Financial Term-a-palooza

Financial Term-a-palooza

As I’ve written in previous blog posts, the financial industry is full of confusing concepts, terms and acronyms. This week’s post is about a number of those terms that many people don’t fully understand. As with any terms or conditions focused around your hard earned money, understanding them is of critical importance.

Custody / Custodian – A “custodian” has “custody” of your investments. This one isn’t too difficult to grasp. A Custodian has “physical” possession of your assets, and is tasked with the duty of caring for them. This does not include selecting the stocks, bonds or mutual funds that make up your portfolio but does include making sure you get a statement, and ensuring your account balance on paper matches what you have in your account. Think of the custodian as the keeper of a vault that contains your assets. They are on the hook for protecting what’s in the vault.

The most common custodians have names most people recognize and include Vanguard, Fidelity, Schwab and Ameritrade to name a few. They also include some lesser advertised names including Shareholder Services of America, Trust Company of America and Trade PMR.

A certain Mr. Madoff was a “custodian” and had “custody” of his client’s funds … see why this is an important concept to fully grasp?

Discretionary Authority – Discretion / Non-Discretion – This one is a bit trickier to follow, but it is one of the most important concepts for you to comprehend.

Using the vault analogy from our custodian example:

  • Anyone who has discretionary authority has the power (authority) to add or remove items from the vault (your portfolio) without consulting you (discretion) beforehand. Typically used by financial planners (who must act in your best interest) within the mutually agreed on parameters of your Investment Policy Statement.
  • Anyone with non-discretionary authority has the same power (authority) to add or remove items from the vault but must sell you the item by obtaining your permission (non-discretion) first. Typically used by an “Advisor/Broker” (financial product sales people) and are required by law to use non-discretionary authority. You wouldn’t want a salesperson to have full run of your vault would you? It might be a pretty slick way to make a ton of commissions, wouldn’t you agree?

So to summarize the differences: …