Series Glossary

12b-1 fee: An annual fee that mutual funds charge for marketing and distribution expenses. 12b-1 fees are typically 0.25% and included in the fund's expense ratio.

Annuity: A tax-deferred investment vehicle that's issued as a contract between an individual and an insurance company. An annuity provides many types of income options. Annuities come in several categories, including fixed versus variable and immediate versus deferred.

Assets under management: The market value of the assets that a firm manages for its clients. AUM is how firms measure growth and how they compete with other firms. AUM can increase due to capital appreciation of the investments the firm manages and/or new money coming into the firm. Conversely, AUM can decrease due to investment losses and/or money flowing out of the firm. The larger the AUM, the more money the firm makes.

Back-end load: A fee charged by mutual funds when shares are sold; amount depends on how long the shareholder owns the fund shares. Funds that charge back-end loads are often referred to as B-share mutual funds. These funds assess a contingent deferred sales charge, or CDSC. Typically, if the fund is sold within five to 10 years, the mutual fund shareholder pays a fee based on a percentage of the value of the shares sold. The fee is highest in the first year and decreases each year until the period ends, at which time it drops to zero. One example commonly seen is a 5% back-end load if you sell within the first year, 4% in the second year, 3% in the third year or fourth years, 2% in the fifth year, 1% in the sixth year, and nothing in the seventh year and after. (Compare to front-end load.)

BrokerCheck:An online FINRA resource for investors to research financial advisors. It provides information such as educational background, previous employers, tenure in the industry, securities licenses held, and disclosure of any past or pending customer disputes, disciplinary actions, and regulatory events. Click here to go to FINRA's BrokerCheck.

Broker-Dealer: A company or individual that buys and sells securities for its own account or on behalf of its customers.

Certified Financial Planner Professional:A financial advisor who has obtained a certification from the Certified Financial Planner Board of Standards. The designation shows that the advisor has demonstrated proficiency in several areas, including financial planning, taxes, insurance, estate planning, and retirement planning. A CFP also requires ongoing education to maintain certification. A financial advisor does not have to be a CFP. For more information, follow this link to the Certified Financial Planner Board of Standards.

Commission: A sales charge collected by an advisor for buying or selling a security. Because commission-compensated brokers will not get paid very much if their clients don't conduct many transactions, unethical brokers may encourage clients to conduct more trades than necessary.

Contingent Deferred Sales Charge: Commission charged by back-end load mutual funds on the sale of some mutual funds. If an investor sells such a fund before holding it for a certain time period, the CDSC will be deducted from the value of the mutual fund shares sold. See also back-end load.

Discretionary account: Accounts that allow the broker to buy and sell securities on behalf of the client without first obtaining specific approval of a transaction. Clients must sign a disclosure agreement acknowledging this before any trading occurs. Discretionary trading is common in managed accounts, which are personalized investment portfolios that are professionally managed.

Fee-based: Advisor compensation that is based on a set percentage of a client's assets under management, rather than (or in addition to) commissions based on transactions performed.

Fee-only: Advisor compensation that is based solely on fees for financial planning or asset management and excludes commissions.

Fiduciary: A professional or institution that takes on the duty to manage assets in the best interests of clients over the fiduciary's own interests, avoiding any conflict of interest. Investors should ask whether their advisor operates under the fiduciary standard or the less-stringent suitability standard.

Financial advisor: A professional who helps clients plan and arrange their finances. Different financial advisors provide a wide range of services, with some focusing solely on investing while others look at broader financial planning issues including insurance, estate planning, taxes, and retirement planning. Financial advisors must understand their clients' financial situations, need for financial stability, and tolerance for risk in order to make suitable recommendations. Financial advisors often hold various designations indicating some form of professional expertise; follow this link for a list from of more than 100 advisor designations.

FINRA: The Financial Industry Regulatory Authority is the largest non-governmental regulator for all securities firms doing business with the U.S. public. Its goal is to protect American investors. It oversees all securities firms and the advisors they employ. Visit FINRA's website for more information, including access to its BrokerCheck database.

Form ADV: Documentation that a firm submits annually to the SEC. It specifies the services provided, fees charged, investment style, assets under management, and key officers of the firm. The form is a public record and is typically required for companies managing more than $25 million. You can find a firm's filing by going to the SEC's Investment Advisor Public Disclosure database.

Front-end load: An upfront commission charged by a mutual fund and taken from a person's initial investment. Funds charging a front-end load are typically referred to as A-share mutual funds. For example, a 5% front-end-load fund will charge $500 for a $10,000 mutual fund purchase; therefore $9,500 is actually invested in the fund. (Compare to back-end load.)

High net worth: Industry term used for individuals with substantial liquid or investable assets. What is considered "high net worth" differs from firm to firm, but typically an individual with $1 million or more is considered high net worth. Firms often offer different investment products and services to these individuals.

No-load funds: Mutual funds offered directly to the public with no sales charge. No-load funds are not without fees, though; they charge annual expenses (as do all mutual funds).

Registered investment advisor: An investment advisor who is registered with the Securities and Exchange Commission or a state's securities agency. RIAs are paid in any or all of these ways: (1) A percentage of the value of the assets they manage, (2) an hourly fee, (3) a fixed fee, and/or (4) a commission on the securities they sell (this applies if the advisor is also a broker-dealer).

Revenue sharing: An annual fee paid by a mutual fund company to a brokerage firm that sells its funds to investors. The investor does not pay the fee directly, but the mutual fund recoups its expenses from the income that the fund generates. The dollar amount that the brokerage firm receives depends on the dollars invested in the company's mutual funds.

Series 7: Securities license needed for an advisor to sell securities, including stocks, bonds, and other investments.

Series 65: Securities license required for an advisor to function as a registered investment advisor.

Stockbroker: An agent or firm that charges a fee or commission for executing buy and sell orders.

Suitability standard: A requirement that an investment strategy be appropriate for an investor. How suitable a strategy is depends on the investor's situation. Investors should ask whether their advisor operates under the suitability standard or the more stringent fiduciary standard.

At the time thisarticle was published

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