Glossary

Financial glossaries are a dime a dozen, but here we present a selection of the most common and sometimes misundertood terms in Wealth Management.

Asset allocation.  Is a term used to refer to how an investor distributes his or her investments among various classes of investment vehicles (e.g., stocks and bonds).  A large part of financial planning is finding an asset allocation that is appropriate for a given person in terms of their appetite for and ability to shoulder risk. This can depend on various factors; see investor profile.

Examples of asset classes: 

  • cash (i.e., money market accounts)  
    • Bonds: investment grade or junk (high yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets
    • stocks: value or growth; large-cap versus small-cap; domestic, foreign, emerging markets
    • real estate
    • foreign currency
    • natural resources
    • precious metals
    • luxury collectables such as art, fine wine and automobiles

To further break down equity investments into additional asset classes consider the following:
By size: 

  • Large-Cap
  • Mid-Cap
  • Small-Cap

By style: 

  • Growth
  • Blend
  • Value 
  • REITs
  • International Investments: foreign or emerging markets Life Settlements

Asset Protection. The principle of "asset protection" is for a person to divorce himself or herself personally from the assets he or she would otherwise own, with the intention that future creditors will not be able to attack that money, even though they may be able to bankrupt him or her personally. One method of asset protection is the creation of a discretionary trust, of which the settlor may be the protector and a beneficiary, but not the trustee and not the sole beneficiary. In such an arrangement the settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "The Teddy Bear Trust"). The above is a considerable simplification of the scope of asset protection. It is a subject which straddles ethical boundaries. Some asset protection is legal and (arguably) moral, while some asset protection is illegal and/or (arguably) immoral. 

Charities. In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also, but even there a trust is the most usual form for a charity to take. In most jurisdictions, charities are tightly regulated for the public benefit (in the UK, for example, by the Charity Commission). 

Co-ownership. Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee. 

Fiduciary. The fiduciary duty is a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. 

“ A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. ” A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust. In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of Equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became usable in common law courts. When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that " the distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty. 

Financial adviser.  Uses stocks, bonds, mutual funds, REITS, options, futures, notes and insurance products to meet the needs of their clients. Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the industry. A further distinction should be made between "fee-based", i.e., they charge fees and collect commissions, and "fee-only" advisers. Fee-only advisors receive 100% of their compensation directly from their clients and have no conflicts between their own interests and those of clients created by commissions or referral fees paid by other product or service providers. 

Independent Financial Advisers.  Or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market. The term was developed to reflect a  regulatory position and has a specific meaning, although it has been adopted in other parts of the world. 

The term "Independent Financial Adviser" was coined to describe the advisers working independently for their clients rather than representing an insurance company. At the time (1988) the government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or to be an independent practitioner. The term is commonly used in the United Kingdom where IFAs are regulated by the Financial Services Authority (FSA) and must meet strict qualification and competence requirements. 

Individuals and businesses consult IFAs on many matters including investment, retirement planning, insurance and mortgages (or other loans). IFAs also advise on some tax and legal matters. 

Investor profile.  Or style defines an individual's preferences in investment decisions, for example:

  • Short term trading (active management) or long term holding (buy and hold)
  • Risk averse or risk tolerant / seeker
  • All classes of assets or just one (stocks for example)
  • Value stock, growth stocks, quality stocks, defensive or cyclical stocks... 
  • Big cap or small cap stocks
  • Use or not of derivatives
  • Home turf or international diversification
  • Hands on, or via investment funds
  • and so on. 

Money Laundering. The same attributes of trusts which attract legitimate asset protectors also attract money launderers. Many of the techniques of asset protection, particularly layering, are techniques of money-laundering also, and innocent trustees such as bank trust companies can become involved in money-laundering in the belief that they are furthering a legitimate asset protection exercise, often without raising suspicion. See also Anti Money Laundering and Financial Action Task Force on Money Laundering.

Pension Plans. Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.

Corporate Structures. Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g. corporations) in their structure.

Privacy. Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families this alone makes use of trusts ideal.

Risk Free Rate: The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no default risk.

Separately Managed Account, or SMA, is an individual investment accounts offered by financial consultants and managed by independent money managers under an asset-based fee structure. With such a broad definition, many types of accounts might fit the definition of an SMA. There is no official designation for the SMA but there are common characteristics that are represented in all SMA programs. These characteristics include a fee-based cost; open investment choices; multiple managers; and a customized investment portfolio formulated for a client's specific needs.

SMA’s were developed in the 1970’s to accommodate accounts and clients who needed to meet specific objectives, which did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose) tax efficiency and general flexibility that have made separate accounts popular among informed investors.

However, there is some question as to whether separate accounts actually provide significant advantages in terms of risk/return over more typical portfolios. There is no clear answer, and without comprehensive data and benchmarks to test against, any evidence is largely anecdotal. (The same is largely true of hedge funds.)

SMA's also enjoy some popularity among wealthier investors as they are seen as exclusive, and offer investment options not available to those of more modest means. As noted though, whether these options actually result in a better risk/return profile is unclear.

financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation.

Spendthrift Protection. Trusts may be used to protect one's self against one's own inability to handle money. It is not unusual for an individual to create an inter vivos trust with a corporate trustee who may then disburse funds only for causes articulated in the trust document. These are especially attractive for spendthrifts. In many cases a family member or friend has prevailed upon the spendthrift/settlor to enter into such a relationship.

Tax Evasion. In contrast to tax avoidance, tax evasion is the illegal concealment of income from the tax authorities. Trusts have proved a useful vehicle to the tax evader, as they tend to preserve anonymity, and they divorce the settlor and individual beneficiaries from ownership of the assets. This use is particularly common across borders — a trustee in one country is not necessarily bound to report income to the tax authorities of another. This issue has been addressed by various initiatives of the OECD.

Tax Planning. The tax consequences of doing anything using a trust are usually different from the tax consequences of achieving the same effect by another route (if, indeed, it would be possible to do so). In many cases the tax consequences of using the trust are better than the alternative, and trusts are therefore frequently used for tax avoidance. 

Trust. In common law legal systems, a trust is an arrangement whereby property (including real, tangible and intangible) is managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settlor, who entrusts some or all of his or her property to people of his choice (the trustees). The trustees hold legal title to the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiary, a.k.a. cestui que use or cestui que trust), usually specified by the settlor, who hold equitable title. The trustees owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property.

The trust is governed by the terms of the trust document, which is usually written and occasionally set out in deed form. It is also governed by local law. The trustee is obliged to administer the trust in accordance with both the terms of the trust document and the governing law.

In the United States, the settlor is also called the trustor, grantor, donor, or creator.

The trust is widely considered to be the most innovative contribution to the English legal system. Today, trusts play a significant role in all common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. Trusts are recognized internationally under the Hague Convention on the Law Applicable to Trusts and on their Recognition which also regulates conflict of trusts.

In 2007, Switzerland recognised the den Hague Convention. The result of this is that a Trust set up in another countrly will be respected and enforceable in Switzerland. It is also possible to have Trustees in Switzerland to look after the Trust.

Unit Trusts. The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust.

Wills and Estate Planning. Trusts frequently appear in wills (indeed, technically, the administration of every deceased's estate is a form of trust). A fairly conventional will, even for a comparatively poor person, often leaves assets to the deceased's spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.