.

IRA ROLLOVER

An IRA Rollover most commonly represents assets that an individual is taking from an employer sponsored qualified plan and moving those assets into an individual retirement account.  Generally the rollover occurs due to separation from service or retirement.  There are a significant number of rules that govern the timing and how the assets can be moved into an IRA.  This is one of the largest investment product growth areas anticipated in the near future due to the retirement of the Baby Boomers.

MANAGED ACCOUNT

A managed account is an account owned by an individual but managed by a professional which could be a broker, a registered investment advisor, a financial planner or some other type of professional financial advisor.

MONEY MARKET FUNDS

Money market funds generally are low risk funds with a relatively low return.  They are basically cash assets.

MUTUAL FUND

A mutual fund is a professionally managed pool of money from many investors collectively invested in stocks, bonds, and other securities in accordance with a stated investment objective.  These funds are monitored by the SEC and investors pay an investment management fee, which is deducted from the return of the fund.  In many cases these funds are also subject to other types of fees deducted from the fund, in some cases, and other times directly from the investor’s account dependent on how, where or through whom the funds were purchased.

MUTUAL FUND WRAP ACCOUNT

An individually owned account managed by a professional financial advisor that invests through a pool of assets in multiple mutual funds.  The advisor then charges a fee to the account for his or her selection of the mutual funds.

 NIPR

Research terminology which means an investor was classified as fitting within a specific wealth class based on assets other than his or her primary residence.  The phrase means “Not Including Primary Residence”.

 PRIVATE PLACEMENT LIFE INSURANCE

Private Placement Life Insurance is an investment wrapped inside of an insurance policy.  Often this investment is a hedge fund or stocks.  Because the investment is an insurance policy, it is not subject to capital gains taxes like the investments it may hold.  It is often linked to a death benefit as well.  Only accredited investors and qualified purchasers, as defined by the SEC are able to invest in these types of policies.

 REITS – Real Estate Investment Trusts

A reit is similar to a mutual fund but allows individuals to invest in real estate.  Legally a reit is a corporation that distributes 90% of its income back into the hands of investors.  They are generally sold like a stock on the exchanges and allow investors a relatively liquid way to invest in real estate.

REGISTERED INVESTMENT ADVISOR – “RIA”

A Registered Investment Advisor is an Investment Advisor registered with the SEC or a state agency.  RIAs are individuals that receive compensation for giving advice on investing in securities including stocks, mutual funds or ETFs.  Generally they are paid on a percentage of the value of the assets they manage, or an hourly fee, or fixed fee or a commission (if they are also a broker-dealer).

SEPARATE ACCOUNT

An individually owned account managed by a professional investment advisor that uses pooled money to buy assets.

SEPARATELY MANAGED WRAP ACCOUNT

An individually owned account managed by an advisory firm that chooses outside investment managers and invests the money through the use of pooled assets.  The account is then charged a management fee.

SHARE CLASSES

Mutual funds offer different types of shares known as share classes.  Each class charges fees differently.  Any mutual fund may have multiple classes of shares and investors should be aware of the type of share class they are purchasing.

            Class A –have a front end sales load the investor pays at time of purchase

            Class B-usually do not have a front end load but have a fee that is paid if the            

                          Shares are sold before a specific length of time

Class C –often called “level load”. Class C shares have neither a back-end or      front-end sales load but have higher ongoing fees.

            Class I – for institutional investors (i.e. pension or retirement plans)

TARGET DATE FUNDS

Target Date funds have become a popular investment in defined contribution retirement plans.  Their objective is to provide a specific value at a specific time by appropriately mixing cash based investments and stock based upon an individual’s age or anticipated years until retirement. They are not guaranteed but the investment philosophy is to match the investment objectives to a value at the point the individual will most likely be reaching retirement.

UHNW

Research terminology that stands for “Ultra High Net Worth”.  For purposes of this website UHNW households have $5 million plus of net worth not including their primary residence.

UNIFIED MANAGED ACCOUNT

Combines multiple types of assets into a single account number.  Allows a financial advisor to have separate accounts, mutual funds and individual securities within the same account number to report to clients.