Glossary of terms
Financial terms can be confusing. To help make things clearer, we’ve created this glossary explaining common financial words and phrases in easy-to-understand language. Our goal is to demystify wealth management jargon so you can better understand the financial concepts that matter to you. This glossary breaks down complicated industry terms into plain English so you can learn more easily.
Terminology in plain English
A-C
Actively Managed Funds
Active management is the use of a human element, such as a single manager, co-managers, or a team of managers, to actively manage an investment portfolio. Active managers rely on analytical research, company meetings and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.
Active Portfolio Management
Active portfolio management is an investment strategy approach that tries to generate maximum value to a portfolio, by actively managing clients’ exposures to different assets and asset classes at different points in the cycle. Investors, as well as fund managers use various techniques to evaluate which financial securities will yield the greatest returns. Unlike passive investments (where management is perhaps non-existent) active managers also consider risk exposure and may have flexibility to adjust the types of assets held at different points in the cycle to protect and control risk. This can be a key driver of long-term investment returns.
Alternatives
An alternative asset is a broad term that includes assets that are not stocks, bonds, or cash. Examples could include commodities (e.g, gold, oil or wheat), hedge funds, collectibles (e.g, art, wine, or classic cars) and property (both residential and commercial). Alternatives are often more complex investments that may be more difficult to value and harder to turn into cash than traditional assets. They generate an investment return which may be uncorrelated to more traditional asset classes.
Annualised Return
Usually expressed as a percentage rate, annualised return is the net return over a given period (e.g, 5 years) arranged to show what the ‘straight-line’ returns would have been over that period.
Asset Allocation
The distribution of investments across a multitude of distinct asset classes such as stocks, bonds, commodities or property. This can be static or flexible, strategic (long-term) or tactical (short-term).
Asset Classes
Asset classes are the various categories of investment available. Shares, bonds, property and commodities are all examples of different asset classes with each having differing characteristics.
Assets Under Management (AUM)
The total market value of investments that a financial institution manages on behalf of its clients.
Benchmark
Benchmark is a standard index used to evaluate a portfolio’s overall year-on-year performance.
Capital
Capital is the amount of money held in an asset, for example in property or shares. When discussing funds, capital can also mean the market value of the assets within the fund (excluding income).
Capital Gain
Capital Gain is a profit made on an asset which may be realised when it is sold for a higher price than it was originally bought for. An unrealised capital gain is a capital gain which has not yet been realised.
Capital Gains Tax (CGT)
This is the tax paid on any profits made when an asset is sold. Different tax rates are subject to the type of asset and each individuals’ personal tax positions.
Capital Growth
Capital Growth is the increase in value of an investment from its original amount. Funds targeting capital growth aim to select investments that will increase in value over time.
Capital Loss
Capital loss occurs when an asset is sold for a lower price than it was originally bought for.
Capital Return
This is the rate of return on an asset generated from an increase in capital value rather than the income generated from it. It is the increase in value of assets in a portfolio.
Cash
Although cash typically refers to money in hand, the term can also be used to indicate money in bank accounts or any other form of currency that is easily accessible and can be quickly turned into physical cash. Cash may also be held as part of an investment fund or portfolio. Cash is often regarded as a ‘safe’ investment, but when tax and inflation are taken into consideration, it can often represent a loss to an investor in real terms. Credit risk must also be considered.
Cash Flow Modelling
The process of forecasting incoming and outgoing cash flows for a business or individual over a specified period of time. It allows you to predict potential cash surpluses or deficits so you can make informed decisions about financing needs. For individuals, this may be used to guide decision making about retirement or goal-based investing.
Commodities
A commodity is a basic physical asset, often used as a raw material in the production of goods. It is a form of alternative asset after the more conventional investment asset classes of cash, bonds, equities, and property. Investors can gain exposure by buying the physical commodity, through shares directly in commodity companies or indirectly through commodity funds which track the price of the underlying asset. Commodity prices can be volatile and are generally denominated in US Dollars.
Corporate Bonds
Corporate bonds are issued by companies to raise money. When you invest in corporate Bonds, you lend money to a company in exchange for an “IOU”. The promise to repay the debt has a fixed term and at maturity, typically five or ten years, the sum invested is returned. The investor also receives interest via a ‘coupon’. Capital and interest may not be paid to the investor if the company defaults. As a result, corporate bonds are seen as riskier than government bonds, as companies are generally considered to be more likely than governments to default on debt. During the ownership of a bond the value of the bond will fluctuate depending upon various factors including interest rates, inflation, and the credit rating of the issuer.
D-H
Derivative
Derivatives are financial contracts, the value of which is related to the value of a financial index or underlying asset. They are often used for risk management purposes, however, can also be used to enhance returns.
Diversification
Designed to reduce risk, diversification is a strategy in which investment is made in a variety of asset classes, industry sectors and geographical locations to avoid ‘putting all eggs in one basket’. Commonly used by fund managers, this helps to protect investors’ interests, and presents further opportunity for successful investment returns whilst controlling risk.
Diversified Portfolio
In investment planning, portfolio diversification is the risk management strategy of combining a variety of assets to reduce the overall risk of an investment portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. As different asset classes deliver investment returns in different ways and at different times, they are not always correlated.
Dividends
Dividends are a portion or percentage of a company’s profits, typically paid once or twice annually, to investors as cash payments or shares.
Enterprise Investment Schemes (EIS)
Enterprise Investment Schemes are a form of collective investment in small and medium-sized companies. As investments in such companies are considered to be higher risk, investors demand various tax reliefs to offset some of the risk exposure. Due to the higher risk of the underlying companies, it is advisable to seek advice from a financial planner/advisor like Featherstone Partners before considering them as a suitable investment option.
Equities
Equities (stocks and shares) are an instrument that represents an ownership position, or equity, in a private or public company. An equity investment generally refers to the buying and holding of listed company shares on a stock market by individuals and firms in anticipation of income from dividends and capital gains. The value of the stock depends on the supply and demand of the position, which is of course driven by multiple factors.
Estate Planning
Estate planning is the act of preparing for the transfer of a person’s wealth and assets after death. Investment and property assets, pensions, life insurance, property, cars, personal belongings, and of course debts are all part of one’s estate. Estate planning can be provided by professional wealth management and financial planning firms like Featherstone Partners.
Exchange Traded Fund (ETF)
An ETF (also known as a tracker fund) is a passively managed basket of securities that directly trades on a stock exchange just like a typical stock. ETFs are designed to replicate or track the performance of an underlying index or asset class.
Ethical Fund
Ethical funds are typically socially and environmentally driven, investing in eco-friendly and morally positive activities. These funds also aim to invest in ethical companies, such as those who recycle, and can also be described as Socially Responsible Investments. They should exclude investment in contentious industries such as gambling, alcohol, tobacco, and oil.
Expense Ratio
The annual fee charged by a fund expressed as a percentage of assets.
Financial Conduct Authority (FCA)
The FCA is the UK regulator of Financial Services and requires firms and individuals to adhere to strict rules, principles, guidance and to put their customers’ well-being at the core of their business.
Foreign Exchange (FX)
Foreign Exchange, or ‘FX’, refers to the relationship between various global currencies. Currencies move interdependently of each other and are affected heavily by the country’s base interest rate, inflation rate and general economic strength among other factors. Clients generally become exposed to different currencies when making overseas investments or travelling overseas.
Government Bonds
Often referred to as “Gilts” in the UK, “Treasuries” in the US or “Bunds” in Germany, a government bond is a loan to a government of a country with a fixed “coupon” or interest rate. They are issued by a country’s government, promising to repay borrowed money at a fixed rate of interest at a specified time. Bonds are also known as fixed income and fixed interest because they pay out a fixed annual amount of interest. They are issued either as short- or long-dated bonds, and it’s even possible to buy a gilt for up to 50 years. During the ownership of a bond the value of the bond will fluctuate depending upon various factors including interest rates, inflation and the credit rating of the issuer.
Hedge Funds
A private fund that is not allowed to be publicly offered. This is due to the structure, borrowing or investment powers of the fund, as they do not comply with the regulatory requirements for retail funds.
HM Revenue & Customs (HMRC)
The HMRC is responsible for collecting, administering, paying out and enforcing taxes in the United Kingdom.
I-L
Index/Indices
An index is a complex mathematical compilation of rates, prices, commodities and currencies of markets and sectors. This can help construct an estimation of the price movements of those sectors.
Inflation
Inflation refers to the general rise in the cost of goods and services over time. Because a sustained increase in prices results in a relative decrease in the value of money, it is important to consider inflation when looking at personal financial planning.
Inheritance Tax (IHT)
Inheritance Tax (IHT) is levied on assets e.g. cash, investments and property transferred from a deceased person to their beneficiaries.
Inheritance Tax Planning
Inheritance tax planning considers the future value of your estate when you die, and ways to reduce the potential tax liability through forward planning. This may include the value of assets you have given away or put into trust during the previous seven years. Careful inheritance tax planning with your financial planner can reduce or even eliminate the IHT payable and is also an important part of drawing up or reviewing your will.
Interest Rates
Interest rates are the price which must be paid for borrowing money. Money deposited in a bank account is effectively being lent to that bank and, as such, attracts a level of interest based on the amount deposited and the effective term. When borrowing for example with a mortgage (secured) or credit card (unsecured), interest is charged by the lender.
Investment Advice
Any investment recommendations made by a regulated professional regarding an investor’s portfolio. Many professionals, including financial planners, bankers and brokers, can provide investment advice that is specific to their financial situation.
Investment Advisory Services
Investment advisory services are offered by a professional individual or firm making investment recommendations to an individual or group of investors. Investment advisors may be independent investment consultants or work as part of established firms, such as wealth managers of financial planners.
Investment Portfolio Management
Portfolio management includes a range of professional services to manage individuals’ and companies’ securities, such as stocks and bonds and other assets such as real estate. The management is executed in accordance with a specific investment goal and investment profile, and takes into consideration the level of risk, diversification, period of investment and maturity sought.
Investment Theme
An investment theme is a broad economic, political, social, or technological trend that is expected to drive growth in certain sectors, industries, or asset classes over a multi-year period. Identifying key investment themes can help guide investment decisions and portfolio allocation.
Read about Our Top 5 Investment Themes
Individual Savings Account (ISA)
An ISA is a tax-free way to invest and is a good place to start when thinking about personal financial planning.
Whereas with other investments you may have to pay income tax or capital gains tax, neither of these taxes are due on assets held within an ISA. The Government sets an annual limit on how much can be saved in an ISA each year.
Junior Individual Savings Account (JISA)
A JISA is a long-term, tax-free savings account for children which doesn’t allow withdrawals until the child turns 18. They are a useful tool when thinking about family wealth management.
Although it is unlikely that children will have to pay any tax until they start working, a JISA protects the assets from income tax and capital gains tax in the future. The Government sets an annual limit on how much can be saved in a JISA each year.
By using a JISA parents can start tax-efficient investment portfolio management for their children as soon as they’re born. Once set up, JISAs can also be funded by grandchildren or godparents.
M-P
Multi-Manager Fund
Multi-manager funds, sometimes referred to as ‘funds-of-funds’ are collective investment schemes run by one manager which invest in several other managed funds. The underlying funds may be specialised investment funds which look at specific sectors or investment themes. Multi-manager funds can provide exposure to specialist sectors and managers which are not always accessible to individual investors.
Passive Funds
Passive funds are often referred to as Index Funds, as the investor puts their money into investment funds that track a particular index, or market sector. The reason these funds are described as passive is because there is no active strategy for the fund manager to buy and sell securities at their discretion. Instead, the fund manager buys and holds securities of a benchmark index.
Pensions
A pension is a form of investment which can pay out a lump sum or periodic payments (or both) to its beneficiary during retirement. Typically, the pension pot will have been built up over the years that person was employed. There are different types of pensions available in the UK and companies must now offer workplace pension schemes for employees. Pensions can be an extremely tax-efficient way to build long term capital growth for retirement funding. It is crucial to consider pensions as part of long–term financial planning and wealth transfer.
Portfolio
A portfolio describes a collection of investments.
Portfolio Management
Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Professional and licensed portfolio managers work on behalf of clients to implement investment strategies.
Potentially Exempt Transfer (PET)
A Potentially Exempt Transfer enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.
Premium Bonds
A Premium Bond is a lottery bond issued by National Savings & Investments (NS&I). The bonds are entered in a regular prize draw and the UK government promises to buy them back, on request, for their original price. The government pays interest on the bond into a fund from which a monthly lottery distributes tax-free prizes to bondholders whose numbers are selected randomly.
Q-Z
Real Assets
Real assets are physical assets that have value due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land, machinery, and oil. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets such as stocks and bonds. They can also be a good inflation hedge, historically keeping pace with inflation.
Retirement Planning
The process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings scheme, and managing assets with consideration for other factors and variables which undoubtedly change over time.
Risk Profile
A risk profile reflects an individual’s attitude to risk, considering their ability and understanding of investment risk, returns and the possible loss of capital or income, or an investment’s failure to meet financial targets. It is used as a discussion point before implementing suitable investment strategies subject to specific objectives, timescales, and other factors.
Risk Rating
Risk ratings are designed to reflect the risk level of a particular investment or asset. They help investors to gauge how much a fund could go up and down in value. They are formulated by fund managers by considering historical performance and volatility data relative to other funds or markets. Ratings agencies apply a risk score or credit rating to issuers of debt.
Self-Invested Personal Pension (SIPP)
A SIPP is a pension wrapper that holds investments until retirement and beyond. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that it allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC) and may offer more flexibility for accessing pension benefits in retirement.
Short
Usually referred to as ‘going short’, this is the practice of trying to profit on an investment by betting that its value will fall in the future. This is done in the hope that it can be bought back later for a lower price, allowing the seller to make a profit.
Stock Market/Stock Exchange
The stock market is an electronic system in which securities, bonds and shares are facilitated, either between buyers and sellers, or brokers and dealers.
Thematic Investing
Thematic investing is an investment strategy that aims to identify, and profit from long-term trends that are shaping the world.
Trusts
A Trust can be used to manage assets on behalf of someone else. They are widely used in estate planning and family wealth management. Assets placed into trust by a Settlor are then managed by Trustees. The beneficiary or beneficiaries are entitled to receive distributions from the Trust in accordance with pre-determined instructions (as set in the Trust Deed).
There are different types of Trust to fulfil different roles. As such, they are popular vehicles for retirement planning and inheritance tax planning. It is important to seek professional advice when establishing Trusts.
Venture Capital Trusts (VCTs)
Venture Capital Trusts are investment companies listed on the London Stock Exchange. VCTs are a form of collective investment designed to allow equity investment in small and expanding companies. To encourage investment in small growth companies, the UK government provides several tax reliefs to investors. Due to the higher risk of the underlying companies, it is advisable to seek advice from a financial planner before considering them as a suitable investment option.
Regulatory Information
This communication does not constitute tax or financial advice. All information is accurate at the time of writing. The value of investments can go down as well as up. Capital is at risk. Featherstone is a trading name of Featherstone Partners Limited, Old Brewhouse, Yattendon, Berkshire, RG18 0UE, which is authorised and regulated by the Financial Conduct Authority (799741) and registered in England (Company Number 11039522).
What is wealth management?
Private Wealth Management is the combined practice of Investment Management and Personal Financial Planning, typically for private clients, although this can extend to companies, charities and trusts. The goal of private wealth management is to grow, manage and protect long-term wealth.
Broadly, a private wealth management firm will offer access to specialists who work together to create holistic wealth management services. Investment management and financial planning should go hand in hand, although are often not offered as an integrated service by wealth managers.
There are various roles within the private wealth management industry which can lead to confusion as they often overlap. The roles of Wealth Manager, Investment Adviser, Financial Adviser and Financial Planner can be used interchangeably – there are generalists and there are specialists…
These roles should all contain an element of investment advice. In addition, Financial Planners provide retirement planning, inheritance tax planning, estate planning, pension and protection advice alongside investment advice. Finding a private wealth management company which is good at every discipline is hard to find, although they do exist.
Investment advisers and financial planners are required to obtain and maintain rigorous professional qualifications, and wealth management firms must be authorised by the Financial Conduct Authority (FCA).
What is financial planning?
Personal financial planning is the ongoing process of evaluating your personal financial position and putting a plan in place to achieve your financial goals. Personal financial planning will usually be multi-faceted, and the approach will likely change as your circumstances change for example, as you get older.
Basic financial planning is something which might be done yourself. However, a financial advisor might be required to help with investment portfolio management and other financial advisory services. As you get older, retirement planning and inheritance tax planning become more important, so a specialist financial advisor or pension advisor will be better suited to offer specialist advice.
Personal financial planning often includes an element of financial forecasting or cashflow modelling to help to support informed decision making. This considers liquidity and life events as part of wealth accumulation or decumulation. It incorporates tax efficient investment planning to make optimal use of available tax allowances.
What is investment management?
Investment management forms a key part in wealth management and is primarily focused on optimal investment portfolio performance, by using different asset classes to manage risk and returns. Some investment managers use a passive approach to investing, meaning that the portfolio remains static in its asset allocation, and some will adopt a more proactive approach, hopefully adding value and further managing risk.