The Fiduciary Standard stipulates that an advisor must place the client’s best interests first. The best way to understand the fiduciary standard is to think in terms of another standard, called the suitability standard. The suitability standard says that a broker/advisor need only recommend investment products that are “suitable” for the client - but those investments do not necessarily have to be in the client’s best interests. Continue reading...
Any professional that you work with for financial planning is going to be compensated for the work they do, but there are different ways they earn their pay. Whether it’s worth it to you is another question. If you have enough knowledge and time on your hands, and your investment portfolio is not very complicated, you may be able to manage it on your own. This can save you some money on financial advisor fees. Continue reading...
Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate. An employer is responsible for establishing a 401(k) and for overseeing it as the sponsor and fiduciary. A self-employed individual can also establish an Individual 401(k), which has the same contribution limits and requires none of the testing or auditing of a regular plan. Other options for work-site retirement plans are SIMPLE IRAs, SEP IRAs, and various kinds of profit-sharing and deferred compensation arrangements. Continue reading...
The suitability standard states that a broker-dealer is obliged to, in the very least, make investment recommendations that are suitable for their clients. The SEC defines a broker as someone who acts as an agent for someone else, and a dealer as someone who acts as a principal for their own account. The suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for clients (in terms of the client’s financial needs, objectives and unique circumstances) instead of having to place his/her interests below that of the client. An example would be a broker recommending a proprietary bond fund for a client looking for a fixed income solution. Continue reading...
Due diligence is the responsibility of the investor and broker to research all pertinent information about the individual's, investments, and companies involved prior to doing business. Due diligence is a responsibility and also a legal defense. If a fiduciary person or company is accused of negligent or criminal behavior, it may be a good defense to show a document trail of research about the people, companies, and investments involved in a transaction. Continue reading...
Standard Deviation is a measurement of how far from the average (mean) the majority of a data set lies. Standard Deviation is a measure of variability, and it is on a different scale for each data set being measured; there is no “standard” standard deviation. It is possible to normalize it for comparison to other data sets using measurements like r-squared and the sharpe ratio. The number arrived at when computing standard deviation is going to reveal the distance, in terms of one of the quantifiable variables being observed, from the average, in either a positive or negative direction, within which 68% of the data set falls. Continue reading...
Employees have no control over the assets in their Defined Benefit plan. The short and simple answer is: No. The payments you will receive in retirement are calculated according to a pre-determined formula. Your employer is responsible for managing the investments, while you simply receive the agreed-upon payments when they are due to you - assuming all goes as planned. Most pension funds, as they are sometimes called, are invested in very conservative instruments such as long term government bonds and fixed accounts offered by some insurance companies and banking institutions. Continue reading...
Mortgage suitability is a standard that does not technically exist in a regulatory way at this point, even though some legislators and consumer protection groups have sought such a standard. Some financial services representatives, for instance, operate under a suitability standard that takes the financial situation and goals of the individual into account when making investment recommendations. This protects consumers to the extent that it deters some professionals from taking advantage of the consumer and being possibly subject to fines, sanctions, and suspension or loss of license due to violations of the standard. Continue reading...
A bond trustee is an institution which has the fiduciary responsibility of administering and enforcing the terms of the bond indenture. A bond indenture is the contract between the bond issuer and the bondholder. A trustee has the resources to manage the distribution of the funds to the bondholders, to keep up with and distribute the required bookkeeping and statement information to the interested parties as well as regulators like the SEC. If there is a violation of the contract, the trustee must report it and act in the best interest of the wronged party. Continue reading...
Basically synonymous with Normalized EBITDA, Adjusted EBITDA is a non-GAAP method of making earnings valuations a little more standardized between companies. Adjusted Earnings is a valuation that has many moving parts in the form of the interest, taxes, depreciation and amortization that might be included there, in addition to the non-GAAP nature of the methods. EBITDA removes all of those moving parts and looks at the Earnings before any of the other arithmetic interferes, hence the name Earnings Before Interest, Taxes, Depreciation, and Amortization. Continue reading...
Professional investment advice is highly regulated, and all publications, seminars, correspondence and recommendations between professional advisors and clients must be kept on record and hold up to scrutiny. It is easy to mislead or misinform investors who have not had a chance to educate themselves, and their very livelihoods are at stake if their money is mishandled. Investment advice can be found at the local barber shop, bleachers, and beaches, but those who want to make sure their money is handled correctly will seek professional advice. Continue reading...
A coefficient of Variation is a statistical measure of expected return relative to the amount of risk assumed. It’s also known as “relative standard deviation,” which makes sense since that implies that your expected risk is adjusted based on the expected return. You can easily calculate the Coefficient of Variation by dividing the standard deviation of the security by its expected return. Continue reading...
Also known as Business Combination Accounting, there are specific guidelines and bits of information that must be documented on the books during an acquisition. Acquisition Accounting is a standardized way to account for the assets and liabilities of companies who are part of a merger or acquisition. International Financial Reporting Standards (IFRS) stipulate that even in a merger where a new company is formed, one company must play the role of acquirer and the other of acquiree, but that rule really only applies outside of the US. Continue reading...
A resistance line is the inverse of a support line and represents the glass ceiling through which a security price has difficulty breaking through. Resistance lines are calculated as part of analysis methods which use moving averages and standard deviation, or similar calculations, to put a range of probability on the expected movement of a security price, with the resistance line representing the top of that range. Continue reading...
Volatility is a measure of the variance, deviation, or movement of a stock. Volatility is all the extra movement of a stock or other security over and above (and below) a line of averages. Put another way, it is a measure of how many changes in price, and by how much, a security experiences over an amount of time. Computations of Standard Deviation and Variance are measures of the degree of volatility which exists in the movement of a stock. Volatility will also be measured relative to a benchmark index, and the degree to which a security adheres or deviates from the benchmark is called Beta. People will also trade on derivatives of the VIX, which is the volatility index of the S&P 500. Continue reading...
The Sharpe Ratio is a risk-weighted metric for returns on investment. It measures whether an investment offers a good return for the amount of risk assumed by the investor. The risk/return trade-off is a positive linear relationship in most theoretical depictions – if an investor seeks greater returns, they will have to take on greater risk. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...
Bollinger Bands were developed by famous trader John Bollinger as a technical analysis tool to discern the likely trading range of a security. A Bollinger Band is typically two standard deviations from a moving average line, both above and below the average. Standard deviation is another word for the average volatility of a price over a length of time. It is typical for a trader looking up the historical price chart for a security to compare it to a moving average line. Continue reading...
A credit rating is given to a company or debt issue after a disinterested third party evaluates the strength of the business or cash flow and rates its ability to pay all of its liabilities. Third-party institutions such as Standard & Poor’s (S&P), Moody’s, and Fitch will conduct research in order to give investors an idea of how likely a business, bond issue, or insurance company can pay all of its obligations. Continue reading...
Household expenses are sometimes also called a family budget. In some cases this can be limited to items purchased such as food and clothing, and services paid for such as utility bills, which only have to do with the livability of the home and the health of the family. This can be extended to included all out of pocket expenses for a family, from health insurance to school tuition. Household expenses are things that people feel that they must pay for to maintain their standard of living, for themselves and their family. You may not have to pay for natural gas to get heat and hot water, but you most likely do, and this is a household expense. The same goes for food and other necessities. Continue reading...
The possibility of a company or municipal government defaulting on their bond obligations, usually by going bankrupt, is a real one. For this reason, all bonds are rated according to the financial stability of the issuer. A look at the history of corporate and municipal debt will illuminate the fact that the possibility of the issuer being unable to pay its obligations to bondholders is a very real one. There is an established system of bond ratings that gives a rough estimate of the bond's reliability. Continue reading...