AAMS key terms

A written document that records a client's goals, risk tolerance, time horizon, and permitted investments, and explains how the portfolio will be managed, monitored, and reviewed over time.

The amount of investment volatility and potential loss a client is financially able and emotionally willing to accept while pursuing goals, influenced by experience, personality, and capacity to absorb losses.

The length of time an investor expects to hold assets before needing the money; longer horizons generally allow more volatility and a larger allocation to growth assets.

The requirement that an investment recommendation fit a client's objectives, financial situation, risk tolerance, and needs, based on information the advisor has gathered and documented.

An ownership share in a corporation that typically carries voting rights and a residual claim on earnings and assets after debts and preferred shareholders are paid.

A loan to a government, municipality, or corporation that pays periodic interest and returns principal at maturity; bond prices generally fall when interest rates rise.

A pooled investment vehicle that raises money from many investors and invests it in a diversified portfolio of securities, with shares priced once daily at net asset value.

A pooled fund whose shares trade on an exchange throughout the day like stock, typically tracking an index and offering low costs, tax efficiency, and intraday liquidity.

A company that owns or finances income-producing real estate and distributes most of its taxable income to shareholders, giving investors liquid exposure to property markets.

Spreading investments across assets, sectors, and regions so no single holding or risk dominates the portfolio's outcome, reducing company-specific risk without necessarily lowering expected return.

A statistical measure between -1 and +1 showing how closely two investments move together; lower or negative correlation among holdings increases the risk-reduction benefit of diversification.

The long-term target mix of asset classes selected to match a client's goals, time horizon, and risk tolerance; it is the main driver of portfolio risk and return.

Short-term, deliberate deviations from strategic target weights made to exploit perceived market opportunities or manage risk, usually kept within ranges set by policy.

Periodically returning portfolio weights to target levels by selling overweight assets and buying underweight ones, which controls risk and enforces a disciplined buy-low, sell-high process.

The set of portfolios that offer the highest expected return for each level of risk under modern portfolio theory; portfolios below the frontier are considered inefficient.

Market-wide risk that diversification cannot eliminate, such as interest rate, inflation, or recession risk; investors expect to be compensated for bearing it.

A measure of how much an investment's returns tend to move relative to the overall market; a beta above 1 suggests greater volatility than the market and below 1 less.

A statistical measure of how widely an investment's returns vary around their average, commonly used to express total volatility or risk.

A measure of a bond's price sensitivity to interest rate changes, expressed in years; a duration of five implies roughly a 5% price change for a 1% rate move.

The risk that a bond issuer or borrower fails to make timely interest or principal payments, reflected in credit ratings and the extra yield investors demand.

A risk-adjusted performance measure equal to excess return over the risk-free rate divided by standard deviation; higher values mean better return per unit of total risk.

Profit from selling an asset for more than its cost basis; the holding period determines whether the gain is short-term, taxed as ordinary income, or long-term.

The original purchase price of an investment adjusted for commissions, reinvested dividends, and other items, used to calculate gain or loss when the asset is sold.

Selling investments at a loss to offset realized gains or ordinary income, then reinvesting in a similar but not substantially identical security to maintain market exposure.

A tax rule that disallows a loss deduction when a substantially identical security is bought within 30 days before or after the sale; the disallowed loss is added to the new basis.

Placing tax-inefficient assets, such as taxable bonds, in tax-deferred accounts and tax-efficient assets, such as index funds, in taxable accounts to improve after-tax returns.

The minimum amount that must be withdrawn each year from most tax-deferred retirement accounts after a certain age, calculated from the account balance and life expectancy tables.

A retirement account funded with after-tax dollars that allows tax-free qualified withdrawals and, for the original owner, no lifetime required minimum distributions.

An employer-sponsored defined contribution plan that lets employees save for retirement through payroll deferrals, often with an employer match and a menu of investment choices.

A percentage of a portfolio that can be withdrawn annually, adjusted for inflation, with low risk of running out of money over a chosen retirement period.

The danger that poor investment returns early in retirement, while withdrawals are being taken, permanently reduce a portfolio's ability to fund later years.

A form naming who receives an account or insurance proceeds at the owner's death; it generally overrides a will and should be reviewed after major life events.

The rule that raises the cost basis of inherited assets to their value at the date of death, reducing capital gains tax when heirs later sell.

The court-supervised process of validating a will, paying debts and taxes, and distributing assets; it is public and often slow, so trusts are commonly used to avoid it.

The legal obligation to act solely in a client's best interest, putting the client's interests ahead of the advisor's own and disclosing conflicts of interest.

A situation where an advisor's personal or financial interest could bias recommendations, such as earning a commission on a product they recommend; it must be disclosed and managed.

A SEC rule requiring broker-dealers to act in the best interest of retail customers when recommending securities, without placing their own financial interest ahead of the client's.

An arrangement where the advisor is paid only by client fees, such as a percentage of assets or a flat retainer, and receives no commissions, reducing potential conflicts.