Advice and the Advisor

Financial Jargon Your Adviser May Throw at You

The world of finance is loaded with technical concepts and complicated terminology — much of it vital shorthand for industry participants, including your financial adviser. From estate planning to investment, to taxes, complex terms and phrases are basic to strategy and execution.

It's likely your adviser will fall back on using this jargon when soliciting your business and, later, in the planning and execution of your financial accounts. In some cases, the words may sound impressive; in other cases, intimidating or confusing. Worse, some of the vocabulary isn't what it sounds like.

You may want to take note of these terms during your meetings and check them out later in a financial dictionary or glossary, such as CNBC Explains or one of the sources below.

We've highlighted some of the more colorful, and perhaps misleading, terms you may encounter. Check out these 10 curious terms (in alphabetical order).

8 Oct. 2012

Sources: Investopedia, Finance,

Bottom-Up Investing

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This investing strategy is a good example of figurative speech that implies one thing but is actually something very different. This phrase does not mean buying assets at the bottom of their price range or the cheapest stocks available.

Instead, it's an investing approach based on focusing on a specific company rather than its industry, the economy or market cycles. Apple arguably falls into this category because its business has performed far better than rivals and the overall U.S. economy.


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There's no code to this sometimes critical element of estate planning. Codicil is the name for the legal document used to make changes to a previously existing will. It must be executed with the same legal requirements, such as witnesses.

The alternative to a codicil is a new will. The term and concept can come up in probate (court-supervised) proceedings, where there are questions about the validity and/or chronological status of rival documents.


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Given the prefix, you might think this term has something to do with being oppositional. But here, the operative meaning is apart or away. As for mediation, well, one guess is as good as another.

Disintermediation, in fact, has been practiced in recent years because of the global financial crisis.

It is the movement of savings or investment funds away from institutions such as banks into higher-yielding investments in the securities markets, such as

Discretionary Trust

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In this estate-management and asset-protection tool, discretion is about the power to decide, not about being discreet or circumspect.

The idea is to set aside property for the benefit of another, but the person appointed to control the trust — the trustee — has a right to accumulate the annual income generated by the property for future dispersal, rather than pay it out annually to the beneficiary.

Somewhat related, and very common, is a discretionary account, which is a brokerage account that can be traded by an adviser without the client's advance approval.

Efficient Frontier

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The key word here is efficient, and there is nothing far out about the concept.

If your adviser mentions "efficient frontier," it's a reference to the concept that different groups of securities have different elements of risk and return on investment — and that there is an optimal meeting point on a parabolic chart. Presumably, then, there is such a point for you and your investments.

The efficient frontier concept is said to be a major component of what's considered modern portfolio theory, and is partly responsible for promoting the importance of diversification.

Guaranteed Income Contract

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No, it is not a job for life.

This concept is coming up more as people opt for annuities, which convert a lump sum into an income stream at a later point, an arrangement that could last for life.

In particular, with a GIC, the contract calls for an insurance company to borrow a lump sum from you at a pre-determined interest rate that then produces a pre-determined amount of cash at a specified future date.

On a related note, when you annuitize, you are converting a sum of money into an income stream that starts after a certain time period.

High Current Income Mutual Fund

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Many financial advisers construct your portfolio with a group of funds, rather than individual stocks, so you'll want to know as much as possible about each of the funds you own.

A "high current income mutual fund" sure sounds good, but it says little about its composition. Yes, its goal is to produce high current income, but other kinds of funds are designed to do that as well.

The key is that the fund's primary asset is high-yield corporate bonds, also known as junk bonds, which are below investment grade and typically carry higher risk.

Imputed Interest

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Here's a case where it helps to have an adviser who handles both taxes and investments, and maybe even estate planning.

Imputed interest is interest that is not paid but must be accounted for on a tax basis. For instance, if you lend money to a family member and charge zero interest, your advisers or the IRS must decide what the applicable interest rate is on such a loan. If it is 3 percent, then the imputed tax is 3 percent of the sum borrowed and must be reported as income on the tax return of the lender.

Fixed income fans should pay special attention. Such interest also applies to certain kinds of bonds, such as zero-coupon bonds — ones bought at a sizable discount to their face value but generate a profit at maturity, which is based on the difference in the purchase and maturity prices.

Law of Large Numbers

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Don't confuse this with the law of averages.

If you're unhappy with your adviser's performance, and you complain, you might hear about this theory.

Simply put, it posits that beating large numbers — say, large numbers of investors (or other fund managers) — is very difficult to achieve. Put another way, it's rare that your adviser will outperform the general market.

For some, the law of large numbers makes a good case for the logic of low-cost index funds that essentially mirror the market.

Variable Universal Life Insurance

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Life insurance is complicated enough for many people, and the introduction of products beyond the plain-vanilla kind has made it more of a challenge for consumers. Moreover, in the current world of financial planning, life insurance often seems like an investment.

Take this product, variable universal life insurance, which combines the standard death benefit and a tax-free savings component.

The owner can take the policy's cash value — the amount offered to the policy owner by the insurer upon cancellation of the contract — and invest it in separate accounts (bonds, stocks), rather than keep it in the insurer's general account. The different investments, of course, yield varying values, thus the "variable."

Another important aspect is that the policy holder has the flexibility of making premium payments of variable sizes from month to month, rather than at a fixed rate.