Meeting with a financial professional can be key to getting your finances on track. But one thing that doesn't make it easier: When your financial advisor seems to be speaking an entirely different language. U.S. News tapped certified financial planners to round up their least favorite financial jargon -- and to translate what your financial professional is actually saying.
Money experts use this term to talk about how you divide up your portfolio into various investment categories -- stocks, bonds, cash, etc. -- to balance risk and reward. But it can be a tough term for the typical investor to understand. "I tell people that their money is like eggs (eggs are all the same). What we are doing is putting eggs in different baskets to accomplish their goals. An asset is an egg in a basket. Asset allocation is how you pick your baskets," says Chris Chen, a certified financial planner based in Boston.
This term sounds misleadingly gloomy, says Marguerita M. Cheng, certified financial planner and co-founder of Blue Ocean Global Wealth in Gaithersburg, Maryland. But in reality, it refers to something positive. After years of growing a retirement account, people who enter the "decumulation" phase begin drawing down their savings to fund their golden years.
This relatively recent term exploded in popularity after the financial crisis, says Leon LaBrecque, CEO of LJPR Financial Advisors in Troy, Michigan. But its meaning isn't complicated. "It refers to the simple concept of paying off debt," LaBrecque says.
When your advisor talks about "diversification," he or she is describing investing in a healthy range of asset classes, a strategy that reduces risk if one investment loses value. The common misinterpretation is this: "People often confuse 'diversification' with having multiple advisors or brokerage/bank locations," says Melissa Sotudeh, a wealth advisor at Halpern Financial in Rockville, Maryland. Relying on an unnecessary range of financial services can result in a needlessly complex and costly financial life, with a disjointed range of portfolio strategies, she says.
Equities and fixed income
Strip away the jargon, and your advisor is likely talking about stocks and bonds. "I hate it when advisors say equities and fixed income instead of stocks and bonds to clients," says Kristi Sullivan, a certified financial planner in Denver. Advisors may use these terms to seem a little smarter, but it's "really annoying," Sullivan says.
Fee-only and fee-based
These terms refer to a financial advisor's fee structure. They may sound similar, but a fee-only advisor is different than a fee-based one. "A good way to ensure your financial advisor's interests and yours are aligned is to find a fee-only fiduciary advisor -- someone who is paid a flat fee (whether it is hourly or a percentage of assets managed)," Sotudeh says. Fee-based advisors, on the other hand, may be permitted to accept commission on financial products sold, meaning there is the potential for conflicts of interest.
'It has a great story.'
This familiar phrase has nothing to do with fantastic literature. Instead, it refers to how well an investment has performed in the past, says Brent D. Dickerson, owner of Trinity Wealth Management in Lubbock, Texas. "It is such a stupid saying that I don't even think most professionals understand what it means," he says. "I wish it could be banished from the lexicon because it doesn't do anything but act like fingernails on a chalkboard."
When financial experts mention the risks related to an investment, clients typically picture a bleak scenario -- the chance that they'll lose their money, says Clark D. Randall, certified financial planner and owner of Financial Enlightenment in Dallas. "In fact, risk is just the chance that the investment will not match your expected return (either positive or negative)," he says. For example, he says, if a mutual fund has a 7 percent historical return, and the actual return is 20 percent, that's the good side of risk. A better term would be "volatility," Randall says.
Despite its name, this term has nothing to do with agriculture. Instead, tax-loss harvesting involves selling investments at a loss to score a reduction on your tax bill for the year. "Most of the time, a similar investment is bought as a replacement at a lower price, which means the client may realize an increase in taxes later," says Roger Ma, certified financial planner and founder of financial-planning firm Lifelaidout in New York City.
"Most everyone refers to the market as a singular thing," says Theodore R. Haley, president of Advanced Wealth Management in Portland, Oregon. "But I always ask them to take a step back and clarify: Are we talking about the stock market or bond market? U.S. or international? Dow or S&P 500? This leads to a deeper conversation, and the reminder that our accounts are not invested to meet or beat 'the market,' they are invested to help us achieve our life goals."
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