Investing & Digital AssetsInvesting & Digital Assets GlossaryPart 5 of 13
Wealth and Advice Glossary
39 terms from the Investing & Digital Assets book's Wealth and Advice part, each defined in a line and linked to the chapter that explains it.
- Applicable age (RMD): the age at which traditional IRA required minimum distributions begin: 73 for someone who reaches 72 after 2022 and 73 before 2033, 75 for someone who reaches 74 after 2032 (IRAs & Retirement Accounts).
- Block order: one market order for the combined quantity of many client accounts, filled and then allocated back to them at the average price by a rule fixed before the order is sent (RIA Custodians & Advisor Platforms).
- Cash drag: the return a portfolio gives up by holding cash instead of its invested assets, about the cash weight times the difference between the invested return and the cash yield (Robo-Advisors & Model Portfolios).
- Cherry-picking: allocating a block's better-priced fills to favored accounts after prices are known; prevented by locking the allocation before the order goes out (RIA Custodians & Advisor Platforms).
- Composite (GIPS): a group of portfolios managed to one strategy whose asset-weighted return a firm presents; every actual, fee-paying, discretionary segregated account must be in at least one (Portfolio Accounting & Performance).
- Direct indexing: owning an index's constituent stocks in the account instead of a fund, so individual stocks can be harvested, excluded or tilted at the cost of tracking error (Tax-Loss Harvesting & Direct Indexing).
- Direct rollover: a distribution from a retirement plan paid straight to the receiving IRA's custodian, with no withholding and no 60-day clock; Form 1099-R code G (IRAs & Retirement Accounts).
- Drift: the distance between an account's current weights and its model's targets, measured per asset class or for the whole portfolio (Robo-Advisors & Model Portfolios).
- Drift band (tolerance): the drift beyond which a threshold rebalance runs, for example 3% or 5% (Robo-Advisors & Model Portfolios).
- Dual registrant: a firm registered as both a broker-dealer and an investment adviser, which must say in which capacity it acts (Advice, Reg BI & Conduct).
- External cash flow: money or assets crossing the boundary of the portfolio being measured (deposits, withdrawals, transfers), as opposed to the portfolio's own income and trades (Portfolio Accounting & Performance).
- Fiduciary duty (adviser): the duty of care and loyalty an investment adviser owes a client under the Advisers Act for the whole relationship, shaped by agreement but never waived (Advice, Reg BI & Conduct).
- Form 1099-R: the report of each distribution from a retirement account, with its taxable amount, withholding and a distribution code (IRAs & Retirement Accounts).
- Form 5498: the IRA custodian's annual report of contributions by kind and tax year, year-end value and whether an RMD is due (IRAs & Retirement Accounts).
- Form ADV: an adviser's registration and disclosure form: Part 1 (registration data), Part 2A (the brochure) and 2B (supplements), and Part 3 (Form CRS) (Advice, Reg BI & Conduct).
- Form CRS (relationship summary): the short document a broker-dealer or adviser delivers to retail investors describing services, fees, conflicts and its standard of conduct, at most two pages (four for a combined dual registrant) (Advice, Reg BI & Conduct).
- Hypothetical performance: performance not actually achieved by any of the adviser's portfolios (model, backtested, targeted or projected), usable in advertising only under the marketing rule's conditions (Advice, Reg BI & Conduct).
- Indirect (60-day) rollover: a retirement distribution paid to the owner and redeposited in an IRA within 60 days of receipt; IRA-to-IRA rollovers are limited to one per 12 months (IRAs & Retirement Accounts).
- IRA match: a broker's contribution to a customer's IRA as a percentage of their own contribution, kept only if conditions such as a holding period are met (IRAs & Retirement Accounts).
- Marketing rule: Advisers Act Rule 206(4)-1, governing adviser advertisements: general prohibitions, testimonials and endorsements, third-party ratings and performance (Advice, Reg BI & Conduct).
- Model portfolio: a versioned set of target weights by asset class, with the tickers that represent each class, its drift band and its cash weight (Robo-Advisors & Model Portfolios).
- Modified Dietz: an approximation of the money-weighted return: the gain divided by the starting value plus time-weighted flows (Portfolio Accounting & Performance).
- Money-weighted return (MWR): the internal rate of return on an account's starting value and cash flows; measures the investor's outcome (Portfolio Accounting & Performance).
- Pure gross-of-fees return: a wrap fee portfolio's return before the whole bundled fee, shown under GIPS only as labeled supplemental information (Portfolio Accounting & Performance).
- Regulation Best Interest (Reg BI): Rule 15l-1, requiring a broker-dealer recommending a security, strategy or account to a retail customer to act in the customer's best interest, through disclosure, care, conflict of interest and compliance obligations (Advice, Reg BI & Conduct).
- Required beginning date: April 1 of the year after the IRA owner reaches the applicable age, the deadline for the first RMD (IRAs & Retirement Accounts).
- Required minimum distribution (RMD): the annual withdrawal from a traditional IRA after the applicable age: the prior December 31 balance divided by the distribution period from the IRS tables (IRAs & Retirement Accounts).
- Retail communication (FINRA 2210): a broker-dealer communication distributed or made available to more than 25 retail investors within any 30 calendar-day period, approved by a principal before use (Advice, Reg BI & Conduct).
- RIA custodian: a broker-dealer or bank that holds an independent adviser's client accounts in the clients' names, sends their statements and executes and bills on the adviser's instructions (RIA Custodians & Advisor Platforms).
- Robo-adviser: an investment adviser that gives software-generated advice and manages portfolios through automated jobs, owing the same fiduciary duty as any adviser (Robo-Advisors & Model Portfolios).
- Substitute security: a fund bought after a harvest that keeps the asset class's exposure but tracks a different index, so it isn't substantially identical to the one sold (Tax-Loss Harvesting & Direct Indexing).
- TAMP (turnkey asset management program): an outsourced provider of models or managed sleeves, rebalancing, trading and often billing for advisers (RIA Custodians & Advisor Platforms).
- Tax alpha: the after-tax return a harvesting program claims to add; mostly deferral, decaying over time, and often hypothetical (Tax-Loss Harvesting & Direct Indexing).
- Tax-loss harvesting: selling a lot below its basis to realize a loss and buying a substitute that keeps the exposure without washing the loss (Tax-Loss Harvesting & Direct Indexing).
- Time-weighted return (TWR): the return from chaining sub-period returns split at every external flow, unaffected by flows; measures the manager (Portfolio Accounting & Performance).
- Tracking error: the standard deviation of the difference between an account's return and its benchmark's (Tax-Loss Harvesting & Direct Indexing).
- Unified managed account (UMA): one account split into sleeves following different models or managers, with an overlay that nets trades and manages taxes across them (RIA Custodians & Advisor Platforms).
- Uniform Lifetime Table: the IRS table of distribution periods by age used for most IRA owners' RMDs (Table III in Publication 590-B) (IRAs & Retirement Accounts).
- Wrap fee: one asset-based fee bundling advice, trading and custody (Robo-Advisors & Model Portfolios).