AAMS flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Fiduciary duty
- A legal obligation requiring the advisor to act with loyalty and care, placing the client's interests ahead of the advisor's own and disclosing conflicts.
- Investment policy statement
- A written document recording a client's goals, risk tolerance, constraints, target asset allocation and review procedures that guides consistent portfolio decisions.
- Risk tolerance versus capacity
- Tolerance is the client's emotional willingness to accept volatility; capacity is the financial ability to absorb losses without derailing goals.
- Rule of 72
- A shortcut estimating the years to double an investment by dividing 72 by the annual percentage return; at 8% money doubles in about nine years.
- Bond duration
- A measure of a bond's price sensitivity to interest-rate changes; a duration of 5 implies roughly a 5% price move for a 1% yield change.
- Net asset value
- The per-share value of a mutual fund, calculated as total assets minus liabilities divided by shares outstanding, typically priced once daily.
- REIT distribution requirement
- Real estate investment trusts must distribute at least 90% of taxable income to shareholders to retain favorable tax treatment while offering liquid real estate exposure.
- TIPS
- Treasury Inflation-Protected Securities whose principal adjusts with the consumer price index, providing inflation protection with lower real yields than nominal Treasuries.
- Efficient frontier
- The set of portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient under modern portfolio theory.
- Rebalancing
- Periodically returning portfolio weights to target allocations, controlling risk and enforcing a disciplined sell-high, buy-low process; may be calendar or threshold driven.
- Asset location
- Placing tax-inefficient assets such as bonds and REITs in tax-deferred accounts while holding tax-efficient equities in taxable accounts to improve after-tax returns.
- Strategic asset allocation
- The long-term target mix of asset classes based on goals, risk tolerance and time horizon; it typically explains most of a portfolio's return variability.
- Beta
- A measure of a security's sensitivity to market movements; beta above 1 is more volatile than the market, below 1 less volatile.
- Sharpe ratio
- Risk-adjusted return calculated as portfolio return minus the risk-free rate, divided by standard deviation; higher values indicate better return per unit of total risk.
- Systematic risk
- Market-wide risk from interest rates, inflation or recessions that cannot be eliminated through diversification; measured by beta.
- Value at risk
- A statistical estimate of the maximum expected loss over a specified period at a given confidence level; it does not describe losses beyond that threshold.
- Wash sale rule
- A capital loss is disallowed if a substantially identical security is purchased within 30 days before or after the sale; the loss is added to the new basis.
- Tax-equivalent yield
- The taxable yield needed to match a municipal bond's yield, calculated as the municipal yield divided by one minus the investor's marginal tax rate.
- Step-up in basis
- Inherited assets generally receive a new cost basis equal to fair market value at the date of death, eliminating unrealized gains for heirs.
- Net investment income tax
- A 3.8% surtax on investment income for taxpayers with modified adjusted gross income above $200,000 single or $250,000 married filing jointly.
- Required minimum distribution
- The minimum amount that must be withdrawn annually from traditional retirement accounts starting at age 73, or 75 for those born 1960 or later, under SECURE 2.0.
- Sequence-of-returns risk
- The danger that poor investment returns early in retirement, combined with withdrawals, permanently reduce portfolio longevity even if average returns are normal.
- Roth five-year rule
- Qualified Roth withdrawals require the account to have been open five years and the owner to be 59½, disabled, deceased or using first-time homebuyer funds.
- Social Security delayed credits
- Delaying benefits past full retirement age increases the monthly benefit by about 8% per year up to age 70, a form of longevity insurance.
- Intestacy
- Dying without a valid will; state law determines how assets pass and the probate court supervises distribution, which may not match the decedent's wishes.
- Revocable living trust
- A trust the grantor can amend or revoke that avoids probate and manages assets during incapacity, but its assets remain in the taxable estate.
- Beneficiary designation
- A contract provision on retirement accounts and life insurance naming who receives assets, generally overriding instructions in a will.
- Annual gift exclusion
- The amount one person may give another each year without gift tax or using lifetime exemption; $19,000 per recipient in 2025.
- Regulation Best Interest
- SEC rule requiring broker-dealers to act in a retail customer's best interest, with obligations of care, disclosure, conflict management and compliance.
- Fee-only compensation
- Advisor revenue comes solely from client fees such as AUM, hourly or flat charges, with no commissions, reducing conflicts of interest.
- Loss aversion
- A behavioral bias in which losses feel roughly twice as painful as equivalent gains, causing investors to hold losers too long or avoid prudent risk.
- Suitability standard
- A requirement that a recommendation fit a client's objectives, risk tolerance, time horizon and financial situation; less stringent than a fiduciary best-interest standard.