When working to obtain a fund certificate to start your financial advisor career, it is necessary that you are conscious of two helpful tools. To begin, understand the link between a fund’s turnover and tax efficiency. Additionally, you should be aware of a Systematic Withdrawal Plan (SWP). Improved knowledge will show that you are different and show that you take your profession seriously. Your clients will have more trust in your ability to handle their investments and you will far succeed others.

The financial press emphasizes the “connection” between a mutual fund’s turnover rate and its after-tax returns. The belief is that the higher the turnover, the less tax efficient the fund. The discussion never includes the fact that the sale of losing securities can offset realized gains, dollar for dollar.

The reality is that mutual funds can have quite a bit of selling activity that generates tax losses that may offset some, most, or all of the securities sold for a profit. On the other hand, a fund can have very high turnover and still be extremely tax efficient. Equally important, large gains may be due to securities in the portfolio that have enjoyed substantial appreciation but are still owned by the fund. Such paper profits are not taxed since no gain (or loss) has yet been realized.

To be successful in your financial advisor career, it is of top importance that you maintain a strong and trusted relationship with your clients. A Systematic Withdrawal Plan (SWP) is one of the most powerful tools that can be utilized by the advisor on behalf of the client. A SWP provides the investor with periodic income. The income is generated from the sale of mutual fund shares. In the case of equity funds, share liquidation after the first year of ownership is tax-advantaged (maximum 5-15% long-term capital gains rate). There is no cost in establishing, terminating, amending, or restarting a SWP. One of the benefits of a SWP is that it allows complete flexibility when it is being set up and on an ongoing basis. The investor is not locked into anything. At any time, the dollar amount can be increased or decreased.

There are a few things that the advisor should make sure the investor understands about SWPs. First, be aware that few investors actually experience market returns. Secondly, the effect of compounding over long periods of time often results in numbers that seem too good to be true (and are). Next, despite what most investors say, few are actually “long term” and still fewer will stay the course for 5-10 years or more. Additionally, whatever is projected, reality will most likely be quite different. Lastly, before Greenspan became Fed chairperson, he was a principal of a money management consulting firm that underperformed the S&P.

Although your fund certificate may allow you to work as an advisor, there are other tools necessary to ensure that your clients remain satisfied. Components such as turnover, tax efficiency and SWPs are all parts in improving your skill set. The more you learn and understand about the financial marketplace, the better you will be in succeeding and prospering in your career.

Author Bio: Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about a fund certificate, financial advisor career, or IBF, visit http://www.icfs.com

Category: Finances
Keywords: fund certificate, financial advisor career