Terminology

An Account Based Pension is a regular income stream purchased with money that has been accumulated through super. After you have reached preservation age, you can start an Account Based Pension with regular income derived from the assets held in that account. Generally, the investment earnings are tax free and the pension payments are also tax free.

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An index which measures movements in the value of the major shares listed on the Australian Stock Exchange. It takes into account the capital appreciation and dividends of the 500 largest listed companies.

Alpha is considered to be the active return on an investment measured against a market index or benchmark which would represent the markets movement as an entirety. The difference between the investments return and the markets benchmark index is the investments Alpha. It may be positive, negative or zero and is usually a result of active management. An Alpha of zero would indicate the investment is tracing in line with the benchmark or index.

A form of life insurance which operates to provide retirement income. The person who takes out the annuity pays the life office a lump sum and in return receives a series of payments.

Asset allocation is an investment strategy that aims to balance risk and reward by allocating a portfolio’s assets among different asset classes according to an investor’s goals, risk tolerance and investment horizon.

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One hundredth of 1 per cent: 100 basis points equals 1 per cent.

A market which is likely to fall; a situation where a dealer is more likely to sell an asset, even to the extent of selling assets which the dealer does not have. The bear hopes to close his short position by buying at a lower price than the assets he has contracted to deliver. The difference between the purchase price and the original sale price represents the successful bear’s profit. Assets can be in the form of stock, currency or commodities.

Someone who receives a benefit or asset in the event of the owner passing away.

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The maximum amount of time for which you could receive benefit payouts as part of an insurance policy

Beta is the measure of risk or volatility of a stock or a portfolio compared to a benchmark or index fund that represents the entire market. The beta will indicate if the investment is more or less volatile than the entire market.

Generally, a market portfolio would be represented with an exact beta of 1. A beta below (-1) would mean that the investment has lower volatility than the market or that the investment is not highly correlated with the market movements. A beta greater than 1 would usually indicate that the investment moves up and down with the market and can even magnify those trends.

A blockchain collects information and groups it together in sets which are known as blocks. It is predominantly used as a ledger for transactions that provides an exact timestamp of when each transaction is added to the chain.

Shares in well established companies that have shown ability to pay dividends in uncertain markets.

An investment option generally issued by governments and companies. These pay a fixed interest amount on a regular basis for the life of the investment. The initial investment is paid upon maturity.

Investment based on analysis of individual companies, whereby that company’s history, management, and potential are considered more important than general market or sector trends (as opposed to top-down investing).

A market which is likely to rise; a situation where a dealer is more likely to buy than sell stock/currency/commodities and therefore establish a bull position. A bull with a long position hopes to sell his purchases at a higher price after the market has risen.

The buy/sell spread is the difference between the entry (buy) and exit (sell) prices of the fund, and is charged as a percentage of the value of the trade you’re making. The buy/sell spread helps the fund cover transaction costs involved in the fund buying or selling assets, such as brokerage fees, bank fees, and government taxes.

A tax on the gains of an investment, payable only when the capital gain is realised by selling the investment.

The official cash rate is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the central bank (RBA) charges on overnight loans between commercial banks.

Concessional Super Contributions are payments made into your Superannuation fund from pre-tax income. This includes employer super guarantee (SG) contributions. Concessional contributions are generally taxed at 15% once received by your super fund. Anyone earning $250,000 or more will have their concessional contributions taxed at 30%.

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The Consumer Price Index is a measure of the periodic change in the price of a constant basket of basic goods and services. The goods and services are representative of the consumption by residents in a household of a specific area. The basket can’t include all the items households consume but it does include the important one’s under the following segments: housing, transportation, medical, food, clothing, education, insurance and financial services to name a few.

As prices in the basket vary, so will that measure indicating a positive or negative change in CPI. It is a very important economic indicator and provides a general measure of price inflation changes so that the Reserve Bank of Australia can evaluate future monetary policy.

Securities that are convertible into the ordinary shares of a company at a pre-set price or ratio at specified times. Convertible notes are attractive to some investors because they display certain properties of bonds and shares.

A debt security issued by a company to investors to raise money to finance its business activities. Also known as a fixed-income securities as the issuer promises to pay a specific amount of interest on a regular basis and repay the principle on a set date.

The original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends and return of capital distributions.

Rating applied to a company’s debt or debt security that indicates the company’s relative creditworthiness. The most well-known ratings are issued by US ratings companies Moody’s Investors Services or Standard & Poor’s. Debt issuers pay these companies to rate their debt to make it easier to attract investors.

Failure to meet a debt obligation.

A contract with an insurance company that promises to pay the owner a regular income, or a lump sum, at some future date

Defined benefit schemes are traditionally associated with large corporate and public-sector superannuation funds. Essentially, the final benefit amount is calculated by several variables, including but not limited to age, time as a member or duration of employment and salary. Because the benefit is not subject to the market performance, it provides members with a degree of certainty. Usually, the benefit is correlated to an individual’s final salary e.g.  example 70% of the average of the last four years’ salary. The benefits may be made in the form of a pension or lump sum. These types of benefits a being phased out and are more of a legacy product used in the past.

Disposable income is the amount of money that an individual or household has to spend or save after income taxes have been deducted.

Diversification is an investment strategy that involves mixing the amount, values and types of assets held within a portfolio to spread risk and minimise losses. Diversification doesn’t guarantee gains or protect against losses, it manages the risk/reward trade off by selecting a mix of investments to help you achieve more consistent returns over time.

The distribution of part of the earnings of a company to its shareholders.

An emergency fund is a pool of money that is set aside to cover any urgent or unexpected costs. This could include car repairs, unexpected travel, or any urgent medical costs due to an unexpected injury or illness that may arise. To read more about how you can start building one up, click here.

An emerging market is based on an economy that is undertaking significant reform – normally developing nations. Generally, these types of markets are transitioning away from a low-income and less-developed economy, into a more middle-income and developed economy. It is at this stage where those invested in an emerging market can see greater returns due to rapid growth. However, it is these investors that can be exposed to great risk due to uncertainty in the economy as a result of legal and government systems.

An ETP is generally a lump sum payment made as a result of the termination of a person’s employment. It can be constituted by:

• Payments for unused sick leave or unused rostered days off
• Compensation for loss of job or wrongful dismissal
• An agreed golden handshake deal
• Certain payments made after death

The ETP is taxed in the year in which it is received. It can not be rolled over into your super.

An Enduring Power of Attorney is an individual who is appointed to make both financial and legal decisions for a person once they lose the mental capacity or ability to do so.

ETFs are units in managed funds that can be invested in a number of different asset sectors but have the ability to be traded in the same manner as a direct share.

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Additionally, a fee disclosure statement outlining the fees charged and services produced in the previous 12 months must be provided to clients paying ongoing fee.

Financial planning is the process in which a financial planner assist individuals, families, professionals and business owners to prepare and organize their financial affairs so they can accomplish their short term, medium and long term financial and personal goals. The planning often covers cash flow management, retirement planning, investment planning, financial risk management, tax strategies, insurance planning, estate planning and Business succession planning.

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When a client seeks financial service, they must be provided with a financial services guide (FSG). An FSG is a document that contains information about the financial adviser, the range of services offered, the fees charged and how the adviser will deal with the client’s confidential information.

Interest paid on investments such as bonds and debentures, paid at a predetermined and unchanging rate for a specified period.

A franking credit is a type of tax credit paid by corporations to their shareholders along with their dividend payments as the corporate has already paid tax on the dividends they distribute to shareholders which reduces or eliminates double taxation.

A fund manager is responsible for controlling the pool of assets within a fund on behalf of its investors who are allocated a number of units within the fund.

A derivative, an obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.

Gross income is a person’s total pay before taxes or any other deductions have been applied. Once the taxes and deductions have been worked out you will receive a net income. The gross income can be used as the base to calculate your superannuation entitlements.

Growth stocks are companies found in small-, mid- and large-cap sectors that have the potential to outperform the market. This is largely based on the solid financials of the company. An alternate to growth stocks is value stocks.

An investment fund where the fund manager is authorised to use derivatives and borrowing to provide a higher return, albeit at a higher risk.

Risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.

A hybrid security a term used to describe a security that combines certain elements and characteristics of a debt security and an equity security. These types of securities typically promise to pay a rate of return (fixed or floating) for a certain period. However, they also have equity like features, meaning they can provide a higher rate of return than just a normal debt security. This inherit higher risk is due to features that may include reduced certainty to the timing and amount of income generated. This could even include converting the security into equity of the company offering the hybrid or an early termination date of the hybrid. The holder could be second in line to other creditors.

Pays the insurer a regular income for a specified period if you cannot work due to a temporary disability or illness

A low-risk investment management strategy in which, the investor trades according to the performance of a market as a whole, rather than particular stocks or assets.

Industry superannuation funds were originally created to provide retirement benefits for workers of specific sectors. Generally, they are cheap options but don’t offer a wide range of investment options and are less flexible when it comes to reporting and distributions. Industry funds are usually non-for profit and returns profits to members.

Industry super funds are funds designed to cater for members of a specific industry. However, most industry super funds are available to the public and offer limited investments similar to a retail super fund.

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The sustained increase in the general price level of goods and services in an economy over a period of time.

The cost of borrowing money on a loan or earned on an interest-bearing account.

A percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.

Joint tenants is where a property is owned by two or more people with each person owning an equal share. If one of the owners passes away the property automatically is passed to the other joint tenant(s), regardless of what is set out in the deceased will.

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Life cover is an insurance policy that pays a set amount of money to the insured person’s beneficiaries when the insured person dies. Also known as term life insurance or death cover.

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Liquidity to refers to the ease an investment can be converted into cash or access in a short time frame.

A managed fund involves pooling together money from different investors into one fund that is invested and controlled by a professional investment manager. Funds can contain only a single asset class or a mix of different asset classes.

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Management fees are the cost of having an investment fund professionally managed by an investment manager. The management fees cover not only the cost of paying the managers but also the costs of investor relations and any administrative costs.

Marginal tax rate is the highest rate of tax a taxpayer pays on their income. Please see below table for 2018/19 marginal tax rates.

A measure of a company’s size, calculated by multiplying the total number of shares in issue by the current share price. Companies are commonly grouped according to size as small cap, mid cap or large cap.

A contribution to a complying superannuation fund that are made from after tax income. For the 2018/2019 year, the annual non-concessional contributions cap is $100,000.

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Under legislation, advisers must request their clients who pay an ongoing service fee to agree to renew their advice agreements every 2 years, through an ongoing service agreement.

An option is a type of derivative. It is a contract that gives the holder the right but not the obligation to purchase or sell an asset at a specified price during certain time frames.

A pension refresh strategy involves commuting an existing pension and commencing a new pension to include contributions accumulated since the original pension was initially established.

Portfolio – A portfolio is a combination of financial investments such as bonds, cash, stocks or other financial assets that you own with the expectation that it will grow in value over time and/or earn a return. When creating your portfolio diversification and risk profile are major factors to take into consideration.

Portfolio Rebalancing – This is the process of adjusting your holdings regularly by selling assets and using the proceeds to buy different ones to keep the assets allocations within your original risk profile tolerance.

A General Power of Attorney gives someone the legal ability to act on someone else’s behalf in financial matters if for any reason they are unable to manage these matters themselves. A General Power of Attorney does not allow the attorney to continue to act on your behalf after you have lost capacity, this requires an Enduring Power of Attorney, which must be appointed before the loss of capacity.

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The preserved benefit is the amount that is required to be preserved and kept within the fund until the member meets a condition of release. (Condition of release: retirement, total and permanent disability, death, reaching age 65 etc.)

When a client wishes to buy a financial product, they must be provided with a product disclosure statement, which is prepared by the issuer of the financial product. The objective of the PDS is to help consumers compare and make informed choices about financial products.

A recession occurs when there is consistent decline in economic performance. Technically, the term is used when there are two consecutive quarters of negative growth.

A Record of Advice (ROA) is a document of advice detailing smaller changes (less than 10%) to an investment portfolio whereby the client’s circumstances and the basis of advice has not changed since the last provided Statement of Advice (SOA)

Retail super funds are usually run by banks or investments companies which anyone can join. They offer a limited range of investment options and tend to have lower costs than other types of funds due to the limited investment options.

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Retirees are more concerned about wealth protection and spending with a focus on ensuring a steady income stream throughout retirement rather than growing wealth. Decisions need to be made on how to invest in the most tax effective manner, but always considering a client’s appetite for risk. Changes in government legislation and the economic environment and changes in client circumstances make it necessary to regularly review the retirement plan, and where appropriate, update the plan so it continues to be effective and relevant to the client’s needs and objectives.

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A calculation that works out how efficient a business is at generating profit from the original equity from the owners/shareholders. It’s a way of thinking about the benefit (return) of the money you invest into the business. To calculate ROI, divide the gain (net profit) of the investment by the cost of the investment. The ROI then becomes a percentage or a ratio.

A reversionary beneficiary is the person who will receive the balance of your death benefit as an income stream. Only spouses, certain children and dependants are eligible to become reversionary beneficiaries.

Measuring and determining your risk tolerance, usually through a risk profile questionnaire, is the first step to take before choosing the best investments to achieve your financial goals. Risk tolerance refers to the amount of volatility, or market ups and downs, an investor can tolerate. Financial planners often use risk tolerance to categorize investors as aggressive, moderate or conservative investors.

An amount of pre-tax salary that an employee decides to contribute to super instead of taking it as cash.

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A self-managed super fund is a private super fund you manage yourself. In an SMSF you choose the investments and insurance and run every aspect of the fund yourself. While having control over your own Super can be appealing, it’s a lot of work and comes with risk.

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A separately managed account (SMA) is a customised share portfolio where the assets are owned by individual investors. An investment is allocated across one or more available investment models, which will determine the portfolio allocation between shares.

Danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market. A diversified portfolio can protect your savings against sequence risk.

Share buybacks occur where a company makes an offer to re-purchase some of its shares from existing shareholders which reduces the number of shareholders in the company. To read more about how these work, click here.

An investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 million, as prescribed by the Corporations Regulations Act 2001 (reg 6D.2.03 and reg 7.1.28)

An SOA is a document that outlines the advice given to a client by a financial adviser. It will include the basis on which the advice is given, details of the client & information regarding any benefits or payments the adviser or licensee will receive as a result of the advice given in the SOA.

Superannuation – superannuation or ‘super’ is money set asdie while you’re working to support your financial needs in retirement. In Australia the current superannuation guarantee payment rate is 10% of your salary as of May 2022.

An investment strategy which finds the best sectors or industries to invest in, based on analysis of the corporate sector as a whole and general economic trends (as opposed to bottom up investing).

Pays the insurer a benefit if they become seriously disabled and are unlikely to work again

A formal and legal document that outlines the rules under which the trustees must act and operate.

The unit price is the price that reflects the value of the investments held within a fund at a point in time. Prices can represent a group of different investments and this will be reflected in the unit price based on the proportion of each investment, which is called the weighted average.

Occurs when an investment increases in value but is not sold or realised.

Value stocks are said to be ‘cheap’ against their earnings and long-term potential. These types of stocks are normally more well-established and larger than growth stocks, but are considered value due to the current price being considered under-valued relative to what analysts believe the stock is worth.

Volatility is the measure of variation in price of different types of investments over a certain time.

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An agreed amount of time after you suffer from a disabling sickness or injury – usually between two weeks and two years – before you become eligible to make an insurance claim

Once an individual reaches age 67, they are no longer eligible to make contributions into super without meeting the government’s work test. This means being ‘gainfully employed’ means working at least 40 hours in a period of 30 consecutive days during the same financial year that you wish to make any contribution. A written declaration needs to be provided and accepted by your superfund to make these contributions. Once accepted, individuals can contribute up to the standard limits.

Wrap platforms are a lot more flexible and allow individuals to invest in managed funds and direct shares unlike industry and retail funds. This platform tends to be a bit more expensive as it offers greater flexibility to investing.

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The measure of return on an investment displayed as a percentage (calculated by dividing the income generated by the asset in the current capital value of the asset)