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 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.
A liability is the opposite of an asset. An asset is owned, but a liability is owed. Liabilities are debts, like a home mortgage, car loan, loan from your brother, credit card debt, and student loans. Liabilities reduce your net worth. Your net worth is a simple calculation that helps you arrive at the current value of your total wealth. Net worth = assets minus liabilities.
Mutual Funds and Exchange-Traded Funds
You might own some assets directly, such as shares of stock, a rental property, or a gold bar. For more diversified 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 Fidelity 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 “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, like joint brokerage accounts or individually-owned non-retirement accounts. 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 at your request, or buying or selling holdings within it. Your custodian also periodically reports account activities to you, typically monthly. At Wisdom Wealth Strategies, our custodians are Charles Schwab and TD Ameritrade Institutional.
Note: We strongly recommend ensuring your financial advisor is not 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, 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.
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 to not only help you manage your money, but to help you actually understand what we’re talking about when we do.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.