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What Is Asset Management?

As investors begin to acquire assets — from stocks and bonds to alternative investments and real estate — some may wish they had a bit of help managing them. Asset management is a service provided by an individual or financial institution, in which they direct and invest a client’s financial assets on their behalf in exchange for a fee. For example, you may work with an asset management firm to manage your accounts.

Understanding what financial asset management is and the role it can play in managing your portfolio can help you decide whether it is a service that’s right for you, or whether another type of financial professional is a better fit.

Asset Management Basics

What is asset management? If this is a new concept, here’s a simple asset management definition: It simply means paying a professional to oversee your financial assets. This can include bank accounts as well as investment accounts.

Traditionally, asset management companies screen out smaller investors by requiring high investment minimums. As a result, the clients they tend to work with are what is known as high-net-worth clients. These clients could be individuals, corporations, institutions like universities, or even government agencies.

Asset managers handle investments on their client’s behalf, working to deliver investment returns while aiming to mitigate risk. They choose which investments to buy, sell, or avoid entirely. And they make recommendations based on what they think will help their client’s portfolio grow safely.

In addition to trading traditional and alternative securities, such as stocks, bonds, real estate and private equity, asset managers may also offer services not usually available to private investors such as first access to initial public offerings (IPOs).

Asset managers may also allow their clients to take advantage of other less common investment strategies. For example, they may let an investor borrow against the securities in their portfolio if there are other investment opportunities that require quick cash.

They may also offer their clients other services like bundled insurance, which can be cheaper to buy through them than through another insurance company.

How Does Asset Management Work?

Asset managers often make investments based upon an individual or institutional client’s investment mandate. This mandate is a set of instructions for how the client wants their pool of assets to be managed and how much risk to take on. These mandates may include instructions on a client’s goals and priorities, what benchmarks may be used to measure success, and what types of investments should be prioritized or avoided. For example, an environmental organization might avoid stocks or funds that include petroleum companies, or a human rights organization might target funds that prioritize good corporate governance.

To make managing and monitoring their accounts easier, clients may consolidate all of their accounts — including checking accounts, savings accounts, money market accounts, and investment accounts — into one asset management account. These accounts provide one monthly statement to help clients keep track of their financial activities, and may provide other benefits such as automatic periodic investment.

Asset management accounts are relatively new: The government first allowed them just over 20 years ago. In 1999, the Gramm-Leach-Bliley Act overrode the Glass-Steagall Act of 1933, which banned firms from offering banking and securities services at the same time. The Gramm-Leach-Bliley Act permitted financial services firms to offer brokerage and banking services, and the asset management accounts were born.

How Much Does an Asset Manager Cost?

Investors should pay special attention to how an asset manager gets paid, as their compensation structures can be complicated. Before hiring an asset manager, an investor should feel comfortable asking for a copy of their fee structure. Individual Advisory Representatives (IAR), which most asset managers are, are required by the Securities and Exchange Commission (SEC) to file a Form ADV that includes information such as the manager’s investment style and assets they manage, among other things.

Many asset managers charge an annual fee based on a percentage of the value of an account. These fees may change depending on the size of the portfolio. For example, large portfolios may be charged lower fees than smaller portfolios. Alternatively, some asset managers may offer tiered-fee systems that assign different fees to different asset levels within a portfolio. For example, managers may charge one fee for the first $250,000 in a portfolio and a slightly smaller fee for the next $250,000 to $1 million, and so on.

Asset managers may also earn fees on other products or services they offer, such as insurance policies. Other asset management firms are fee-only, meaning they don’t collect commissions on specific products, and only make money from the management fees they charge their clients. A fee structure like this may make investors feel more confident that their asset manager is choosing investments and products that are appropriate to their investment strategy, rather than choosing products because they carry higher commissions.

Some asset management accounts come with account minimums and related fees. Smaller investors may have trouble meeting the opening balance amount or keeping enough in their account to avoid fees.

Importance of Asset Management

Financial asset management is important on several levels for both individual investors as well as business entities. For example, asset management makes it easier to keep track of assets in a centralized way. If you run a business, maintaining accounts at an asset management bank could help with tracking cash flow. If you’re an individual investor, asset management can help you see at a glance how much you have to invest at any given time or how your investments are performing.

Asset management also plays a part in maximizing financial assets and capitalizing on opportunities. A dedicated asset manager can help develop an investment strategy that’s designed to produce a target level of returns for their client, while still maintaining a risk profile that’s tailored to the client’s needs and preferences.

It’s possible to develop both short- and long-term strategies for financial asset management. The asset manager would establish these strategies based on the risk tolerance, time horizon, and investment goals of the investor they’re working with.

Benefits of Asset Management

Asset management can be attractive to investors, business owners, and other entities that want to benefit from professional financial guidance. For example, your asset manager may be able to review your portfolio and develop a plan for maximizing its tax efficiency. Or if you’re interested in a specific objective, such as generating current income through dividend investments, your asset manager may be able to guide you in your investment decision-making to achieve that goal.

Financial asset management may also yield cost savings. While you may pay a fee to an asset manager for their services, that fee may be justified if they’re able to help you reduce other investment fees. For example, if you’re investing in a mutual fund that has a steep expense ratio and produces average returns at best, an asset manager may be able to help you replace it with a mutual fund that has a lower expense ratio and a stronger return profile.

It’s important to keep in mind that asset management isn’t the same as wealth management. Asset managers typically target specific activities, such as choosing an asset allocation for your portfolio or finding ways to minimize investment taxes. Wealth managers, on the other hand, may take a broader view of your financial situation. For example, in addition to helping you with investment decisions, wealth managers may also be concerned with:

•  Estate planning

•  Insurance planning

•  Tax planning

•  Charitable giving

•  Retirement planning

•  College planning

Asset management is concentrated on specific assets while wealth management is more comprehensive in its approach to building and preserving wealth over time.

Asset Management Accounts

Asset management accounts function like a checking or savings account, but with features of investment accounts. You may find them offered at asset management banks or through traditional and online brokerages. Asset management accounts can also be referred to as “sweep” or “cash” management accounts.

Depending on where you open an asset management account, it may include these features and benefits:

•  Ability to link to your brokerage account for convenient transfers

•  Automatic “sweeps” (transfers) of funds from your brokerage account to your asset management account

•  Interest earned on deposits

•  Check-writing abilities

•  Access to funds via a debit or ATM card

•  Combined statement for brokerage and checking transactions

Asset management accounts may also have fewer fees compared to traditional checking or savings accounts. And they may enjoy enhanced FDIC coverage limits. An asset management account should make it as easy as possible to move funds between your spending account and your investment account.

Developing Asset Management Strategies

If you’re considering working with an asset management bank or firm, it’s important to understand how financial asset management strategies work. While every asset manager is different, they may consider some of the same metrics when developing a plan for managing client assets. Those metrics can include the investor’s:

•  Current age

•  Risk tolerance

•  Time horizon for investing

•  Current portfolio allocation

•  Goals and objectives

Asset managers may also take into consideration an investor’s values as well. For example, you may be interested in ESG strategies that promote positive environmental, social and governance practices. Your asset manager could help you to develop an asset allocation that includes green companies or companies that support social justice. Or you may want to exclude certain industries or stock market sectors altogether, which is something else an asset manager could discuss with you.

Alternatives to Asset Managers

You don’t have to be a high-net-worth individual to access some form of asset management. Some financial firms may offer asset management to some clients through a private client division while offering other clients access to pooled investments, such as mutual funds.

Smaller investors — and any investors — looking for help with their portfolios do have other options besides asset managers. These are some of the more common ways to get help putting together and monitoring an investment portfolio.

Managed Funds

Actively managed mutual funds, index funds, and exchange-traded funds (ETFs) are structures in which investors’ money is pooled and then managed in a single account by asset managers. While there are some funds that focus on specific ideals or are focused on producing income to an individual’s needs, the managers don’t work for individual investors specifically. The funds do, however, offer some benefits of active management. Any investor can buy shares of these funds through a broker or with the help of a financial advisor.

Actively managed funds are led by a team of well-trained experts who are trying to outperform the market. This expertise can come at a price, and actively managed funds may come with higher fees. When you invest in mutual funds, for example, you can expect to be charged a sales load — a percentage of the dollar amount invested — by brokers and the mutual fund company when you buy or sell the fund. Front-end loads are paid by the investor up front when they purchase shares of a fund. So if a mutual fund has a load fee of 5% and an investor buys $10,000 worth of shares, $500 will be taken out of the account to pay brokers and distributors.

Back-end fees are paid when an investor sells shares. These fees are usually calculated based on the initial investment and not on the final value of the shares at the time of the sale.

Passively managed funds closely mirror a market index, such as the S&P 500. These funds hold the same securities contained in the index and tend to stray very little from that pattern. As a result, the fund is essentially on auto-pilot and requires very little human intervention.

One low-cost option for investors who want to take a hands-off approach to their portfolios are online investment platforms, some of which use algorithms to build and manage client portfolios.

Registered Investment Advisors (RIAs)

A registered investment advisor (RIA) is an individual or firm who gives investment advice, but may outsource asset management to third-party firms.

RIAs must register with the SEC or another state-level authority. They have a fiduciary duty to their clients, which means they are legally obligated to act in their clients’ best interests. In other words, RIAs must provide investment advice because it is best for their client — and not because it’s beneficial or more profitable to them. The advice they give must be as accurate as possible based on the information available, and RIAs must consider cost and efficiency when making investments on their clients’ behalf.

Not all financial professionals are held to this same standard. Stock brokers for example, are held to a suitability standard rather than a fiduciary standard, meaning the recommendations they make to clients must be suitable to their client’s needs. This differs slightly from the fiduciary standard an investment advisory is held to, which means that the advisor is bound to act in the client’s best interest.

RIAs may suggest investments to their clients for which they receive monetary compensation, such as a commission, as long as the product is in the client’s best interest and the RIA discloses the conflict of interest.

When registering as an RIA, advisors must disclose the investment styles and strategies that they use, how much money they manage in total, their fee structure, past disciplinary actions, conflicts with clients, and any potential conflicts of interest.

Broker Dealers

Broker-dealers are individuals or companies who are licenced to sell securities and other investments. In effect, they are middlemen who buy and sell on behalf of clients. They don’t help investors build their portfolios, or develop an allocation and diversification strategy. However, an investor can turn to a broker-dealer when they want to execute a trade.

Other Financial Advisors

Sometimes, an investor might seek general financial advice that doesn’t necessarily have to do with managing their assets. If those instances, a certified financial planner (CFP®) might be someone to consider. CFPs can make recommendations about asset allocation, investment accounts, and tax strategy, for example. And they can help an individual put together long-term investment plans to save for major financial goals, such as retirement or sending kids to college.

CFPs are credentialed by the CFP Board, and to earn their stripes they must meet rigorous training requirements and pass the CFP exam. The CFP board holds its members to a fiduciary standard, so as with RIAs, the advice they give must be in their clients’ best interest.

The Takeaway

Though asset managers typically work with high-net-worth clients, there are a number of different options any investor has — including wealth managers, RIAs, and CFPs — when it comes to finding a professional service or individual to manage their investment portfolio. For any investor, it helps to consider one’s income bracket, specific needs, and tolerance for fees, when deciding where to turn for professional guidance.

SoFi Invest® can help anyone from seasoned investors to eager beginners get started building a diversified portfolio today. Members can trade stocks and ETFs, choosing to take a hands-on, active approach to building their portfolio—or letting SoFi take the reins to build an automated portfolio for you.

Learn more about SoFi Invest and how it can help grow wealth.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Should I Use a Dividend Reinvestment Plan?

Should I Use a Dividend Reinvestment Plan?

A dividend reinvestment plan, or DRIP, allows investors to reinvest the cash dividends they receive from their stocks into more shares, or fractional shares, of that stock.

Hundreds of companies, funds, and brokerages offer DRIPs to shareholders. Although some stock exchanges offer automatic dividend reinvestment, this is different from a formal DRIP. Reinvesting dividends through a DRIP may come with a discount on share prices or no commissions.

Of course, it’s possible to simply keep the cash dividends to spend or save, or use them to buy shares of a different stock. In order to decide what’s best for your financial plan, it helps to know the pros and cons of a dividend reinvestment plan and how it works.

What’s a Dividend?

First, some basics about dividends themselves. A dividend is a payment made from a company to its shareholders (people who own shares of their company’s stock).

Dividends are often drawn from a company’s earnings and paid to shareholders on an annual or quarterly basis. While they’re typically paid in cash via direct deposit or a check, in some cases a company might elect to pay dividends via additional shares. Either way, dividends are subject to tax.

Not all stocks pay dividends, though. Growth stocks, for example, are less likely to offer a dividend, as these companies typically reinvest all of their profits in further growth.

If you buy a dividend-paying stock and want to qualify for a dividend payout, you must own the stock before its ex dividend date. This is a date set by the company that determines which shareholders are eligible to receive an upcoming dividend payment.

Recommended: How Does a Dividend Work?

Dividends Paid on Per-Share Basis

Dividends are paid on a per share basis. Dividend per share (DPS) represents the total amount of dividends per individual outstanding share of stock in a company.

There are two ways to calculate dividend per share:

Total dividends paid/Shares outstanding = Dividend per share

OR

Earnings per share (EPS) x Dividend payout ratio = Dividend per share

In this second formula, earnings per share is a company’s net profit divided by the number of outstanding shares. This is a key metric that’s used to assess a company’s profitability.

Dividend payout ratio (DPR) reflects the total amount of dividends that are paid out to shareholders, relative to a company’s net income. This metric can tell you at a glance what percentage of its profits a company pays to investors as dividends versus reinvesting in growth.

What Is Dividend Reinvestment?

Dividend reinvestment typically means using the dividends you receive to purchase additional shares of stock in the same company (although technically you can reinvest in any company’s stock). So if you’re asking, Should I reinvest dividends? what you may want to know is whether you should use your dividends to buy more of the same stock.

Here’s how it works. If you own 20 shares of a stock that has a current trading value of $100 per share, and the company announces that it will pay $10 in dividends per share of stock, then the company would pay you $200 in dividends that year.

If you choose to reinvest the dividends, you would own 22 shares of that stock ($200 in dividends/$100 of current trading value = two new shares of stock added to your original 20). If the stock price was $200, you’d be able to purchase a single share; if it was $50, you could theoretically reinvest and own an additional four shares.

If instead you want cash, then you’d receive $200 to spend or save, and you’d still have the initial 20 shares of the stock.

When you initially buy a share of dividend-paying stock, you typically have the option of choosing whether you’ll want to reinvest your dividends automatically. Let’s look at how those plans work.

Dividend Reinvestment Plans

Depending on which stocks you invest in, you may have the option to enroll in a Dividend Reinvestment Plan or DRIP. This type of plan, offered by about 650 companies and 500 closed-end funds, allows you to automatically reinvest dividends as they’re paid out into additional shares of stock.

So should you reinvest dividends with a DRIP?

Pros of Dividend Reinvestment Plans

You may have heard that Albert Einstein once said that the most powerful force in the universe was compound interest. The story may be apocryphal, but it’s true that one of the best reasons to reinvest your dividends is that it helps to position you for potentially greater long-term returns, thanks to the power of compounding.

Generally, if a company pays out the same level of dividends each year — whether that’s 2%, 3% or another amount — and you take your dividends in cash, then you’ll keep getting the same amount in dividends each year (assuming you don’t buy any additional shares).

But if you take your dividends and reinvest them through a DRIP, then you’ll have more shares of stock next year, and then more the year after that — which means that the dollar amount of the dividends (at least in our example where the payout percentage is the same each year) will keep rising. Over a period of time, the amount you would receive during subsequent payouts could increase significantly.

An important caveat: Real-life situations aren’t often as straightforward as this example, of course. For one thing, stock prices aren’t likely to stay exactly the same for an extended period of time.

Plus, there’s no guarantee that dividends will be paid out each period; and, even if they are, there is no way to know for sure how much they’ll be. The performance of the company and the general economy can have a significant impact on company profitability and, therefore, typically affect dividends given to shareholders.

From a long-term historical perspective, though, stocks have provided financial growth and, when dividends are reinvested, the effect of compounding can provide significant benefits.

There are more benefits associated with DRIPs:

•  You may get a discount: Discounts on DRIP shares can be anywhere from 1% to 10%. Investors can also purchase fractional shares through DRIPS. This is useful because dividend payments may not be enough to buy an entire share of the stock.

•  Zero Commission: Most DRIP programs can allow you to buy new shares without paying commission fees. However, many brokerages offer zero-commission trading outside of DRIPs these days.

•  Fractional Shares: DRIPs may allow you to reinvest into fractional shares, rather than whole shares that may be at a pricier level than you wish to purchase.

•  Dollar-cost averaging: This is a common strategy investors use to manage price volatility. You invest the same amount of money on a regular cadence (every week, month, quarter) no matter what the price of the asset is. This is generally smarter than trying to time the market.

Cons of Dividend Reinvestment Plans

Dividend reinvestment plans also come with some potential negatives.

•  The cash is tied up. First, reinvesting dividends obviously puts that money out of reach. That can be a downside if you want or need the money for, say, home improvements, a tuition bill, or an upcoming vacation.

•  Risk exposure. You should also keep potential risk factors in mind. For example, you may have concerns about the stock market in general, or about the particular company where you’re a shareholder, and reinvesting your cash into more equities may seem unwise. Or you may need to rebalance your portfolio. If you’ve been reinvesting your dividends, and the stock portion of your portfolio has grown, using a DRIP could inadvertently put your allocation further out of whack.

•  No flexibility. Another factor to consider is that when your dividends are automatically reinvested through a DRIP, they will go right back into the company that issued the dividend, giving you no choice as to where to put those funds. Perhaps you’d simply rather buy stock from another company.

•  Less liquidity. Also, when you use a DRIP and later wish to sell those shares, you must sell them back to the company. DRIP shares cannot be sold on exchanges.

Cash vs. Reinvested Dividends

Should I reinvest dividends or take cash instead? How you approach this question can depend on several things, including:

•  Short term financial goals

•  Long term financial goals

•  Income needs

Accepting the cash value of your dividends can provide you with ongoing income. That may be important to you if you’re looking for a way to supplement your paychecks during your working years, or other income sources if you’re already retired.

As mentioned earlier, you could use that cash income to further a number of goals. For instance, you might use cash dividend payouts to pay off debt, fund home improvements or put your kids through college. Or you may use it to help pay for long-term care during your later years.

You might consider a cash option for dividends rather than reinvesting dividends if you’re already building sufficient wealth for retirement in your portfolio. That way you can free up the cash now to enjoy it or address other current priorities.

Cash may also be more attractive if you’re comfortable with your current portfolio configuration and don’t want to purchase additional shares of the dividend stocks you already own.

On the other hand, reinvesting dividends automatically through a DRIP could help you to increase your savings for retirement. This assumes, of course, that your investments perform well and that the stocks you own don’t decrease or eliminate their dividend payout over time. Choosing Dividend Aristocrats or Dividend Kings could help to hedge against the possibility of dividend cuts.

Dividend Aristocrats represent a select group of companies that have increased their dividend payout year over year for at least 25 consecutive years. The Dividend Kings are an even more elite group of companies that have increased dividend payouts year over year for 50 consecutive years or more.

Tax Consequences of Dividends

One thing to keep in mind is that dividends — whether you cash them out or reinvest them — are not free money. There may be tax consequences when you receive dividends because if the amount is significant enough, you might need to pay income taxes on what you’ve earned.

Each year, you’ll receive a tax form called a 1099-DIV for each investment that paid you dividends, and these forms will help you to determine how much you owe in taxes on those earnings.

Dividends are considered taxable whether you take them in cash or reinvest them — even though when you reinvest, the money isn’t currently available for you to spend.

The exception to that rule is for funds invested in retirement accounts, such as an online IRA, as the money invested in these accounts is tax-deferred. If you have received or believe you may receive dividends this year, it can make sense to get professional tax advice to see how you can minimize your tax liability.

Should You Reinvest Dividends?

Reinvesting dividends through a dividend reinvestment plan is partly a short-term decision, and mostly a long-term one.

If you need the cash from the dividend payouts in the near term, or have doubts about the market or the company you’d be reinvesting in (or you’d rather purchase another stock), you may not want to use a DRIP.

If on the other hand you don’t have an immediate need for the cash, and you can see the value of compounding the growth of your shares in the company over the long haul, reinvesting dividends makes sense. And using a DRIP, which may offer some cost savings, could be a smart way to go.

The Takeaway

In general there is a strong case to be made for reinvesting dividends as a growth play, and using a dividend reinvestment plan (or DRIP) is an automatic feature investors can use to take their dividend payouts and use them to purchase more shares of the company’s stock.

As appealing as that sounds, though, it’s important to kick the tires, as it were, and consider all the usual scenarios before you decide to surrender your cash dividends to an automatic reinvestment plan. While there is the potential for compound growth, and it’s likely that using a DRIP will allow you to purchase shares at a discount and with no transaction fees, these dividend reinvestment plans are limiting. You are locked into that company’s stock during a certain market period and even if you decided to sell, you wouldn’t be able to sell DRIP shares on any exchange but back to the company.

Before you can truly decide whether to use a DRIP, it may help to have some dividend-paying stocks. When you open an online investment account with SoFi Invest® a whole world of stock investing is open to you, and you can explore dividend-paying stocks, fractional shares, and more. Becoming a SoFi member also gives you access to complimentary financial advisory services.

For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Ready to start building your portfolio? Download the SoFi Invest app today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .
Claw Promotion: For the full terms and conditions of SoFi’s Claw Promotion, click here. Probability of a customer receiving $1,000 is 0.028%.

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Secured Overnight Financing Rate: Transitioning to SOFR

Secured Overnight Financing Rate Explained

The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate most likely replacing LIBOR in the United States by the end of 2021. More than $80 trillion in loans have already switched over to SOFR, which is based on the cost of overnight borrowing that banks pay when they complete repos, or U.S. Treasury repurchase agreements.

LIBOR, the London Interbank Offered Rate, used to be a commonly used system for setting commercial and consumer loan interest rates. However, after playing a role in several manipulation scandals as well as the financial crisis and the Great Recession, there has been a global shift away from LIBOR.

There are some important differences between LIBOR and SOFR to know about, some of which may affect consumers and investors. Read on to learn more about the LIBOR replacement, SOFR.

What Is the Secured Overnight Financing Rate (SOFR)?

Financial institutions use SOFR as a tool for pricing corporate and consumer loans. SOFR sets rates based on the rates that financial institutions pay one another for overnight loans or repos, hence the name overnight financing. The SOFR rate is published daily by the Federal Reserve Bank of New York.

SOFR is a popular benchmark because it is risk-free, robust, and transparent. It is based on more than $1 trillion in cleared marketplace transactions, whereas LIBOR is only based on hypothetical short-term loan rates. This has historically made LIBOR less reliable and more vulnerable to insider manipulation.

A benchmark rate like SOFR is especially important in derivatives trading, where interest-rate swaps are used by corporations to manage the risk of interest rates and for speculation on borrowing. Traders may exchange fixed-rate payments and adjustable-rate payments. The rates are all based on a benchmark such as LIBOR or SOFR, as well as the party’s credit rating and other factors.

How Does the SOFR Work?

When large financial institutions lend money to one another in order to adhere to reserve and liquidity requirements, they do so through the Treasury repurchase market using Treasury bond repurchase agreements, also known as repos. Using repo agreements, Treasurys are used as collateral and banks are able to make overnight loans.

SOFR is made up of the weighted averages of the interest rates used in real, finalized repo transactions.

Current SOFR Rates

Current SOFR rates can be found through the Federal Reserve Bank of New York.

The current 1-month and 3-month SOFR averages are 0.05%.

The History of SOFR

As mentioned above, the adoption of SOFR is a result of the need to phase out LIBOR, which was previously used for determining interest rates for borrowing money and the costs of complex transactions that may involve mortgages, derivatives, credit default swaps, and asset-backed securities.

Financial institutions, banks, and lenders rely on particular indexes to determine interest rates. Before the 1980s, there wasn’t one particular index that was used internationally. However, during the 1980s, increased complexity in the market resulted in the need for more standardized use of a benchmark tool for determining adjustable rates.

The international financial industry adopted LIBOR as the standard because it was viewed as a trusted, accurate and reliable index. Other indexes were still used, but the majority of institutions used LIBOR. LIBOR rates were the basis for about $300 trillion in assets around the world.

Fast forward to around 2008, and certain large financial institutions were manipulating interest rates illegally in order to increase their profits. This was possible in part because of the use of LIBOR, since it’s based on hypothetical rates. Manipulation of rates was one factor that led to the financial crisis.

Once that manipulation was discovered, there was a global demand for a new rate benchmark and a call to end the use of LIBOR. As a result of the crisis, banking regulations led to less borrowing and a lessening of trading activity. Less trading made LIBOR even less reliable.

In 2017, the Federal Reserve formed a group of large financial institutions known as the Alternative Reference Rate Committee (ARRC) to work on finding an alternative to LIBOR. They ultimately chose SOFR.

While SOFR is designed to work in conjunction with LIBOR, it ultimately may replace it completely. Now that fewer and fewer loans are using LIBOR and backing the rate, there is even less reason to use it.

It’s expected that LIBOR will be fully phased out by the end of 2021.

How SOFR Is Different From LIBOR

There are some key differences between SOFR and LIBOR, which also in part explain why the shift toward using SOFR in recent years. Some of the main differences are:

•   SOFR is based on completed transactions whereas LIBOR is based on quotes and hypothetical rates. This makes LIBOR more vulnerable to manipulation because it’s based on hypotheticals, which may not be from real financial institutions.

•   Lending based on LIBOR doesn’t use collateral, making it unsecured. Loans using LIBOR include a premium due to credit risk. SOFR, on the other hand, is secured as it is based on transactions backed with Treasurys. Therefore, there is no premium included in the interest rates.

•   With LIBOR, banks know ahead of time what the borrowing rate will be. With SOFR, they don’t know precisely what it will be until the loan term ends.

•   SOFR must be updated twice a year, while LIBOR is updated just once a year.

•   SOFR is a daily (overnight) rate whereas LIBOR has seven variable rates.

How SOFR Could Affect You

There has been some concern that shifting away from LIBOR will cause great market disruption. However, the shift has been designed to be a slow transition, so the risk of that is pretty low. Still, the transition may result in short-term trading volatility for derivatives traders.

If you already have a mortgage, the transition to SOFR could affect you, though you likely won’t notice the change. Those with a 5-, 7-, or 10-year adjustable-rate mortgage with a fully indexed interest rate based on LIBOR may see a small rate change, but it is unlikely to be very significant. If you are entering into a loan, SOFR rates are already being used.

Since SOFR is updated more frequently, this could result in a change in the cost of borrowing cash. To avoid this uncertainty, you could consider taking out a fixed-rate loan for student loan refinancing.

The SOFR index is meant to be more reliable and less risky though, so the transition should be a positive thing for you if you are a borrower worried about student loan interest rates, for instance, or if you are considering taking out a mortgage.

The Takeaway

Now that you know more about the transition to SOFR from LIBOR, you can likely rest easy. The effects of the shift to SOFR should be minimal, and they could even turn out to be a good thing if, for instance, you’re considering taking out student loans.

SoFi® uses SOFR for its student loan interest rates, and you can apply and get approved for a private student loan or refinance right from your phone.

If you’re looking for an easy way to borrow, SoFi® offers simple online tools that can make the process quick and easy to navigate.

Photo credit: iStock/Nicholas Ahonen


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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Tips For Your First Physician Sign On Bonus

If you’re a new doctor who has just been offered your first sign on bonus, you’re probably over the moon. Chances are, you’ve put in eight years of school, then another three to seven years of residency and fellowships, all while making do on a low salary. Now, your hard work is finally paying off financially.

The average doctor bonus for physicians who just landed their first full-time job reached nearly $30,000 in 2017, which is a record high. The size of bonuses has increased substantially since 2011, when the average was around $20,000 . The largest recorded bonus paid in 2017 was a whopping $200,000 .

Bonuses are very common: About 90% of doctors now get them. Swelling bonuses and salaries are partly a response to a growing physician shortage in the U.S.

The size of bonuses is especially impressive compared to what you’ve likely earned up until this point. The average medical resident makes only $59,300 a year. Given how frugally you’ve been living, you may not know what to do with this large chunk of change. Here are some tips on how to make the most of your bonus, and some words of caution about how not to spend that newfound cash.

What Not to Do with Your Doctor Sign On Bonus

Since you’re not used to having a large amount of extra cash, you may be tempted to use your bonus on a fun splurge. Or, you may simply not know what to do, having focused more on your medical textbooks than financial know-how. Here are some things to avoid doing with your bonus:

•  Don’t blow it on things that won’t last. After years of penny-pinching, it’s understandable that you’d want to treat yourself to some costly retail therapy, or on expensive meals and trips. There’s nothing wrong with spending on high-quality goods or a life-changing experience but be conscientious about each purchase.

•  Don’t let your money linger. Putting your bonus into a checking or savings account, can seem like the easiest thing to do and a way to protect your money. But, the interest rates you earn likely won’t even be enough to keep up with inflation. That means your money could decrease in value while in these accounts.

•  Don’t slide into debt. Having a large sum of cash can make you feel richer than are. You may be tempted to take on ongoing expenses, such as a house or car, that you can’t really afford once the bonus runs out. If your regular cashflow can’t sustain these expenses, you run the risk of going into credit card debt.

How Much is a Sign On Bonus Taxed?

Your bonus will be considered supplemental income and be subject to federal taxes, as well as state and local taxes depending on where you live. In 2018 , the IRS taxed supplemental wages at a rate of 22%.

If you receive the bonus as a check, rather than as part of your paycheck, it will be up to you to make sure you pay taxes on it. Get clear on how much you owe before you spend the check, and set money aside for taxes—otherwise, you might spend more than you actually have and come up empty when tax time rolls around.

Smart Options for Spending Your Physician Sign on Bonus

If you’re looking for ways to use your physician sign on bonus to wisely plan for the future, there are a lot of options that can be beneficial for your finances. Depending on your personal situation, you’ll be able to determine which option will best set you up to try and hit your financial goals.

Make a Dent in your Debt

If you’re just getting your first physician job, you might still have a hefty amount of student loan debt. Over a quarter of medical residents have student debt over $200,000 .

Since you’ve been living on a pretty low salary, you may have racked up some credit card debt as well. Particularly if your debt comes with high interest rates, it could be a smart move to use your bonus to pay some of it off. This is particularly true for credit card debt, which usually has high interest rates.

With student loans, your bonus could go even further if you refinance. Refinancing student loans involves taking out a single new loan, which comes with a new term and interest rate, to pay off your existing loans. Now that you have a stable job and a higher salary, refinancing may get you a lower interest rate, which may reduce how much you pay over the life of your loan.

Use a student loan calculator to figure out how much you could save, and how putting some of your bonus toward the loan could reduce what you owe over the life of the loan.

Build an Emergency Fund

Many financial professionals advise that everyone have an emergency fund equivalent to about six months of living expenses. This fund is meant to pay for unexpected and urgent costs, such as medical bills, car repairs, or a layoff.

The money should be kept in cash equivalents, so you can access it as soon as you need to. The fund is meant to help prevent you from going into credit card debt or worse if an emergency comes up. If you don’t already have an emergency fund, it makes sense to use your bonus, or part of it, to create one.

Save for Retirement

A frequently cited rule of thumb is to have the equivalent of one year of your salary saved for retirement by the age of 30. But, you might be behind on building your nest egg, since you’ve been in school or in low-paying residencies and fellowships. If you already have an emergency fund, you can use your sign on bonus to increase your 401(k) contribution (the maximum is $18,500 per year).

After you’ve done this, you can also put up to $5,500 into either a traditional or Roth IRA. These are accounts you can open on your own, regardless of what your employer offers, and allow you to invest in a variety of stocks, bonds and other assets.

The traditional and Roth IRA offer different tax benefits, and you must make below a certain income limit to qualify for a Roth IRA. If you’re not sure whether you’re on track in saving for retirement, an online retirement calculator may help you figure out where you stand.

Invest through a Wealth Account

Opening an individual investment account, such as a SoFi Invest account, is a great way to help your bonus benefit you in the long term. You can put in as much money as you want—the minimum is $100—and withdraw it anytime. Your funds will be invested in five to seven Exchange Traded Funds (ETFs), which consist of a diverse mix of stocks and bonds.

Diversification can help reduce risk, while investing in passively managed ETFs is a good lower fee approach. Plus, there are no management fees no matter the size of your portfolio. SoFi rebalances portfolios at least quarterly to maintain an investment mix and risk level you’re comfortable with. With a SoFi Invest® account, you can benefit from the low costs of automated investing, as well as the clarity that comes with human advisors.

The earlier in life you invest, the more value you can potentially create down the line. Of course, this isn’t guaranteed, since you can’t predict how the market will perform in any given time period. But the earlier you invest, and the longer you leave your money in the market, the more of a chance your money has to grow.

Suddenly having thousands, or even tens of thousands of dollars on your hands can be confusing for anyone. It can be especially overwhelming for a new physician used to getting by on student loans or a low resident’s salary.

Don’t make the mistake of thinking short-term or letting your doctor bonus sit idle.Whether you pay off debt, prepare for emergencies, save for retirement, or invest, you can rest assured that your money will be put to good use. By thinking long term, you can use this windfall at the beginning of your career to help set yourself up for a successful well planned financial future.

Use your sign on bonus to invest in a fulfilling future. Open a SoFi Invest account and put your money to work for you today.


SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
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How Does Student Loan Deferment in Grad School Work?

No matter how good a graduate or professional school’s potential return on investment is, climbing that mountain requires careful consideration so that you don’t end up with a heavier student debt burden than you planned for.

That means not only having a plan for graduate school loans but knowing what to do with any existing undergraduate student loans.

Deferring payments may bring temporary relief while pursuing a graduate degree, but loan refinancing or an income-driven repayment plan could bring longer-term help.

Deferment vs. Forbearance

Graduation from undergrad or graduate school is followed by a payment grace period of six months for most federal student loans. But if you hit a snag at some point and can’t afford payments, both deferment and forbearance are designed to allow you to apply to postpone payments.

The main difference: Interest accrues on only some federal student loans during deferment, whereas it accrues on nearly all in forbearance.

Any unpaid interest is capitalized, or added to your loan balance, at the end of the payment pause, increasing the total amount you end up repaying.

Deferment, for up to 12 months at a time, for a maximum of 36 months, may be a better choice than forbearance if:

•   You have subsidized federal student loans and

•   You’re dealing with substantial financial hardship

If you don’t qualify for deferment and your financial hardship is temporary, forbearance is an option.

If you have private student loans, many lenders will allow you to apply for a payment pause during hardship, too, though the terms and fees may be less borrower-friendly than is the case with federal student loans.

Do I Qualify to Defer My Payments?

For federal student loans, you’ll need to submit a request to your student loan servicer, usually with documentation to show that you meet the eligibility requirements for the deferment. For private student loans, you’ll need to check the rules directly with the lender.

A variety of circumstances may qualify you for deferment. Here are several.

Economic Hardship Deferment

You:

•   Are receiving a means-tested benefit, like welfare

•   Work full-time but have earnings that are below 150% of the poverty guideline for your family size
and state

•   Are serving in the Peace Corps

Unemployment Deferment

You receive unemployment benefits or you are unable to find full-time employment.

Graduate Fellowship Deferment

You’re enrolled in a graduate fellowship program that provides financial support while you pursue graduate studies and research.

Military Service and Post-Active Duty Student Deferment

You are on active duty military service in connection with a war, military operation, or national emergency; or you’ve completed active duty service and any grace period.

Rehabilitation Training Deferment

You’re enrolled in an approved program that provides mental health, drug abuse, alcohol abuse, or vocational rehab.

Cancer Treatment Deferment

You may qualify for deferment while undergoing cancer treatment and for six months afterward.

When Interest Accrues in Deferment

If you’re looking into deferment, you’ll want to check how interest would be handled during the payment pause and whether, if unpaid interest is capitalized, you’re prepared to take on a higher overall cost of the loan.

During deferment, you are generally not responsible for paying interest on:

•   Direct Subsidized Loans

•   Federal Perkins Loans

•   The subsidized portion of Direct Consolidation Loans

•   The subsidized portion of Federal Family Education Loan (FFEL) Program Consolidation Loans

With deferment, you are generally responsible for paying interest on:

•   Direct Unsubsidized Loans

•   Direct PLUS Loans

•   FFEL PLUS Loans

•   The unsubsidized portion of Direct Consolidation Loans

•   The unsubsidized portion of FFEL Consolidation Loans

•   Private student loans (if the lender allows deferment)

If you’re starting graduate or professional school or are in the thick of it, your federal borrowing options are Direct PLUS Loans (commonly called grad PLUS Loans when borrowers are graduate students) and Direct Unsubsidized Loans (also available to undergrads).

As noted above, those loan types accrue interest during a deferment.

Direct loans for graduate students currently carry a 5.28% rate (the rates are set by federal law for each academic year), with a loan fee of 1.057%.

For new graduate PLUS loans, the rate is currently 6.28%, with a loan fee of 4.228%.

Nongovernment lenders may offer private graduate student loans, sometimes with a fixed or variable rate and no loan fee.

Something to chew on: If you pursue deferment on loans in the second category above to manage costs while in grad school, it’s a good idea to at least consider making interest-only payments during the deferment.

Options to Deferment in Grad School

There are at least two other ways, beyond forbearance, to get a handle on student loan payments in grad school.

Income-Driven Repayment

Some graduate students who have federal student loans might want to consider switching, even temporarily, to an income-based repayment plan.

Your monthly payment would be tied to family size and income, which may be low for a graduate student enrolled full time.

The four income-driven repayment plans stretch payments over 20 or 25 years, after which any remaining balance is supposed to be forgiven. After graduation, you could switch the student loan repayment plan back to the standard 10-year plan.

Though borrowers often pay less each month using one of these plans, they’ll generally pay significantly more in total interest over the duration of the drawn-out loan.

In fact, under all of the income-driven repayment plans, your monthly payment may sometimes be less than the amount to cover interest on your loans. That’s called negative amortization; the unpaid interest gets added to the amount you borrowed, and the amount you owe increases.

A little good news: Any student debt that was forgiven used to be taxed as ordinary income, but the 2021 COVID relief package put a stop to that, at least through 2025.

Refinancing

Another way to potentially lower your monthly payments without deferring your loans (and accruing interest) is by refinancing your student loans (different from consolidating federal student loans with a Direct Consolidation Loan, when the rate is determined by the weighted average of the loans, rounded up a hair).

With refinancing, a private lender pays off your loans (both federal and private) with one new loan, ideally with a lower interest rate.

A decrease in an interest rate while maintaining the loan’s duration is a compelling way to both save money each month and over the life of the loan. To understand how a change of even 1% can affect how much interest you’ll pay on a loan over time, you might want to play around with this calculator.

If you refinance federal student loans, it is important to understand that you will lose access to federal programs such as income-driven repayment and loan forgiveness as well as future benefits applicable to federally held loans.

Private lenders may or may not have a deferment option.

Lenders that offer student loan refinancing typically require a good credit history and a steady income, among other factors.

The Takeaway

Student loan deferment before or during grad school could bring temporary relief. It could also add unpaid interest to loans and create a bigger balance to pay off. Those looking to manage payments long term may want to look into alternatives.

One is student loan refinancing. SoFi offers low fixed and variable rates and flexible terms when refinancing private or federal student loans.

And as a SoFi member, you’ll have access to a professional-grade list of benefits.

It takes only minutes to see what interest rate you may qualify for.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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