Comprehensive Wealth Management:

Comprehensive Wealth Management:

What does it mean to be a fiduciary?

Being a fiduciary means putting our clients’ interests ahead of our own.  As RIAs we are legally bound and ethically motivated to act in the best interest of each of our clients. In the case of Pinnacle Private Advisors, our fiduciary responsibility means that, as we manage the assets of our clients, we must do so with only their best interest at heart.  Not the best interests of outside shareholders, corporate stakeholders, or our own profit.

Legally speaking, a fiduciary is bound by law to put our client’s best interests ahead of our own profit. Being an RIA (Registered investment advisor) means we have a fiduciary duty to our clients. The standards of fiduciary relationships start with a “prudent person standard of care;” originally put into place in 1830. Fiduciaries must ensure that no conflict of interest arises in the relationship.

Suitability vs. Fiduciary Standard

Registered Investment Advisor (RIA)s  are most often engaged on a fee-basis.  In 1940 the investment Advisors Act was passed which established the fiduciary standards ensuring that the SEC or state securities regulators could oversee the investment advisory relationship and ensure that a “duty of loyalty and care is maintained”.

An RIA cannot buy securities for their own account prior to buying them for a client.  They also must not choose a trade based on higher commissions for the advisor or investment firm.

Ensuring that clients have accurate and complete information for each trade as a “best execution” standard, meaning that they must strive to trade securities with the best combination of low-cost and efficient execution.

Stocks give their holders a share of ownership in a company.

There are two primary types of stocks: common stock, and preferred stock.

Common stock entitles owners to vote at shareholder meetings and receive dividends.

Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

Here’s a list of stock categories:

  • Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
  • Income stocks pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
  • Value stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
  • Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.
  • Large-cap stocks are market capitalization stocks in large companies.
  • Mid-cap stocks are market capitalization stocks in mid-sized companies.
  • Small-cap stocks are market capitalization stocks in smaller companies.
  • Microcap stocks are stocks in startups.
  • Penny stocks are stocks in companies with very low or no earnings; they don’t pay dividends and are highly speculative (think Wolf of Wall Street).

What is a Bond?

A bond represents a promise by a borrower to pay a lender their principal and interest on a loan. Bonds are issued by governments, municipalities, and corporations. The interest rate (coupon rate), principal amount, and maturities will vary from one bond to the next in order to meet the goals of the bond issuer (borrower) and the bond buyer (lender). Most bonds issued by companies include options that can increase or decrease their value and can make comparisons difficult for non-professionals. Bonds can be bought or sold before they mature, and many are publicly listed and can be traded with a broker.

Characteristics of Bonds:

  • Face value is the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses when calculating interest payments. For example, say an investor purchases a bond at a premium $1,090 and another investor buys the same bond later when it is trading at a discount for $980. When the bond matures, both investors will receive the $1,000 face value of the bond.
  • The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. For example, a 5% coupon rate means that bondholders will receive 5% x $1000 face value = $50 every year.
  • Coupon dates are the dates on which the bond issuer will make interest payments. Payments can be made in any interval, but the standard is semiannual payments.
  • The maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
  • The issue price is the price at which the bond issuer originally sells the bonds.

Categories of Bonds:

  • Corporate bonds are issued by companies. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.
  • Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors.
  • Government bonds such as those issued by the U.S. Treasury. Bonds issued by the Treasury with a year or less to maturity are called “Bills”; bonds issued with 1–10 years to maturity are called “notes”; and bonds issued with more than 10 years to maturity are called “bonds”. The entire category of bonds issued by a government treasury is often collectively referred to as “treasuries.” Government bonds issued by national governments may be referred to as sovereign debt.
  • Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie Mac.

A mutual fund is made up of a pool of money collected from many investors to invest in stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Advantages of Mutual Funds

There are a variety of reasons that mutual funds have been the retail investor’s vehicle of choice for decades. The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds. Multiple mergers have equated to mutual funds over time.

Disadvantages of Mutual Funds

Liquidity, diversification, and professional management all make mutual funds attractive options for the younger, novice, and other individual investors who don’t want to actively manage their money. However, no asset is perfect, and mutual funds have drawbacks too.

A limited partnership (LP) is not a limited liability partnership (LLP).

A limited partnership is usually a type of investment partnership, often used as investment vehicles for investing in such assets as real estate, businesses, securities etc…

An LP is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. The general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.

Put simply, an asset class is a group of financial instruments that have comparable characteristics and exhibit like behaviors in the marketplace.

Examples include:

  • Stocks
  • Bonds
  • Alternatives (Aviation, Marine Finance, Real Estate, Art Finance, Cryptocurrency, Private Equity, etc.)

Real estate asset classes are broken down into two main property types: commercial and residential.

Residential Real Estate

Residential property is simply real estate for living. It includes single-family homes, townhouses, condos, and vacation houses. Residential real estate properties are considered an investment if the asset is not owner-occupied, and it is owned for financial gain—either via rent or the appreciation in value.

  • Single-family homes. 
  • Co-ops. 
  • Condominiums.
  • Townhouses. 
  • Multi-family properties. (under 4 units)
  • Vacation homes. 

Commercial Real Estate

CRE, includes any property that generates income.

  • Multi-family. (4+ units)
  • Retail. 
  • Office. 
  • Self-storage. 
  • Hotels.
  • Mobile home Parks. mobile home parks have the highest capitalization rate of any real estate niche, at 7-10% nationally, according to Reonomy.
  • Land:
  • Greenfield land hasn’t previously been developed.
  • Brownfield land was previously developed and typically requires clean-up before it can be used.