Doctors write prescriptions. Auto mechanics perform tune-ups. Lawyers prepare briefs. Financial advisors help you manage your money. Ultimately, it’s that simple. But like any other profession, we advisors sometimes have a funny way of saying it.
Just as it’s good to know that Enter your PIN doesn’t mean you should jab a sharp object into your phone, understanding some of the shoptalk we use can help you manage your money more effectively and hold more meaningful conversations with your advisor. Following are 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.
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 (REITs); and so on.
Investment accounts are containers for holding your mutual funds, ETFs, and various 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 Aspire Planning Associates, Shareholders Service Group/Pershing LLC typically serve these essential roles, including submitting their independent reports directly to you for your review.
Note: We strongly recommend ensuring that your financial advisor is never also your custodian. If your advisor is responsible for managing your investments AND they are the only source for reporting the results to you, it makes it too easy for the criminally minded to hide their malfeasance by sending you fake reports. Think Bernie Madoff.
Investable assets are assets that are already part of your investment portfolio, or readily available to add to your portfolio. Money 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 setup, 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, and financial planning services. But they are typically excluded from your AUM totals.
Want to Know More?
Now that you’re getting the hang of some of our specialized lingo, what else can we answer for you? As a fiduciary advisor, responsible for serving investors’ highest financial interests, we consider it our privilege and duty not only to help you manage your money but to help you actually understand what we’re talking about when we do.
Schedule a complimentary 15-minute call with a fee-only financial planner to discuss your situation.