Welcome to the Asset Financial Planners Directory

FPD Glossary

This glossary is designed to offer site users with greater understanding of some of the terms used in the financial services industry and by financial planners.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

AFSL
The Australian Financial Services License (AFSL) number issued to all financial planners and financial services industry corporations by the Australian Securities and Investment Commission.

Australian Securities and Investments Commission (ASIC)
The Australian Government regulatory body that enforces and administers Corporations Law and consumer protection law for investments, life and general insurance, superannuation and banking.

Asset Allocation
The apportionment of an investment portfolio among different asset classes (shares, bonds, property, cash and overseas investments) from time to time in accordance with the investment outlook of the investor or investment manager.

Asset Class
A broadly defined category of financial assets (eg. domestic shares, overseas bonds, cash, etc).

Asset Value
The value of the assets underpinning a security. These may not be fully reflected in the price of a security.

Benchmark
An index or other market measurement that is used by a fund manager as a yardstick to assess the risk and performance of a portfolio. For example, the All Ordinaries Accumulation Index is a commonly used benchmark for Australian share portfolios.

Blue Chip
Referring to the shares of a leading company which is known for excellent management and a strong financial structure. The term has become a generic one for quality securities.

Bond
A debt security issued by such entities as corporations, governments or their agencies (eg. statutory authorities). A bond holder is a creditor of the issuer and not a shareholder.

Broker
An agent who handles investors' orders to buy and sell securities, commodities, insurance policies or other property. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.

Brokerage
A fee charged by a broker for the execution of a transaction; or alternatively an amount per transaction or a percentage of the total value of the transaction. Sometimes also referred to as a commission or fee.

Cash Management Trust (CMT)
A pooled investment vehicle for investors who would not individually have access to the professional money market. By pooling funds from various sources, larger volumes of higher yielding short-dated securities can be purchased and the resulting higher returns can then be returned to the trust members. CMTs generally restrict themselves to negotiable instruments of a duration of no longer than six months. As these securities are highly liquid, a CMT can accommodate cash flows, both in and out, on a daily basis, thereby offering small investors a flexibility not present in a traditional fixed rate term deposit.

Dealer group
The distribution arm typically of funds management groups or banking institutions designed to offer investors financial planning services. Dealer groups often employ large numbers of financial planners, offering them training, licensing and support services. They also often provide financial planners with lists of recommended investment products from which to service their clients.

Diversification
The spreading of investment funds among classes of securities and localities in order to distribute and control risk. This is a fundamental law of investment, meaning simply: 'don't put all your eggs in one basket'.

Dividend
The amount of a company's after-tax earnings which it pays to shareholders.

Equity
a) a synonym for a share (as distinct from fixed interest) investment; b) The interest or value which an owner has in an asset over and above the debt against it.

Financial Planning
The process of providing comprehensive advice and assistance to a client for the purpose of meeting a client's financial needs and life goals. The process normally includes six steps: data gathering, goal setting, identification of financial issues, preparation of written options and recommendations implementation of the client's decision, and periodic review and revision of the plan.

FPA
The abbreviation of the Financial Planning Association of Australia. This is a national body representing professionals who specialise in giving financial planning advice, with 700 members, including 320 principal members (licensed dealers or investment advisers). FPA funds an independent cost-free Complaints Code of Ethics and Rules of Professional Conduct and holds the exclusive licence in Australia to confer the international designation of Certified Financial Planner.

Fixed Interest
Referring to income which remains constant and does not fluctuate, such as income derived from bonds, annuities and preference shares. Any debt security which has a fixed flow of income is known as a fixed interest security.

Gearing
a) A measure of indebtedness, ie. the extent of borrowings as against the equity held by a person or company in an asset; b) The ability to increase exposure by investing in futures contracts without making the underlying cash available.

Growth Assets
A general term for assets such as shares and property, which provide investment returns, (comprising both capital growth and income), which outperform inflation. Growth assets compare to debt securities such as fixed interest and/or cash investments.

Growth Fund
An investment portfolio which aims to achieve an above average rate of after-tax income and capital growth over the medium to longer term, while adopting a medium risk profile. A growth fund typically comprises a balanced portfolio of equities, fixed interest, property and cash.

Growth Investor
One who seeks capital gain from expected further growth in company earnings. Typically, growth investors care less about price/earnings ratios and other valuation measures and more about earnings growth.

Insurance
A contractual arrangement under which one party (the insurer) agrees to pay an amount of money to another (the policy holder) on the occurrence of a defined event, in return for payment of a premium (eg. life, disability, professional indemnity).

Investment
An asset acquired for the purpose of producing income and/or capital gains for its owner.

Investment Manager
An organisation that specialises in the investment of a portfolio of securities on behalf of individuals and/or organisations subject to the guidelines and directions of the investor. Investment managers offer both pooled investment products and individual portfolios to a range of clients including superannuation funds, institutions and individual investors.

Leverage
a) A synonym for gearing (eg. using derivative investments to over-invest a portfolio); or b) The use of an asset as security for a borrowing.

Liabilities
a) Debts (plus, in the case of companies, dividends due to shareholders). Opposite of Assets; b) A stream of obligations (eg. pension payments).

Life Insurance Company
A financial institution with the main business of providing insurance against death and disability through households investing funds with the company. Life insurance companies also operate superannuation funds.

Liquid Assets
Assets held as cash, or in the form of securities which can be converted into cash swiftly and with minimal capital loss (eg. short-term bank bills).

Master fund
An investment vehicle that enables individual investors or small superannuation funds to channel money into one or more underlying investments, most commonly wholesale or retail pooled funds operated by professional investment managers. They can take the form of:

(a) discretionary funds where the individual investors selects the underlying investment products;

(b) fund of funds where

the investor selects a general risk profile eg growth, capital stable etc

(c) feeder funds which operate similarly to fund of funds arrangements but with the master fund manager also being responsible for managing the underlying investments.

Management Expense Ratio (MER)
A ratio expressing the management, trustee and certain other expenses of a pooled investment fund as a proportion of the net asset value of the fund.

Mortgage
A form of security for a loan, in which a specific item of property is pledged by the borrower (mortgagor) to the lender (mortgagee).

Net Asset Value
Total assets of a company less total liabilities.

Non-Bank Financial Institution (NBFI)
A generic term describing any financial institution not covered by Reserve Bank supervision, but more commonly referring to institutions such as Building Societies, Credit Unions and Friendly Societies, all of which are now regulated by the Australian Financial Institutions Commission.

Optimal Portfolio
The portfolio which best meets the investor's needs and risk/return expectations among the range of all feasible portfolios.

Option
An agreement which conveys the right to the holder to buy (receive) or sell (deliver) a specific security at a stipulated price and within a stated period of time. If the option is not exercised during that time, the money paid for it (but no more than that amount) is forfeited.

Portfolio
The collection of investment holdings of a particular investor usually with reference to its composition ie. the mix of different classes of securities, such as bonds, property, shares and cash, or if in a single asset class, the mix of different sectors and stocks.

Portfolio Manager
A person or organisation engaged to manage investment portfolios and make investment decisions on behalf of others.

Quantitative Management
An approach to investment management which seeks to use statistical or numerical methods to create efficient portfolios, with the optimum risk/return trade-off. Quantitative managers generally attempt to add value by exploiting pricing anomalies, or by providing particular levels of risk control, rather than by subjective forecasting of market behaviour.

Risk
In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must promise higher expected yields if investors are to be attracted to them. Risk can take many forms, but a major one is Valuation Risk paying too much for an asset.

Risk Management
The monitoring and controlling of various risk factors in an investment portfolio with the aim of minimising volatility of investment returns.

Risk Profile
Investors are put into broad categories based on their willingness to take risk to achieve higher returns. This information is then used to select the appropriate investments for their profile.

Rollover
a) In relation to superannuation, the transfer of an eligible termination payment into an approved deposit fund, deferred annuity or superannuation fund prior to retirement in order to defer or (if the rollover remains in place until at least minimum retirement age) avoid the requirement to pay lump sum tax; b) In relation to banking, the renewal of a loan or extension of a deposit at defined intervals, normally including a revision of the interest rate charged or paid.

Securities Institute of Australia (SIA)
The national professional body representing people engaged in and connected with Australia's investment and securities markets. Membership is drawn from a wide range of professionals including sharebrokers, merchant bankers, investment analysts, fund managers, bankers, investment advisers, securities dealers, lawyers and accountants.

Service Fee
Usually a monthly fee levied to cover bank cost of administering & maintaining the loan account i.e. fixed and variable costs such as staff, IT software / hardware.

Share
The ownership of part of a company; a contract between the issuing company and the owner of the share which gives the latter an interest in the management of the corporation, the right to participate in profits and, if the company is dissolved, a claim upon assets remaining when all debts have been paid.

Specialist Manager
An investment manager which confines its investment activity to specific asset classes (eg. equities, fixed interest, property, overseas shares, etc) instead of (or as well as) balanced funds.

Superannuation
A means of setting aside funds during working life for use as retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors.

Tax Deductible
Referring to an expense which can be offset against taxation liabilities.

Term Deposit
A deposit with a financial institution for a fixed period and a rate of interest which applies for the duration of the deposit.

Trust Fund
A fund whose assets are managed by a trustee or a board of trustees for the benefit of another party or parties. Restrictions as to the type of investments in which the trustee may invest the assets of the trust fund are usually found in the trust deed and in applicable legislation.

Underwriter
A broker or bank which arranges the sale of an issue of securities on behalf of a client and, if it does not sell all stock to other institutions or investors, itself undertakes to purchase the unsold securities. By using an underwriter, the client is therefore assured of raising the full amount of money it is seeking.

Unlisted Securities
Securities which are not listed on an organised stock exchange.

Source: The definitions have been sourced from the moneymanager website and The Australian Financial Review Dictionary of Investment Terms.