Like any profession, the wealth management sector has its own terminology for clients to get to grips with. In this brief jargon-buster we outline key concepts and terms to help investors get the most out of their conversations with their advisers.
Managing wealth optimally can be a complex business that presents the uninitiated with a bewildering array of new terminology – but you shouldn’t let that put you off beginning a relationship that is likely to make a huge difference to your financial position.
Of course, there is no need for clients to learn all about wealth management in granular detail themselves as this sector – like medicine or law – is all about trusting the real experts. That said, familiarising yourself with key terms that you may encounter will put you on a great footing for having more productive conversations with potential advisers. And, for experienced investors, testing your knowledge will be an illuminating exercise.
Absolute return
The performance of portfolios and investments are measured relative to benchmarks, but the absolute return is another crucial metric that tells you how it has lost or gained value in its own right. Correspondingly, an absolute return fund aims to deliver positive returns irrespective of its benchmark (and therefore the market at large).
Active versus passive
Active investment management aims to beat the market through skilled research and analysis. It is therefore more expensive than passive investment, where a fund replicates a benchmark index to track its performance (hence passive funds being known as market “trackers”).
Ad valorem fees
The performance of portfolios and investments are measured relative to benchmarks, but the absolute return is another crucial metric that tells you how it has lost or gained value in its own right. Correspondingly, an absolute return fund aims to deliver positive returns irrespective of its benchmark (and therefore the market at large).
Alpha versus beta
The performance of portfolios and investments are measured relative to benchmarks, but the absolute return is another crucial metric that tells you how it has lost or gained value in its own right. Correspondingly, an absolute return fund aims to deliver positive returns irrespective of its benchmark (and therefore the market at large).
Alternative assets
The traditional asset classes are cash, equities and bonds. Alternatives range from property, commodities, private equity and hedge funds through to highly esoteric assets like art, jewellery and cars. Alternatives require specialist advice but may play a very useful role in portfolio diversification and improving returns.
Annualised return
You should always look at returns over multiple periods and annualised returns show how much a portfolio or fund has earned on average each year.
Asset allocation
Your asset allocation strategy determines the proportional composition of your portfolio. These weighting will help ensure you are exposed to the right mix of asset classes, markets and instruments for your investment objectives and risk-profile.
Benchmark
The metric by which the performance of a fund – or a whole investment portfolio – is measured. These are typically a specified market index or peer group average. Always make sure you understand why a particular benchmark has been chosen.
Bonds, credit and coupons
Governments and companies raise money from investors by issuing bonds entitling the holder to repayment of the principal on maturity and interest payments along the way, known as “coupons”.
“Credit” is often used as a synonym for the bond market (particularly in a corporate sense), as is fixed income, as bonds grant a fixed rate of reward (the coupon).
Bulls and bears
Collectives
Collectives see investment managers pool many investors’ capital and invest it via a single investment vehicle, creating economies of scale and diversification benefits. Collectives can be structured (and regulated) in a variety of ways, with often significant differences in safety, costs and tax-efficiency that can catch DIY investors unawares.
Commodities
Commodities category of alternative investment which are sub-divided into “hard”, extracted resources like metals and oil and “soft”, agricultural ones like crops and livestock. Naturally, this asset class is mostly accessed through equities or funds rather than investors holding the underlying assets themselves.
Correlation
Correlation measures the extent to which asset classes (or individual securities like stocks) move up and down in value in tandem. Perfect (-1) opposite correlation is rare, but holding assets that are uncorrelated to a good degree is invaluable in diversifying investment risk.
Credit rating and risk
Bonds carry a credit rating assessing their risk of default, which are issued (and regularly reviewed) by independent ratings agencies. Credit risk describes the likelihood that an issuer will fail to pay bond holders their interest (coupons) and return their principal investment.
Derivatives
Including options, swaps and futures, derivatives are financial instruments that “derive” their value from an underlying asset like a commodity, currency or stock. They can be very complex and highly risky endeavour, as many DIY investors have learned to their cost when betting with leverage on Contracts for Difference.
Developed, emerging and frontier markets
Developed markets are industrialised and fairly economically stable, whereas emerging ones are rapidly growing and thus represent higher potential for both returns and risk. Frontier markets are even further out on this spectrum and can expose investors to political instability and illiquidity.
Top Tip
Although some people are very hands-on, many of our users want to delegate the management of their wealth to a trusted professional, and whichever category you fall into, we can help set up a relationship that suits. You certainly don’t need to study to get the most out of your wealth – as that’s what the professionals are for – but understanding key terms that often crop up can be a very empowering thing.
Lee Goggin
Co-Founder
Discretionary wealth management
Diversification
Dividend and dividend yield
Dividends are rewards paid out to shareholders at amounts and periods of the company’s choosing. The dividend yield is a company’s dividend per share divided by its current share price. |
FCSC
The Financial Services Compensation Scheme protects deposits made with UK-regulated financial services institutions in case of insolvency. Protection is limited to £85,000 per person per firm (£170,000 for couples), however, meaning that wealthy individuals should consider spreading their money around several institutions
Gilts and treasuries
Major government bonds have their own well-known names. UK ones are called “gilts”, US ones “treasuries” and German ones “bunds”.
Growth versus income strategies
Growth investors focus on companies with rapid growth potential, rather than their current share price. In contrast, value investors focus on the dividends that a company is likely to pay out, in addition to share price rises over time. Strong dividend-payers naturally appeal strongly to retirees seeking an income from their portfolio.
Index
Market indices group companies listed on stock exchanges by characteristics such as their size, sector or dividend paying history. Thus, the FTSE 100 is the FTSE’s largest 100 companies. Indices represent companies relative to their size and so can change significantly over time.
Investment trust
Liquidity
The liquidity of an investment denotes how easily it can be “liquidated” and turned back into cash. The time a sale will take, or the difficulty of finding a buyer, dictates the liquidity of an asset. Ensuring your portfolio has the right liquidity profile for your needs is vital.
Multi-manager funds
Multi-manager funds invest in a range of funds to package up many managers, styles and investment objectives into one convenient portfolio, rather than investors having to invest directly in the underlying instruments. Their further sub-division into “fund of funds” and “manager of managers” is an important one in terms of costs and the fund universe available, and you can discuss their relative merits with your wealth manager.
OEIC
Overweight and underweight
Investment funds – and portfolios – are compared to agreed indices for their composition and performance. If exposure to an asset class, market or individual investment exceeds the reference benchmark, this is an “overweight” (and an “underweight” if it is less).
Private equity
Real return and yield
An investment’s real return is that which is generated after the effect of inflation has also been taken into account. The real return on cash (i.e. minus inflation) means it is often not the safe haven for your wealth it appears.
Risk premium
All investments entail a degree of risk, and returns are your reward for taking this on. The risk premium on an investment is the extra reward you can expect for choosing a riskier one over a safer one.
Sharpe ratio
The Sharpe ratio is among the most cited measures of risk-return relationships. In simple terms, it describes how much additional return you are rewarded with for the volatility associated with riskier assets. A higher Sharpe ratio means a better risk-adjusted return.
Shorting
Short selling entails borrowing assets from a third party, selling them and then buying them back to return them to the original lender. This tactic, often deployed by hedge funds, is intended to profit from the price falling in the middle period.
Tracking Error
Tracking error measures how closely a fund or portfolio follows the performance of its benchmark. You may be presented with predicted or realised, actual figures here. Remember that high management costs can result in high tracking error because management and trading fees come out of returns.
Volatility and drawdown
Volatility is the amount by which the value of an asset – or a particular market – fluctuates over time and is an indicator of risk. Drawdown is a measurement of the risk-reward profile of an investment, showing the difference between its peak and trough valuation over a period. (However, drawdown can also denote staged investments into funds from an intended commitment or taking money from a pension pot to generate an income).
Feeling more empowered? Now get proactive
While it is certainly not a comprehensive list, getting familiar with these wealth management terms and concepts will hopefully have made those new to the sector feel more confident about discussing their investment management requirements and comparing providers. We also hope that even experienced investors may have found something new to further enrich their understanding of money matters.
Many of the topics touched on here are covered more extensively in our Knowledge Centre, which features hundreds of pieces from our expert team and the wealth managers from our panel, so please do take a look for topics relevant to you.
If you already feel ready to start making your wealth work harder, then start your 3-minute search for your best-matched adviser here. Or, if you have a specific question for our team, don’t hesitate to get in touch.
