SPA Skills Assessment cheat sheet

Risk tolerance has three inputs: willingness (attitude), ability (capacity to absorb loss), and need (required return); the binding constraint is the lowest of willingness and ability.

Capacity to bear risk falls as time horizon shortens, liquidity needs rise, and income stability declines.

A client's stated risk tolerance in an interview often overstates true tolerance; behavioral evidence (prior losses, past decisions) is the more reliable signal.

Required return = (goal amount ÷ current assets)^(1/n) − 1, where n is the number of years to the goal.

Savings gap = required annual savings to fund the goal minus current annual savings; if negative, the goal is overfunded.

The time value of money formulas: FV = PV(1+r)^n; PV = FV ÷ (1+r)^n; annuity FV = PMT × [((1+r)^n − 1) ÷ r].

Know the client before advising: gather facts (income, assets, liabilities, obligations), then goals, then attitudes, then constraints.

An investment policy statement records objectives, constraints, and review procedures so that decisions are anchored to pre-agreed rules rather than to market emotion.

The six-step planning process: establish the relationship, gather data and goals, analyze, develop recommendations, implement, monitor.

SMART goals are Specific, Measurable, Achievable, Relevant, and Time-bound; a goal without a date cannot be quantified into a savings target.

Emergency reserve target is typically 3–6 months of essential expenses; longer for variable income or single-earner households.

Net worth = total assets − total liabilities; cash flow surplus = income − expenses, and only surplus can fund goals.

Prioritize goals by funding order: essential and near-term goals first, discretionary and distant goals later.

Opportunity cost of a goal = return forgone on assets that would otherwise be invested; compare goal cost against its funding cost.

A goal's funding requirement rises with inflation; use a real (inflation-adjusted) return or inflate the goal amount before discounting.

Monitoring requires a defined review cadence (typically annual or on a trigger event such as marriage, job change, or inheritance).

Expected portfolio return = weighted average of asset expected returns; portfolio risk is not the weighted average of risks unless correlation equals +1.

Diversification benefit comes from correlation below +1; the lower the correlation, the greater the risk reduction at a given return.

Beta measures sensitivity to market moves; standard deviation measures total volatility; Sharpe ratio = (return − risk-free rate) ÷ standard deviation.

Asset allocation explains most of the variability of portfolio returns over time; security selection explains less.

Rebalancing to target weights enforces sell-high/buy-low discipline; bands (e.g., ±5% of target) reduce trading costs.

Bond prices move inversely to yields; longer duration means greater price sensitivity to a given yield change.

Equity products: common stock (residual claim, voting), preferred stock (fixed dividend, senior to common), and funds (mutual, ETF, closed-end).

Cost drag compounds: a 1% annual fee reduces a 30-year terminal value by roughly a quarter relative to a zero-fee portfolio.

Insure large, low-probability losses; retain small, high-probability losses through deductibles and reserves.

The four risk treatments are avoidance, reduction (mitigation), transfer (insurance), and retention.

Life insurance need via the human-life or needs approach: income replacement + debts + education + final expenses − existing resources.

Term insurance provides pure death benefit with no cash value; permanent insurance combines death benefit with cash value and higher cost.

Disability insurance replaces income; key terms are own-occupation vs. any-occupation definition, elimination period, benefit period, and residual benefits.

Long-term care insurance covers custodial care; inflation protection and elimination period drive premium.

Liability limits should exceed net worth; umbrella policies sit above auto and homeowners limits.

An indemnity principle: insurance restores the insured to pre-loss financial position, not to a profit; insurable interest is required at policy inception.

Marginal tax rate applies to the next dollar of income; effective tax rate = total tax ÷ total taxable income.

Taxable income = gross income − above-the-line adjustments − standard or itemized deductions.

Capital gains: short-term (held one year or less) taxed at ordinary rates; long-term taxed at preferential rates.

Tax-loss harvesting offsets realized gains; excess losses may offset a limited amount of ordinary income, with the remainder carried forward.

Tax deferral grows value: postponing tax on earnings lets the pre-tax balance compound, but withdrawals are taxed at future rates.

Asset location: place tax-inefficient assets (taxable bonds, REITs) in tax-deferred accounts and tax-efficient assets (index equities) in taxable accounts.

Basis = cost + commissions + improvements − depreciation; realized gain = proceeds − basis.

Wash-sale rule disallows a loss if a substantially identical security is bought within 30 days before or after the sale.

Retirement need = replacement ratio × pre-retirement income, adjusted for reduced work expenses and increased health costs.

Accumulation phase grows assets; distribution phase converts assets into income while managing longevity and sequence-of-returns risk.

Retirement account types: tax-deferred (traditional), tax-free (Roth), and employer plans (defined benefit vs. defined contribution).

Required minimum distributions force withdrawals from tax-deferred accounts after a statutory age; Roth accounts generally avoid lifetime RMDs.

Social Security claiming before full retirement age permanently reduces the benefit; delaying past it increases it, up to age 70.

Estate planning documents: will, revocable living trust, durable power of attorney, health care directive, and beneficiary designations.

Beneficiary designations override the will for retirement accounts and insurance; review after life events.

The estate tax applies to the taxable estate above the exclusion amount; annual exclusion gifts and marital/charitable deductions reduce exposure.

Fiduciary duty requires loyalty (act in the client's best interest) and care (prudent, informed advice); suitability is a lower standard.

Conflicts of interest must be disclosed, and disclosure alone does not satisfy a duty to avoid or manage the conflict.

Know-your-customer rules require verifying identity, understanding the client's objectives, and documenting the basis for recommendations.

Material nonpublic information may not be traded on or tipped; information becomes material if a reasonable investor would consider it important.

Recordkeeping: retain client records and the basis for recommendations for the period required by the applicable regulator.

Compensation arrangements (commissions, fees, revenue sharing) must be disclosed in writing before or at the time of engagement.

Advertising and performance reporting must be fair, balanced, and not misleading; hypothetical or backtested results must be labeled as such.

Supervision requires written policies, periodic review of communications, and escalation of red flags such as unusual trading or client complaints.