In short, an Advisory account is an account normally directed by an IAR and held at an RIA for a flat form of compensation. Normally compensation is a % of the assets being managed. The advisor under this arrangement is held to a fiduciary standard and is bound to behave in the clients best interest at all times. This type of arrangement typically does not allow for the advisor to collect commissions.
The assets held in these forms on accounts are stocks, bonds and other securities registered in the 1940 securities act as investment companies.
IRA'S An IRA is an individual retirement account. The account is considered qualified funds. They have special restrictions imposed from a tax standpoint. Many qualified plans may offer some sort of tax relief for contributing into the plan. Most plans follow similar distribution rules, although there are some differences. With the exception of the Roth, the majority of account owners benefit from deferred taxation during the account accumulation phase. Upon distribution, most people will receive a 1099r. Income received through a 1099r can be most disadvantageous in a tax calculation. There are many types of IRA accounts. Specifics will depend on type, age, contributions, distributions, marriage status, inclusion in other retirement plans, tax filing status as well as other factors. For most IRA holders the age you can distribute without an additional tax penalty is 59.5 years old.
Example types of distributions
Pre Mature (before age 59.5 Years old)
MUTUAL FUNDS A mutual fund is a type of investment company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities. Mutual funds are registered with the SEC and subject to SEC regulation.
401K PLANS 401K plan is typically an employee sponsored retirement plan regulated by the United States Department of Labor. There are many different structures of such plans, and they may offer different benefits that are specific to the plan. Employees are normally allowed to defer pre tax dollars into an account that is for their benefit. The employer has an option to make matching contributions. Distribution rules for such plans vary based on the plan.
Deferred Compensation Plans Deferred Compensation plans can come in qualified and non-qualified forms. Depending on the structure these plans can offer certain tax advantages. Although, if not structured properly or administrators fail to follow certain government guidelines, it can be a very costly mistake that can result in the loss of certain protections from creditors or previously issued tax statuses. Combining these plans and their guidelines with other plans may allow additional benefits for workers and employers. These plans require complex planning. Typically, you want to have an established business with high confidence in your cash flows and ability to produce profit. These plans are typically used for producing benefit packages to retain key employees.
REITS REITS or Real Estate Investment Trusts. These can be publicly traded or private and non-traded. The capital of a REIT is normally invested into real estate, although others types of investments can be allowed in certain scenarios. There are many qualifications for a company to qualify as a REIT, but the hallmark trait is 90% of the taxable income must be paid out to shareholders. REITS typically use leverage and borrow against the assets of REIT to purchase more real estate or real estate related investments. This makes them interest rate sensitive and can be very volatile at times.
ETF'S Exchange traded funds are a derivative investment. Most retail shareholders do not have claim to the underlying assets, this posses different risks than something with direct or mutual ownership. Typically, an ETF creator manages an asset pool that is held in a trust and is intended to track or follow a well known index of prices that could be stock, commodity or other asset based. The market prices can separate from the underlying asset prices. Today more ETFs are being created that are actively managed. These investments trade on public exchanges like a stock. Market Makers create and redeem shares based on the net asset value of the fund and the price of the underlying securities. Typically, if it is advantageous for the market maker to acquire underlying shares and create a unit, they deposit those shares into the trust and sell the ETF shares they created. They can also do the reverse scenario where they can acquire the shares of the ETF and then redeem the underlying assets from the trust. It is a form of arbitrage where authorized participants can be rewarded for helping support the liquidity of the fund. These trading mechanisms have the potential to fail. When they do fail the event is commonly refereed to as a flash crash. ETFs can help investors gain exposure to particular areas of the market they may not have been able to get exposure to. They generally offer intraday liquidity and are low cost effective. These were originally formed as trading vehicles.
FIXED ANNUITIES A fixed annuity is a type of annuity that typically pays an interest rate that is defined in the contract issued by the issuing insurance company. They offer some tax deferral benefits. They are insured by the claims paying ability of the issuing company. Typically a deferred fixed annuity does not allow withdraws without penalty before the age of 59 1/2. Normally these investments do not fluctuate in value. Some policies pay a fixed interest rate, some pay a rate based on other metrics. All annuities carry credit risk of the issuing company of the promises made under the contract. Annuities typically have a maturity date of when the insured turns 90 years old, at which time the policy holder must make a decision to terminate the policy or annuitize the policy. Normally clients terminate such policies, as annuitization offers payments based on your life expectancy and carries many unknowns. If someone is annuitizing policy payments they probably are in a position they are afraid of running out of money, or the money is earmarked for a particular purpose. Many companies will allow extensions in age that typically requires a formal request by the policy holder.
VARIABLE ANNUITIES In a variable annuity much of the tax structure is similar to a fixed annuity as they are both deferred annuities. The difference is the money in a variable annuity is separate from the assets of the annuity companies general fund. Typically the funds inside of the policy are invested in sub accounts that are managed by a sub advisor. Normally in publicly traded securities. These annuities do fluctuate in value. The policies can offer many types of death and living benefits. The difference in these benefits can vary greatly depending on the issuing company, client age, marriage status and other factors. The money inside a variable annuity is not at credit risk of the issuing company, but the benefits and promises made under the contract are. The premiums allocated to variable sub accounts carry market risks. Investors should be very careful that they understand the benefits of their policies. These types of policies can offer great risk transfer strategies. Sometimes the fees in these policies can be very high depending on benefits elected.
STOCKS Stocks are certificates that represent direct ownership in a company. There are different classes of stock. Stock holders are typically the last people paid in the case of company insolvency if there is any net equity in the event of liquidation. Publicly listed stocks trade on public exchanges. The price of a stock is worth whatever a purchaser is willing to pay you for it. At times the balance sheet listed shareholder equity and the price in the public market can have large separations. This creates risk for shareholders, but it also can create opportunity for buyers. Stocks carry a multitude of risks, nearly anything can effect the demand for their shares in a public market which has a direct impact on their pricing. Stocks are leveraged to benefit from good company execution and effective deployment of capital.
BONDS Bonds are issued as debt. It is the institutional equivalent of taking out a loan. There are many different types of bonds with many different types of structures. The structure can vary widely. They can be secured or unsecured. They may have fixed or variable rates. Typically they pay back interest and then a balloon payment at the maturity of the bond. Some amortize and pay interest payments back as well. Their are three main risks to be aware of while purchasing a bond credit, interest rate and inflation risks. There are other risks as well, but without a fundamental understanding of these three risks, investors may not have an understanding of their investment. Bonds can be good to create income for investors. A less common know benefit can also be to gain control of a company or their assets in a faltering position in the event of bankruptcy. Bonds are higher in the capital claims paying structure and considered safer than stocks, although "safe" is relative to the company and the environment and collateral or lack of pledged collateral and creditor position for claims.
MANAGED FUTURES Most managed futures are normally considered and alternative investment, although there are now some mutual funds that invest in futures contracts. Most managed futures contracts are done through private placements and held in a trust that has a hedge fund fee structure. It is literally what is says it is, future contracts that are being managed by an investment manager. A future contract is a contract to deliver a good at a particular price in the future. Farmers and material producers use these contracts to pre sale their goods. The futures markets help with the coordination and delivery of the proper amount of certain types of food and other goods through market pricing. Managed futures are speculative in nature although these managers can include fundamental analysis in their speculation based on supply and demand. Futures are typically highly leveraged and fluctuate in value greatly.
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