AAMS cheat sheet

Six-step process: establish the relationship, gather client data, analyze data, develop recommendations, implement the plan, and monitor progress.

An investment policy statement (IPS) records objectives, risk tolerance, constraints (liquidity, time horizon, tax, legal, unique) and a review schedule.

Risk tolerance is the client's emotional willingness to accept volatility; risk capacity is the financial ability to absorb losses. Both are assessed and reconciled.

Future value: FV = PV × (1 + r)^n. Present value: PV = FV ÷ (1 + r)^n.

Rule of 72: approximate years to double = 72 ÷ annual return percentage (at 8%, about 9 years).

An emergency reserve of 3–6 months of essential expenses is typically held in liquid, low-volatility assets.

Fiduciary duty requires loyalty and care; Regulation Best Interest requires a retail recommendation to be in the customer's best interest with disclosure.

Horizons shorter than about 3 years are generally matched with cash or short-duration fixed income; longer horizons can tolerate more equity volatility.

Cash equivalents include Treasury bills, CDs, money market funds and commercial paper; they offer high liquidity and low credit and interest-rate risk.

Bond prices move inversely to yields; approximate price change ≈ −duration × change in yield, so longer duration means greater sensitivity.

Current yield = annual coupon ÷ bond price. Yield to maturity is the internal rate of return of all coupon and principal cash flows if held to maturity.

Preferred stock pays a fixed dividend, ranks ahead of common stock in liquidation, is often callable, and behaves like a rate-sensitive hybrid security.

Mutual fund NAV = (total assets − liabilities) ÷ shares outstanding and is typically struck once daily; ETFs trade intraday at market prices.

REITs must distribute at least 90% of taxable income to shareholders and provide liquid real estate exposure.

Variable annuities offer tax-deferred growth through subaccounts but carry mortality and expense fees and often early surrender charges.

TIPS adjust principal with the consumer price index, offering inflation protection at generally lower real yields than nominal Treasuries.

Options and futures are derivative contracts whose value derives from an underlying asset and are used to hedge or to speculate.

Strategic asset allocation sets long-term target weights by asset class; tactical allocation makes deliberate short-term deviations from those targets.

Diversification reduces unsystematic risk; adding assets with low correlation improves risk-adjusted return for a given level of expected return.

The efficient frontier is the set of portfolios offering the highest expected return for each level of risk under modern portfolio theory.

Correlation ranges from −1 to +1; a value of 0 means returns move independently, and negative correlation provides the strongest diversification benefit.

Rebalancing returns weights to targets, controls drift in risk, and enforces a sell-high, buy-low discipline; it can be calendar-based or threshold-based.

Asset location places tax-inefficient assets such as bonds and REITs in tax-deferred accounts and tax-efficient equities in taxable accounts.

Monte Carlo simulation estimates the probability of meeting a goal by running many randomized return sequences rather than one average return path.

A core-satellite structure pairs a low-cost broad index core with smaller active or thematic satellite positions.

Total risk = systematic (market-wide) risk + unsystematic (diversifiable) risk; diversification removes only the unsystematic portion.

Standard deviation measures total volatility; beta measures only sensitivity to market movements, with the market set at 1.0.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; a higher value indicates more return per unit of total risk.

CAPM: expected return = risk-free rate + beta × (market return − risk-free rate).

Value at risk estimates the maximum expected loss at a confidence level over a period but does not describe the severity of losses beyond that threshold.

Interest-rate risk rises with duration; credit risk is default probability; inflation risk erodes real purchasing power; liquidity risk is the cost of selling quickly.

Risk capacity is objective (cash flow, assets, horizon); risk tolerance is subjective (willingness to endure volatility).

Insurance transfers low-frequency, high-severity risks; deductibles deliberately retain small, manageable losses.

Hedging with put options or futures reduces downside exposure but gives up some upside or incurs a premium cost.

Long-term capital gains (holding period over one year) are taxed at 0%, 15% or 20%; short-term gains are taxed at ordinary income rates.

Wash sale rule: a loss is disallowed if a substantially identical security is bought within 30 days before or after the sale, and the loss is added to the new basis.

Tax-equivalent yield = municipal yield ÷ (1 − marginal tax rate).

Inherited assets generally receive a step-up in basis to fair market value at date of death; lifetime gifts generally carry over the donor's basis.

Tax-loss harvesting offsets realized gains and up to $3,000 of ordinary income per year, with excess losses carried forward.

Qualified dividends are taxed at long-term capital gains rates; nonqualified dividends are taxed at ordinary rates.

Traditional accounts are taxed on withdrawal; Roth accounts are taxed on contribution and qualified withdrawals are tax-free.

The 3.8% net investment income tax applies above modified AGI of $200,000 single or $250,000 married filing jointly.

The annual gift tax exclusion is $19,000 per recipient in 2025; amounts above it use lifetime exemption.

2025 401(k) elective deferral limit is $23,500; catch-up is $7,500, and $11,250 for ages 60–63.

2025 IRA contribution limit is $7,000, with a $1,000 catch-up at age 50 and older.

SECURE 2.0 required minimum distribution age is 73 for those born 1951–1959 and 75 for those born 1960 or later.

The required beginning date is April 1 of the year after reaching RMD age; subsequent distributions are due by December 31 each year.

Qualified Roth IRA withdrawals require a five-year holding period plus age 59½, death, disability or first-time homebuyer status.

Delaying Social Security past full retirement age raises the benefit about 8% per year up to age 70; claiming early permanently reduces it.

Sequence-of-returns risk: poor returns early in retirement, combined with withdrawals, can permanently shorten portfolio longevity.

The 4% rule withdraws about 4% of the initial portfolio, inflation-adjusted, and historically lasted roughly 30 years.

Substantially equal periodic payments under IRS Section 72(t) avoid the 10% early-withdrawal penalty before age 59½.

Intestacy means dying without a valid will; state statute determines distribution and the probate court supervises the process.

A revocable living trust avoids probate and manages assets during incapacity, but its assets remain in the grantor's taxable estate.

An irrevocable trust removes assets from the taxable estate but requires the grantor to give up ownership and control.

Beneficiary designations on retirement accounts and life insurance generally control distribution and override the will.

Joint tenancy with right of survivorship passes to the surviving owner by operation of law; tenants in common passes by will or intestacy.

The annual gift exclusion is $19,000 per recipient in 2025, and an unlimited marital deduction applies to a U.S. citizen spouse.

An ILIT holds life insurance outside the taxable estate; a QTIP trust provides a marital deduction while controlling the remainder.

A durable power of attorney and health care directive address incapacity and medical decisions.

Fiduciary duty requires loyalty and care, client interests first, and full disclosure of conflicts.

Regulation Best Interest imposes care, disclosure, conflict-of-interest and compliance obligations on broker-dealers serving retail customers.

Know-your-client data includes goals, risk tolerance, time horizon, liquidity needs, tax status and financial circumstances.

Fee-only compensation comes from client fees such as AUM, hourly or flat charges; fee-based arrangements combine fees and commissions and require disclosure.

Contemporaneous documentation of recommendations and client decisions supports compliance and defends against disputes.

Regulation S-P requires safeguarding nonpublic personal information and providing privacy notices.

Behavioral biases such as anchoring, loss aversion, overconfidence and recency are addressed through education and framing.

Client segmentation by assets, complexity or service needs improves service efficiency and practice profitability.