Follow
Important Financial Advisor Information
- Target-Date Fund
- Price-To-Earnings Ratio
- Prospectus
- Expense Ratio
- Asset Allocation
Key terms are something that every financial advisor should know, but can sometimes be swept aside, especially at the university level. With so many large publications putting out articles on which financial terms everyone should know, it has become more important than ever to ensure that financial advisors are also well aware of these terms, according to CNBC. Here are five key terms that should be natural to every financial professional.
1. Target-Date Fund
Financial advisors don’t get far in their career without understanding what a target-date fund is. This term generally refers to 401(k) plans or other retirement plans and serves as a total package portfolio that is tailored to meet an important date, such as an expected retirement date. Target-date funds usually work by setting a deadline for the portfolio to come to fruition. Advisors then devises a plan for riskier investments in the beginning of the investment strategy, which become more conservative as time goes on. Stocks and bonds are usually a large part of this investment strategy and therefore would be cashed out at the target date.
2. Price-To-Earnings Ratio
The price-to-earnings ratio is a measurement that every financial advisor needs to understand in order to explain it to their clients. The P/E, which is how the measurement is written, is the relationship between a company’s current stock price and its earnings. As a common rule of thumb, a P/E of between zero and 10 is considered low; this could mean the company isn’t faring well or may currently be undervalued. Any P/E between 10 and 17 is considered average, with a company doing well but not experiencing an advancement or a surge in stock prices. A high P/E is over 25, which signals that the company is doing great and may expand in the future. This also means the stock will continue to rise over time. This high P/E can also mean that the company is nearing the moment that their industry bubble is about to burst.
3. Prospectus
The term prospectus refers to a legal document, or a file of legal documents, that contains details about investment options; this includes mutual funds, stocks, bonds, and other options. Financial advisors need to know this term because many clients will ask for a prospectus prior to making a decision about their investment strategy. The document also lists any fees and other transparent financial information they may need in order to make the right decision for them. Financial advisors are generally where clients turn to for this information, so not only is it critical to understand what a prospectus is, it’s also critical to always have them on hand for client meetings.
4. Expense Ratio
All financial advisor should know what expense ratio means, especially if they have clients who have invested in mutual funds. The expense ratio is an annual fee that investors pay to the money manager that runs the fund. The expense ratio can be quite high, which would mitigate how much money an investor makes, but that money is used to pay for administration and record-keeping fees as well as ads that promote the mutual fund. In the current financial market, an acceptable expense ratio is less than 1.5 percent.
5. Asset Allocation
Asset allocation is a term that absolutely every financial advisor ought to be familiar with because it’s a part of their job. The term refers to the investment strategy that a client chooses when deciding where to put their money. There are three categories within asset allocation: bonds, cash, and stocks. Each category has a different risk assessment, with cash being the least risky and stocks being the riskiest. It’s important that financial advisors understand what asset allocation means in order to better explain it to their clients. Because clients come to them for advice on where to put their money, knowing which allocation strategy would be best for their clients is a critical requirement of any financial advisor’s job.
Related Resource: The Top 10 Best Online Master’s in Finance Degree Programs
Financial advisors are the key to investing for many people, so it’s important for these professionals to understand the terms that leave their clients confused. The more adept a financial advisor is in understanding and explaining these terms, the better off their clients will be. With these five key terms every financial advisor should know in hand, advisors can move on to learning more advanced terminology so they can demystify the financial market for their clients.
