Decoding Financial Jargon: Understanding the Basics of Investing and Financial Services
The financial industry can be confusing, especially for those new to investing. Terms such as equity, fiduciary, wirehouse, robo-advisers, fixed income, and ETFs may be overwhelming. Two main business approaches in the financial services industry are the “wirehouse” model, which consists of professionals working for large firms with proprietary investment offerings, and the “independent” model, where professionals work as independent contractors alongside broker-dealers or RIAs. There are different types of professionals in each model, such as registered representatives and investment adviser representatives, who are regulated by FINRA and the SEC, respectively.
Registered representatives primarily operate in wirehouses and follow a more sales-oriented model, charging commissions for transactions. On the other hand, investment adviser representatives provide ongoing investment advice and are held to a higher legal standard called a fiduciary duty, placing their clients’ interests above their own. It can be challenging to determine the type of professional you are working with and how they are compensated, so it’s essential to ask questions and do research before hiring someone. Designations such as CERTIFIED FINANCIAL PLANNER® (CFP®), Chartered Financial Consultant® (ChFC®), and Chartered Financial Analyst® (CFA®) require extensive knowledge, testing, and ethics criteria, showing that the professional has invested time and effort into their career.
Other confusing terms in the financial industry include equities (stocks), fixed income (bonds), ETFs (exchange-traded funds), ADRs (American Depository Receipts), and robo-advisers (automated investing services). Bonds do not have fixed returns like bank CDs unless they are held to maturity, and ETFs are like mutual funds traded on stock exchanges. ADRs allow American investors to purchase foreign stocks, and robo-advisers use computer algorithms to manage investment portfolios. It is important to consult with a financial, tax, or legal professional before making any financial decisions, as investments involve risk.
Overall, understanding the financial industry jargon and navigating the different business models can help investors make informed decisions about their portfolios and retirement planning. By demystifying the industry and providing a clear explanation of terms, individuals can work with professionals who best suit their needs and financial goals.