It’s a common misperception that we all speak the same language. Ever tried to understand the technical explanation of why your computer isn’t doing what you want it to do? If you know the difference between baud rate and band width, you’re ahead of me.
Don’t get me wrong, I can do a lot of things to my computer. I believe I’m “computer savvy”, but I am far, far, far from having the time and knowledge to be able to really handle the highly technical issues without help from an expert.
Along that same line, most of you are “money or finance savvy.” You know about asset allocation, you understand that you may pay commissions or other fees related to investments, and you are aware of the global market and all the players that make our current economy such a fun place. But when it comes to the time and knowledge to make your financial plans happen, you need help from the Financial Nerd Squad.
Because I often get these questions during my workshops, I thought it would be helpful to provide a few definitions of terms we use on a daily basis – just so we can all speak the same jargon! I know many of you may know these terms, and if you don’t, now you will!
12B-1 Fee
This is defined as an annual marking or distribution fee associated with a mutual fund. It covers operational expenses and is included in the fund’s expense ratio. Why is it called 12b-1 fee? It is from the section of the Investment Company Act of 1940.
Expense Ratio
This is just what it sounds like – a measure of what it costs a company to operate a mutual fund. This is an annual calculation:
Why is an expense ratio important? The expenses are taken out of fund assets and lower the return to the fund’s investors. Expense ratios can vary widely between mutual funds and is one consideration in evaluating a potential investment.
Risk
Short word, potentially very long explanation. There are a number of types of risk associated with investing, including interest rate risk, political risk, systematic risk…you get the idea. There are just about as many ways to mathematically evaluate risk: standard deviation, Sharpe Ratio, etc. The bottom line on this one is that there is a potential to lose in any investment. Understanding risk measurements and exposures helps to evaluate potential investment opportunities.
Third Party Managers
These are outside asset managers we (you and the Seasons team) hire together to help create and monitor portfolios. They are generally responsible for trading assets within an account, monitoring and tracking portfolio performance, and researching and implementing portfolio adjustments to keep the assets in line with stated objectives. There are many of these firms and our job is to vet them
There are so many terms associated with investing that it is impossible to address more than a few here. An excellent financial dictionary can be found at Investopedia.com.
We may all speak English, but that is no guarantee that we’ll understand one another. Anytime there is something you don’t understand about your investments, or opportunities that are being presented to you, don’t hesitate to ask. And keep asking until you do understand. We want to make sure we are truly communicating!
The above commentary contains opinions and analysis that are provided by the author for informational purposes only and should not be used as the primary basis for an investment.
Securities & Advisory Services offered through VSR Financial Services, Inc., a Registered Investment Advisor and Member FINRA/SIPC. Seasons Financial Group is Independent of VSR.
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