Like many professions and industries, Financial Services suffers from having its own "jargon." This tends to make the public nervous of approaching an adviser because they do not want to be bamboozled or left feeling they are none the wiser.
This situation is bad for both the adviser and the individual needing help. The adviser misses out on new clients and the public are the poorer for it. There is plenty of evidence illustrating how much better off people are by using an adviser. A survey back in 2017 indicated that on average an individual would be over £43,000 wealthier by taking advice. To help cut through the jargon, we at Rutherford Hughes have produced a short glossary to help cut through some of the confusing terms used in financial services. It is a “live document” which we will add to over time. Below you will find a selection of definitions which we hope you find useful.
Common Financial Terms Explained
What is diversification? This means spreading your invested funds between equities and fixed income. Diversification can also cover geography, i.e., investing both here and abroad, and market capitalisation of the equities.
What are equities? Equities is another name for shares in a company which denotes ownership of the company. As an owner, you benefit from the income the company generates and its increase in value. The value of your shares reduces if the value of the company falls.
What is a fixed income security? They are issued by governments, large corporations and other bodies. They are often referred to as a bond, as they are a promise to pay a fixed rate of interest, on a specific date, and to buy back the security at a fixed price in the future. Between issue and being redeemed, they are tradeable, and their value will fluctuate. However, they are generally less volatile than equities and their price is driven by different forces, making them a good diversifier to equities in a portfolio.
What is investment risk? All investments, including cash, carry some form of risk. In general terms, it is the possibility of losing some or all the value of an investment. In brief, equity and fixed income values fluctuate, and cash suffers from inflation and institutional failure risks.
What is a risk profile? This is an assessment of an investors attitude to the potential rises and falls in their investment portfolio. Someone with a higher risk profile will hold a greater percentage of equities in their portfolio when compared with someone with a lower risk profile. Risk profile should not be the only determinate of the makeup of a portfolio as other factors need to be considered.
What is the FTSE100 or FOOTSIE? This is the index of the 100 largest companies by capitalisation (total value) on the London Stock Exchange. The 100 constituent companies are reviewed from time to time in case what were lower valued companies have overtaken some of the constituents.
What is the Midcap? In the UK it is the next 250 companies by value after the FTSE100. Midcap and Small Cap companies tend to outperform larger companies over time. What is Small Cap? In the UK, they are remaining companies in FTSE All Share (the companies listed on the main market of the London Stock Exchange) that do not qualify as FTSE100 or the Midcap 250.
What is a Tax Wrapper? In financial services, a “Tax Wrapper” is an expression to denote how investments can be held and how tax is applied to them. An example is an ISA which is exempt from Income Tax and Capital Gains Tax. Another would be a Pension Plan, which has the same advantages as the ISA but also benefits from tax relief on contributions and is exempt from Inheritance Tax.
What are alternative investments? They are anything that is outside the normal definition of equities, fixed income and cash. Examples might be Private Equity, Structured Products, etc. They are often illiquid and possibly not regulated by the FCA.
What are property funds? When in investing in a property fund, the investor buys shares or units in the fund. In turn, the fund owns buildings, such as offices, shops, warehouses, etc. The investor benefits from the capital growth in the value of the buildings and rental income, less the funds costs. Management costs of these funds are much higher than fixed income or equity funds. Further, liquidity can be compromised if the fund becomes “gated,” refusing requests for withdrawals for a period, usually six months plus, when demand for redemptions is high. Gating is employed to protect the fund from a “fire-sale” of properties. If you would like more information, or would like to discuss your own position, then please do not hesitate to contact me or my colleagues, David Hughes and Denise Graham. Peter Rutherford is a director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600 peter.rutherford@rutherfordhughes.com www.rutherfordhughes.com
