Industry specific jargon can be intimidating. Fortunately, you can leave most of it to the experts. The six terms listed below are the exceptions – understanding them is crucial to your long term investment success.
Fiduciary. Someone who is legally obligated to put your interests ahead of theirs. In the investment world, Registered Investment Advisors (RIAs) have a Fiduciary responsibility. Stockbrokers do not. The difference is dramatic. Do yourself a favor and make sure you work with someone who is legally obligated to put your interests first so that you can prosper.
Market index. Indices are measuring sticks for different sections of the market. A good example is the S&P 500, which represents the 500 largest companies in the United States. Understanding the indices allows you to track your relative performance. To do so, it’s important to understand which indices are fair representations of your portfolio. Using the S&P as a barometer against a portfolio of international stocks, for instance, does not make sense. In this case, using the EAFE Index (Europe, Asia and Far East) would be suitable.
Personal risk tolerance. In its simplest sense, how much of your portfolio should be allocated to stocks and how much to bonds? The answer depends upon your unique set of goals and circumstances. Remember – it is a personal risk tolerance. Speak with a Certified Financial Planner™ to guide you to an answer.
Stock risk. Ever heard the saying “don’t put all your eggs in one basket?” While some companies may seem like a sure thing, remember this – the S&P 500 of 1960 looked much different than the S&P 500 of today. Times change, companies grow and others fail to meet changing demands of the world. Eastman Kodak and Enron come to mind. Successful investors use diversification to increase their long-term risk adjusted return.
Loaded mutual funds. A front-end load is recognized when you purchase a mutual fund. A back-end load is recognized when you sell one. Choose their no-load counterpart. You will save the fee and the performance is more often than not just as good. After all, a no-load fund has a head start in the amount of the load, which can be upwards of 4% in some instances.
Pundit. Someone who prognosticates, in this case, about the financial markets. Their pedigree may be impressive and their intellect alluring, but do not follow their advice. No doubt they made a few good calls in their day. Chances are they made more bad ones. Your best bet is to develop a long-term strategy with your financial advisor that you can stick to. One that is tailored to your specific needs and goals.
As I read many articles about how to select a financial advisor I frequently see mentioned the importance of working with a Certified Financial Planner™ (CFP®). But what does the designation mean, and how does a person become one? Since I am in the middle of working on my designation, I thought I would provide some insight.
If you decide to become a CFP®, here’s the process you would face. First, you must have a Bachelors degree from an accredited university and a minimum of three years of applicable work experience. I’ve got these requirements covered and am working on the next step, which is the educational work. The courses are offered by numerous sources and follow the same general topics. I chose the College of Financial Planning for my coursework.
Each course listed below is similar to a college quarter of studies with approximately 1000 pages of reading and 500 pages of questions and casework. Each course takes about 160 – 220 hours of study and has a final exam. My program includes the below five courses, and starting in 2012 the college will add a sixth “capstone” course that will be casework on the entire program.
- Financial planning process and insurance
- Investment planning
- Income tax planning
- Retirement planning
- Estate planning
When you finish your coursework, you can then sit for the comprehensive exam given by the CFP® board three times a year. It’s a two day test of your knowledge, comprehension, and your ability to apply what you know to cases. The approximate pass rate is 50% and it’s recommended to have an additional 250 hours of study for the exam. The course, materials, testing fees and test prep can easily cost you $5000 – $7000. After passing the exam there are ethics requirements and continuing education. To see a complete listing of requirements and topics, visit www.cfp.net.
To become a CFP® is a rigorous and costly endeavor. The process has helped me to do a better job advising my clients and I can see the value in the recommendation that people work with a CFP®.
You may have heard the debate over “suitability” versus “fiduciary duty” and wondered “What do those things even mean? Does it even matter?” Well I’m here to tell you: It does matter. It determines whose interest comes first: yours or your financial advisor’s.
So first off, what does it mean to have a fiduciary duty? In the simplest terms, a fiduciary duty is an obligation to act in the best interest of another party. A fiduciary relationship is one of complete trust and utmost good faith. In fact, the term fiduciary comes from the Latin words “fiducia” which means trust and “fides” which means faith. A fiduciary is expected to be extremely loyal to the person whom he owes the duty. (more…)