Chapter 8: Packaged Products Flashcards
Packaged Products
Includes long-term insurance contracts, units, or shares in collective investment schemes
Packaged products also include what?
Life policy, unit in a regulated collective investment scheme, or an interest in an investment trust saving scheme
Investment Company
Entity that is engaged in holding, managing, and investing securities
What are all investment companies registered under?
Investment Company Act of 1940
What characteristics do investment companies contain?
-Multiple investments
-More than one investor investing in the company at present
-Ownership interests are in form of equity or partnerships
-Managed investments
Managed Investment Companies
Manages publicly issued fund shares
Open-End Companies
Issue shares that are sold directly to investors; shares are not bought or sold on a stock exchange
Closed-End Companies
Issue a fixed number of shares that are bought and sold on a stock exchange
Unit Investment Trusts (UIT)
Investment company that provides a portfolio with a fixed set of securities for a specific period of time; can buy or hold a group of securities and make them available to investors as redeemable units
Characteristics of UITs
-Access to a specified asset class and have targeted exposure
-Not actively managed by a manager
-Bought and sold directly from the company that issues them
-Bought from secondary market
-Issued via an initial public offering
-Stated expiration date
-Not actively traded
Face-Amount Certificate Company (FAC)
Offer investors a certificate of investment, along with fixed debt securities that require the issuer to make fixed payments at a future date
What to FAC’s represent?
Contractual agreement between an issuer and an investor, where the issuer commits to making predetermined payments on a specified future date and investor provides fund to the issuer, either through regular installments or as a lump sum payment
Diversified Investment Companies
Usually invest in multiple assets and also in separate securities within each category
Non-Diversified Investment Companies
Allocate their funds to a particular asset type or sector, or to a limited number of securities within each sector
Prospectus
Formal document required by and filed with the SEC that provides details about an investment offering to the public
Investment Objectives
Set of goals that determine an investor’s financial portfolio
Primary Investment Objectives
-Safety of principal
-Income/Dividends
-Growth/Capital Gains
Secondary Investment Objectives
-Liquidity of assets and marketability
-Tax minimization
When is risk disclosure necessary?
When working with stocks, investments, bonds, and anything that is related to financial markets
What does risk disclosure provide?
Better understanding of the company’s risk exposure and risk management practices
What should a risk management document include?
-Risk summaries in case of long disclosure
-Material risk disclosure
-Relevant risk headings
-Inconsistent compliance
-Appropriate disclosure volume
-Generic risk headings
Performance Management
Process of making sure that certain objectives and activities meet the organization’s goal in an efficient manner
Sales Charge
Commission that is paid to the financial intermediary in a mutual fund, such as a broker, advisor, or financial planner
Sales Charge Disclosure
Document that gives general background information about sales charges, expenses, management fees, waivers, etc.
Operating Expense Disclosure
Expense a business sustains through its normal operations
Class Comparison
Descriptions that distinguish one class of fund shares from another within the same fund
Breakpoint
Specific investment thresholds at which discounts apply
Breakpoint Sale
Purchase of a mutual fund at a predetermined dollar amount that qualifies the investor for a lower sales fee tier
Exchange Privilege
Opportunity for mutual fund shareholders to exchange the investment fund with another within the same fund family
Advantages of Exchange Privileges
-Can exchange shares if company reorganizes, with new shares of more value
-Can exchanges share if first fund is liquidated and allows shareholder to maintain investment in similar product
Disadvantages of Exchange Privileges
-Creates sense of entitlement and raises expectations which might lead to disappointment
-Costly and time-consuming
Mutual Fund
Collective investment that pools money from different investors and invests money into equities, bonds, and securities
Who invests mutual fund money?
Professional Fund Managers
Three Tier Structure of Mutual Funds
1) Fund Sponsor
2) Trust and Trustees
3) Assest Management Company (AMC)
Tier 1: Fund Sponsor
Person/entity that can set up a mutual fund to earn money through fund management; must have some experience in financial services and sound financial track record
Tier 2: Trust and Trustees
Created by the fund sponsor in favor of trustees through trust deed and trustees answer to investors; ensure mutual fund’s compliance with regulatory requirements and fiduciary standards
Tier 3: Asset Management Company (AMC)
Responsible for creation and management of a variety of mutual fund schemes that are designed to meet the varying risk tolerance and investment objectives of investors and respond to market conditions
Types of Mutual Funds
-Open-End Funds
-Unit Investment Trusts
-Closed-End Funds
Board of Directors
Executive committee that supervises the activities of an organization
Investment Advisors
Professionals/firms that provide advice on securities to clients and are registered with the SEC or state securities regulators
Transfer Agents
Maintain records of investors and account balances, manage changes in share ownership, and distribute dividends
Custodian
Financial institution responsible for securely holding customers’ securities to protect them from theft or loss
Principal Underwriter
Involved with the initial distribution of mutual fund shares, in a contractual relationship with the investment company issuing fund shares
Underwriting Agreement
Legally binding contract that establishes relationship between an underwriting group or syndicate consisting of investment bankers and the issuing corporation of a new securities offering
What is the primary role of underwriters?
Evaluate the level of risk associated with the issuer’s business and determine the appropriate premium rates, loan borrowing rates, and create a market for securities with accurate pricing based on risk assessment
Mutual Fund Complex
Group of mutual funds managed by the same investment company/fund family
What is the biggest advantage of a mutual fund complex?
Diversification
Net Asset Value (NAV)
Company’s total assets minus its liabilities
What does the NAV represent?
Per-share value of the fund’s assets after deducting its liabilities
Sales Charge
Compensates financial intermediaries and expressed as a percentage of investment
Public Offering Price (POP)
Price at which new issues of stock are offered to the public by an underwriter
No-Load Funds
Mutual fund in which shares are sold without commission or sales charge
Mutual Fund Expense Ratio
How much of a fund’s assets are used for administrative and other operating expenses
Share Class
Differentiates various types of shares in company share capital
Share Class A
Common or preferred stock that has greater benefits in terms of dividends, asset sales and/or voting rights compared to other classes
Share Class B
Classification of common stock that are bought and sold on public exchange platforms
Share Class C
Mutual fund shares characterized by a level load that includes annual charges for servicing, distribution, and fund marketing set at a fixed percentage
Sales Charge: Front-end Load
Fee charged with each purchase, reducing the funds actually invested initially, typically 5-6%, and made up of Class A shares
Sales Charge: Contingent Deferred
Type of back-end load and the amount changes depend on length of time the investor holds onto their shares; typically Class B
Sales Charge: Level Load
Consistent fee that investors pay for the purchase of mutual fund shares, calculated at a fixed percentage over a year; typically Class C
Sales Charge: 12b-1 Fees
Fee paid out of a mutual fund to cover the costs of marketing and selling mutual fund shares
Breakpoint
Investment threshold necessary to qualify for a reduced sales load
Letter of Intent (LOI)
Shareholders indicate their intention to invest a predetermined sum of money in one or more Class A share accounts within a 13-month period; not legally binding
Rights of Accumulation (ROA)
Enable mutual fund shareholders to benefit from reduced sales commission charges when the total number of mutual funds purchased, combined with the existing holdings, meets the ROA breakpoint
Dollar Cost Averaging (DCA)
Used to mitigate price risk when acquiring mutual funds, ETF’s, etc.; rather than purchasing at a single price point, investors systematically buy smaller amounts of sharers at regular intervals, regardless of price
What is a key benefit of DCA?
Reduces investment risk and preserves capital
How can one redeem mutual fund shares?
Submit redemption request form to the fund company or its transfer agent
Redemption Fee
Shareholder fee that some funds charge when the investor redeems mutual fund shares
Withdrawal Plan
Allows shareholders to withdraw their money from a mutual fund or any other investment account at predetermined intervals
Are withdrawals subject to tax deductions?
Yes
Withdrawal Plans: Fixed-dollar Amount
Retirees determine how much money they need to withdraw each year and then reassess the amount after a few years
Withdrawal Plans: Fixed Time
Taking out a fixed-dollar amount over a fixed period
Withdrawal Plans: Fixed Number of Shares
Issues a fixed number of shares through an initial public offering and does not continuously issue new shares or redeem outstanding shares
Unit Investment Trust (UIT) Company
Similar to a mutual fund; Funds from multiple investors are pooled with the aim of achieving a special return, are managed by trustees , and have a fixed portfolio of assets that generally doesn’t change over time
Closed-end Fund
Mutual fund variant that raises capital for the company by issuing a predetermined number of shares in a single IPO
Open-end Fund
Collective investment scheme that allows for the issuance and redemption of shares at any time and does not impose restrictions on the transfer of shares
