* Foundations of Family Wealth Management
Expert-defined terms from the Graduate Certificate in Family Wealth Management course at London School of Planning and Management. Free to read, free to share, paired with a globally recognised certification pathway.
Accredited Investment Fiduciary (AIF) #
An individual who has earned the Accredited Investment Fiduciary designation by completing the requisite education, examination, experience, and ethical requirements established by the Center for Fiduciary Studies. An AIF is trained to follow a fiduciary process that places the client's interests first and helps the individual or organization meet their legal and ethical obligations.
Alternative Investments #
Investments that do not fall into the categories of stocks, bonds, or cash. Examples include real estate, private equity, hedge funds, commodities, and derivatives. Alternative investments can offer diversification benefits, potentially higher returns, and lower volatility compared to traditional asset classes. However, they may also come with higher fees, less liquidity, and increased risk.
Asset Allocation #
The process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash, based on an investor's risk tolerance, time horizon, and financial goals. Asset allocation aims to balance risk and reward and can be customized to an individual's unique circumstances.
Behavioral Finance #
A field of study that combines insights from psychology and economics to explain how investors' emotions, biases, and cognitive errors can impact their financial decision-making. Behavioral finance seeks to understand why investors often act against their best interests, leading to suboptimal outcomes, and how they can improve their decision-making processes.
Bond #
A fixed-income security that represents a loan made by an investor to a borrower, typically a corporation, government, or government agency. In exchange for the loan, the borrower agrees to pay the investor interest periodically and repay the principal at maturity. Bonds are generally considered less risky than stocks but offer lower potential returns.
Capital Gains #
The increase in value of an asset, such as a stock or real estate, that results in a profit when the asset is sold. Capital gains can be short-term (held for one year or less) or long-term (held for more than one year), with different tax implications for each.
Commodities #
Basic goods used in commerce that are interchangeable with other goods of the same type, such as grains, metals, and energy products. Commodities can be traded on exchanges, and their prices are influenced by supply and demand factors.
Derivatives #
Financial instruments that derive their value from an underlying asset, such as a stock, bond, commodity, or currency. Derivatives can be used for hedging risk, speculating on price movements, or generating income. Examples include futures, options, and swaps.
Diversification #
The practice of spreading investments across various asset classes, industries, and geographic regions to reduce risk and potentially enhance returns. Diversification aims to ensure that a portfolio is not overly concentrated in any single investment, thereby minimizing the impact of underperforming assets.
Dollar #
Cost Averaging: An investment strategy that involves systematically investing a fixed amount of money into a particular asset or investment portfolio at regular intervals, regardless of the asset's price. Dollar-cost averaging can help mitigate the impact of market volatility by buying more shares when prices are low and fewer shares when prices are high.
Estate Planning #
The process of organizing one's financial and personal affairs to ensure that assets are distributed according to the individual's wishes upon death, minimize taxes and administrative costs, and provide for the care of minor children or dependents. Estate planning often involves the use of wills, trusts, powers of attorney, and other legal documents.
Exchange #
Traded Fund (ETF): A type of investment fund that is traded on a stock exchange like an individual stock. ETFs typically track a specific index, sector, commodity, or a basket of assets and offer investors the opportunity to gain exposure to a diversified portfolio with lower fees than actively managed funds.
Fiduciary #
An individual or organization that has a legal and ethical obligation to act in the best interests of another party, such as a client or beneficiary. Fiduciaries are required to act with honesty, loyalty, and care, and to disclose any potential conflicts of interest.
Financial Planning #
The process of creating a comprehensive plan to manage one's financial resources to achieve short- and long-term goals, such as buying a home, funding an education, or retiring comfortably. Financial planning often involves analyzing an individual's current financial situation, setting goals, developing a plan to achieve those goals, and implementing and monitoring the plan over time.
Hedge Fund #
A privately offered investment vehicle that uses various strategies, such as long and short equity positions, derivatives, and leverage, to generate alpha, or excess returns over a benchmark. Hedge funds are typically only open to accredited investors and have higher minimum investment requirements, fees, and risk levels than traditional mutual funds.
Individual Retirement Account (IRA) #
A tax-advantaged retirement savings account that allows individuals to contribute a portion of their earned income each year. There are two main types of IRAs: Traditional IRAs, which offer tax-deductible contributions and tax-deferred growth, and Roth IRAs, which offer tax-free growth and qualified withdrawals.
Life Insurance #
An insurance contract that provides a death benefit to the beneficiary upon the insured's death. Life insurance can be used to replace income, pay off debts, fund estate taxes, or provide for the financial needs of dependents. There are two main types of life insurance: term life insurance, which provides coverage for a specified period, and permanent life insurance, which provides coverage for the insured's lifetime.
Liquidity #
The ease with which an asset can be converted into cash without affecting its market price. Assets with high liquidity, such as publicly traded stocks and bonds, can be sold quickly and at a stable price, while assets with low liquidity, such as real estate or private equity, may take longer to sell and may be subject to significant price discounts.
Modern Portfolio Theory (MPT) #
An investment theory developed by Harry Markowitz that emphasizes the importance of diversification and asset allocation in constructing an efficient portfolio that maximizes returns for a given level of risk or minimizes risk for a given level of expected return. MPT assumes that investors are risk-averse and that asset prices are influenced by random fluctuations.
Mutual Fund #
An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets. Mutual funds are managed by professional fund managers and offer investors the opportunity to gain exposure to a diversified portfolio with lower fees than individually managed accounts.
P/E Ratio #
The price-to-earnings ratio is a valuation metric used to assess the relative cost of a stock based on its current price and earnings per share (EPS). The P/E ratio is calculated by dividing the market value per share by the EPS and represents the number of years it would take for the company to earn back the purchase price of the stock based on its current earnings.
Portfolio #
A collection of investments, such as stocks, bonds, real estate, and cash, that are owned by an individual or organization. A portfolio can be customized based on an investor's risk tolerance, time horizon, and financial goals and can be managed actively or passively.
Risk #
The potential for an investment to lose value or underperform expectations due to various factors, such as market volatility, economic conditions, or company-specific events. Risk can be quantified using various metrics, such as standard deviation, beta, and value at risk, and can be mitigated through diversification, asset allocation, and hedging strategies.
Roth Conversion #
The process of converting a Traditional IRA into a Roth IRA, which involves paying taxes on the converted amount in the year of the conversion. Roth conversions can be beneficial for individuals who expect to be in a higher tax bracket in retirement, have a long time horizon, and are willing to pay the upfront taxes.
Securities #
Transferable certificates of ownership or debt that represent an ownership interest in a corporation, government, or other entity. Examples of securities include stocks, bonds, options, and futures. Securities are regulated by various government agencies, such as the Securities and Exchange Commission (SEC), to ensure transparency, fairness, and integrity in the markets.
Standard Deviation #
A statistical measure of volatility that quantifies the dispersion of a set of data points around a mean value. In finance, standard deviation is used to measure the historical volatility of an asset or portfolio and to assess the potential risk of an investment.
Tax #
Efficient Investing: The practice of minimizing taxes on investment income and capital gains through various strategies, such as tax-loss harvesting, asset location, and using tax-advantaged accounts. Tax-efficient investing aims to maximize after-tax returns and can be implemented through passive or active management approaches.
Trust #
A legal arrangement in which a trustee holds and man