Financial Advisory for Women

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Bell Tower Advisors Philosophy

  • We are independent
  • We are fee-only
  • We act as fiduciaries on behalf of our clients
  • We are committed to remain a boutique firm
  • We serve women (and like-minded men!)

Common Investing Terms

One of the books in our recommended section is Women’s Worth, by Eleanor Blayney and she has a fabulous Investment-Term Glossary at the end of the book. With her permission, I have reprinted here below. We also have a piece under BTA Commentary (date: 10/3/11) called “Deciphering the Code”, that has many more investment terms with their definitions.

Women’s Words: 
A Female-friendly Glossary of Financial Terms

Sometimes our journey toward financial education is halted for the simple reason that it involves too many words that are foreign to us. You are not alone!

It is one thing to know what a technical term or phrase means; it is quite another to understand it and weave it into our experience. For the first kind of knowledge, you can check out Investopedia ( ), a website for financial education, which has an online dictionary of more than 7,000 terms. You can also sign up for a financial-word-of-the-day to be e-mailed to you.

The understanding is harder to come by. We have found that stories, analogies, even humor are often the most effective forms of explanation, and that these speak to the creative, intuitive side of women’s brains, where real wisdom resides.

Therefore, we leave the formal financial definitions to the writers of dictionaries or textbooks and offer instead the following less conventional explanations for some of the financial terms that you will come across in the financial world.

Advance directive: Just-in-case instructions that are every bit as important as the list of emergency numbers you leave on your refrigerator or the notes you give to the babysitter. In the case of an advance directive, the instructions pertain to your wishes about your medical treatment at the end of your life and your choice of who will make medical decisions for you if you cannot.

Alternative Minimum Tax (AMT): Like trouble and debt, AMT is something you get into often without knowing it. There is nothing minimum about AMT, since it refers to a computation of your tax liability using a method different from that on your 1040 form, and if the taxes thereby computed are higher than what is on your regular tax return, you must pay the greater amount. Originally intended by Congress to prevent wealthy taxpayers from using deductions and exemptions to whittle away their tax liability to almost nothing, the AMT no longer serves its social policy purpose. Again, as with debt, far too many people are in it who should not be. The AMT will soon be fixed, it is hoped, but until such time it is the very best reason not to do your taxes yourself without an up-to-date software program that will run the AMT computation in the background and tell you if you are in it. Not knowing does not cut it with the IRS.

Annuity: If life is a gamble, similar to “heads I live” and “tails I die,” then buying an annuity is a way to hedge against the first outcome, while buying life insurance is a way to hedge against the second. An annuity is a guarantee, issued by a life insurance company, to pay you a stipulated amount monthly, quarterly, or yearly for as long as you live. Thus it serves the simple purpose of providing you an income, usually in retirement, that you cannot outlive. What you really need to know about annuities, however, is that they are almost never sold or used for this very simple purpose, but rather (like their cousin, life insurance) are promoted for all sorts of other reasons: as tax savings, hedges against stock market risk, and a tax-free source of funds. Do not be distracted when it comes to buying an annuity. Keep costs low and quality of guarantee high.

Asset: Anything that you and at least one other reasonable person agree has a monetary value. It’s important to have this third-party concurrence, since without it your asset cannot be exchanged or sold for something else you need or want. Thus, your skills and experience are assets if an employer is willing to pay for them (see Chapter 4, “Women Work—Maximizing Your Human Capital”); your trenchant sense of humor is probably not.

Asset allocation: The art and science of making good investment pies. Every ingredient (asset class) must be measured and each must add something unique (enhanced return, lower risk), but it is the overall taste (performance) that must meet the investor’s palate (risk tolerance).

Asset location: Not only do we have to choose our asset classes when making investment pies, we also have to decide which pie to put them into. We make the distinction between pies that are taxable and pies that are tax-deferred or nontaxable. A basic rule that financial experts and pundits love to debate, but which nevertheless holds stubbornly true, is as follows: emphasize high-growth assets in your tax-deferred accounts (i.e., IRAs, 401(k)s) and low-growth assets in your taxable account.

Behavioral finance: The field of market economics that studies neither the bulls nor the bears, but the herd of cows that follows them without really knowing why. Behavioral finance focuses on the non-rational way we make financial decisions—on our extreme aversion to loss, for example, or our inflated sense of having above-average decision-making capabilities.

Bond: A bond is usually contrasted with a stock as one of the two major forms of investment. To understand the difference, consider the following parable. A man in a small village sets up a business making soup. To get started, he needs bowls. A woman comes to his shop with a bowl for the soup maker to use, but asks that the bowl be returned to her in a year’s time. She also asks for a sample of soup each week until the time that the bowl must be returned. A second woman comes to the soup maker, and she too offers a bowl. In this case, however, she does not ask for the bowl back. Instead, she asks that if there is soup left over at the end of the day, she be allowed to sit down and eat with the soup maker. The first woman is essentially a bondholder: she lends her bowl (or capital) in return for a promise that her capital will be returned. The second woman is a stockholder: she asks for no guarantees, but instead believes that the soup maker will be successful enough to share his profits with her.

Certified Financial Planner TM: Professionals who hold the CFP® designation are qualified by examination, experience, ongoing education, and compliance with an ethical code to advise individuals on matters of personal finance. I am a CFP® professional and very proud of it.

Credit Shelter Trust: A classic example of the tax tail wagging the dog, a CST refers to money set aside in a given individual’s estate and placed in a trust. The amount set aside is equal to the amount that IRS rules allow an individual to pass to any beneficiary estate-tax-free. The reason CSTs are more like wagging tails and less like whole dogs is that they are usually set up only for tax-saving purposes and not necessarily because an individual would choose to direct money to his beneficiaries via this kind of trust or in the credit-equivalent amount.

Defined benefit plan: A type of retirement plan where what matters is the amount of money you get each month or year, not where the money is invested or how much there is. These are concerns only of the plan sponsors—a company or government—and not of the sponsor’s retired employees. Sound almost too good to be true? They probably are, given that defined benefit plans are rapidly disappearing because plan sponsors are finding them too costly to maintain.

Defined contribution plan: In contrast to a defined benefit plan, a defined contribution retirement plan is one where the participant has to worry about how much goes into the plan and how it is invested. The most prevalent form of defined contribution plans are 401(k) plans. Given the lack of investing knowledge of the average plan participant and the recent meltdown of both stock and bond markets, many claim that 401(k) plans have been a colossal public policy mistake and have not provided adequately for Americans’ retirement.

Equity: Often considered just a fancy synonym for stock, equity is, however, a broader concept, since we can have equity or ownership in assets or enterprises that do not issue stock. Think of your home, for example. Your home equity is your share of the home’s value minus whatever funds you have borrowed to purchase or improve the home.

Estate taxes: The most important thing to understand about estate taxes is that they are separate and different from income taxes. So often people talk about all those taxes that have to be paid when someone dies, without realizing that there are two sorts: taxes that are assessed on income earned from the decedent’s assets starting in the year in which the person died until the time that those assets are completely transferred to his beneficiaries, and estate taxes assessed on the net value of assets above a certain exemption amount. Ironically, the phrase “There is nothing certain but death and taxes” is not correct when it comes to estate taxes, since only a small percentage of wealthy individuals have to pay them. Income taxes are another matter.

Exchange-traded funds (ETFs): The financial world loves to take good ideas and try to make them better, or more confusing. Such is the case with ETFs. They are based on exactly the same principle as index mutual funds (see below), in that they are a basket of securities assembled to replicate the performance of a given market or benchmark. The kicker in the case of ETFs is that, unlike mutual funds, they can be traded on an exchange any time of day. They can be bought and sold just like stocks. You can, for example, put in an order to buy an ETF only at a given price, or sell an ETF if it trades below a certain price. In essence, ETFs take a passive approach to investing (indexing) and make it available to active market traders. While I recommend ETFs for their low costs and diversification, they have been overmarketed as an investment that can be all things to all people.

Executor/Executrix: Also called a personal representative, this person makes sure that the provisions of your will are honored. Don’t be put off by the grim formality of the term. This person should generally be a comfortable close friend or intimate other who knows what you would want, even if you haven’t made it absolutely clear in your estate plan.

529 Plan: Here’s a hint: whenever you hear numbers in a financial term, it means that the product or strategy is governed by a tax statute and is, therefore, complicated and technical. (Other examples include 401(k) plan and 501(c)(3) organization.) A 529 plan is a gift you can make, usually to your child and always for college, with tax strings attached. For the benefit of tax-free growth in the account, you have to abide by certain IRS provisions, such as using the money only for certain approved college costs. Sponsored by individual states, 529 plans are available through brokers and financial service providers. Shopping for one is a little like buying a car. There are so many different makes and models that it is easy to forget the real purpose for getting one: to get you or your child where you want to go, safely.

Fixed income: This is a generic term for the asset class of which bonds are a major part. Women like this asset class because of the fixed component, which sounds like a guarantee, and the income component, which they generally have unrealistic fears of losing or not having enough of. Most women need to learn to like fixed income less and equity investment more to be adequately prepared for retirement.

Guardian: If you are a parent or caretaker of a dependent, guardianship is possibly the most important role to be designated in your will. A guardian is needed for individuals who have not yet reached the age of financial majority (eighteen or twenty-one years, depending on the state of residence) or who are physically and/or mentally handicapped. But deciding on a guardian is also one of the most difficult choices to make. In essence, a guardian becomes your replacement as a caretaker, and there is simply no one in the world as well-qualified for this job than you. To make matters worse, husbands and wives almost never agree on who the guardian should be. You need to swallow hard and make this decision anyway.

Human capital: The sum total of your education, experience, and expertise as it commands value in the workplace. Unlike financial capital or real property, it can rarely be used as collateral for a loan or be borrowed against, but it is nevertheless likely to be your greatest asset in producing future wealth.

Index mutual funds: These can be thought of as market mirrors. These pools of securities have no investment strategy or identity of their own, nor are they managed by individuals who make deliberate, conscious choices of what to buy and sell in the fund. Their purpose is to hold up a mirror to a given investment market, such as the S&P 500 or the Morgan Stanley Europe, Asia, and Far East market, and to replicate the holdings and performance of these markets. Because they are not managed, except by a computer, index funds are generally very low-expense options for investors who want broad market diversification.

Liability: To put a positive spin on a balance sheet word generally understood as a negative, a liability can be thought of as a source of funds used to acquire an asset. Hence, we take out a car loan (liability) to acquire a car (asset), or a mortgage to acquire a home. When we see liabilities as such, it becomes a lot easier to understand the appropriate management of our debt: you want to make sure that the liability or funds borrowed decreases in value over time, while the asset thereby acquired grows in value. If only we had kept it that simple, the huge credit crisis of 2008–09 might never have happened.

Long-term care insurance: LTC insurance provides income in the event that you are unable to carry out normal daily activities on your own. My friend and associate Christine Fahlund of T. Rowe Price calls it “stay in your own home insurance.” Another friend and colleague, the nationally known financial advisor Harold Evensky, defines it as disability income insurance for retirees. In so defining this term, he also reveals his opinion that it is as necessary for retirees as disability insurance is for working people. To Harold’s emphasis, I will add some urgency of my own. If you have visited any nursing homes lately, you are no doubt aware that the vast majority of residents are women.

Market efficiency: The story is told of two economics professors walking down a busy street. One sees a $20 on the sidewalk and bends down to pick it up. The other tells him not to bother because the bill must be an illusion. “If it were real,” he explains, “it would not be left on the sidewalk.” What the second professor is referring to is the efficient market, where information is instantly available to everyone. There are no extraordinary opportunities (i.e., stray $20 bills), because as soon as such opportunities appear, someone takes advantage of them and they disappear. The point here is that in a highly competitive market, such as the market for traded securities, it is a waste of time looking for $20 bills or the next hot stock.

Money: Grease, just grease. It does nothing on its own, but if applied consistently and carefully, it makes things run. And, by itself, it won’t make us happy.

Mutual funds: Compared to a single security (bond or stock), a mutual fund is a pool or basket of securities chosen by a computer program or an investment manager to offer a diversified investment strategy. The irony of mutual funds is that there are more such baskets than there are security eggs (individual stocks) to put in them. This should be instructive to the average individual; marketing and packaging is just as powerful in the investment world as it is in the grocery store. If you want to buy a low-cost generic brand, go for an index fund or an ETF.

Non-qualified plan: This sounds like something you don’t want as part of your investment portfolio, but in fact you do. The non-qualified descriptor simply explains its tax status and means that any income or gains of the plan or account are currently taxable. This is in contrast to retirement plans that are qualified by the IRS to defer taxes until the money is withdrawn. You want non-qualified plans, known more familiarly as brokerage accounts, as part of your investment holdings because these give you a choice when you need money in retirement: you can withdraw from your non-qualified account and not pay taxes, or withdraw from your 401(k) or IRA and pay the taxes that have been deferred. Having the flexibility to plan your taxes is important, as is saving more for your retirement by using both types of plans.

Power of attorney: A document that delegates decision-making authority to another individual, a power of attorney can ensure that what you want to happen with your assets or your health care will happen, even if you are not in a state to make decisions. It can be invoked if you are out of the country or if you are in a coma. Either way, it is important that you have prepared for such states by giving a power of attorney to a trusted friend or family member.

Qualified plan: The quality of being qualified comes from the IRS. Such a plan is governed under special tax provisions that allow the plan to grow without being taxed until the money is taken out.

Stock: See the parable of the soup maker under the definition for “Bond.” There is an unfortunate tendency, which flourishes in bull markets, to think of stocks as having value unto themselves without reference to the underlying productive enterprise in which they represent ownership. If you saw the movie When Harry Met Sally, you’ll understand the problem I am talking about. Sometimes you want what the person at the next table is having without any idea what it is. “Google at $700 a share? I’ll have some of that!!”

Trust: In its formal sense, a trust is a legal mechanism whereby assets are set aside for a specific purpose, and managed and disbursed according to the provisions specified by the creator or grantor of the trust. Informally, trust is a critical component of your relationship with your financial advisor: something you give only after careful research and investigation, and which the advisor should continue to build and maintain over time. In either sense, trust involves a delegation of your intentions and wishes with respect to your money.

Withdrawal rate: This term describes the simple act of taking our own money from our savings or retirement accounts. There is much debate about the optimal withdrawal rate; i.e., the highest rate that will ensure our money lasts as long as we do. As is so often the case, simplicity trumps sophistication; keeping your annual withdrawal rate at approximately 4 percent of your initial balance in the account is a good all-weather strategy.

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