SPA Skills Assessment flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Risk tolerance
- A client's combined willingness and ability to accept investment losses. The lower of willingness and ability governs the appropriate portfolio risk level.
- Investment policy statement
- A written document setting objectives, risk tolerance, constraints, and review procedures. It anchors decisions to pre-agreed rules rather than to short-term market emotion.
- Capacity for loss
- The financial ability to absorb losses without jeopardizing essential goals. It declines as time horizon shortens, liquidity needs rise, and income becomes less stable.
- Savings gap
- The difference between the annual savings required to fund a goal and the client's current annual savings. A negative gap means the goal is currently overfunded.
- SMART goal
- A goal that is Specific, Measurable, Achievable, Relevant, and Time-bound. Without a date the goal cannot be converted into a quantified savings target.
- Emergency reserve
- A cash buffer for unexpected expenses, typically three to six months of essential expenses. Households with variable income or a single earner need more.
- Net worth
- Total assets minus total liabilities at a point in time. It measures accumulated wealth, while cash flow surplus measures the annual capacity to build it.
- Correlation and diversification
- Diversification reduces portfolio risk when assets are correlated below plus one. The lower the correlation, the greater the risk reduction for a given expected return.
- Beta
- A measure of a security's sensitivity to movements in the overall market. A beta above one implies greater volatility than the market; below one implies less.
- Sharpe ratio
- A risk-adjusted performance measure equal to the portfolio return minus the risk-free rate, divided by the portfolio's standard deviation of returns.
- Duration
- A measure of a bond's price sensitivity to interest rate changes. Longer duration means a larger price decline when yields rise.
- Rebalancing bands
- Pre-set tolerance ranges around target asset weights that trigger trades when breached. Bands limit trading costs while enforcing a disciplined buy-low, sell-high process.
- Insurable interest
- A requirement that the policyholder would suffer a financial loss from the insured's death or loss event. It must exist when the policy is issued.
- Elimination period
- The waiting period before disability or long-term care benefits begin. A longer elimination period reduces premium but requires larger personal reserves.
- Own-occupation coverage
- A disability policy benefit that pays when the insured cannot perform the duties of their own occupation. It is broader and costlier than any-occupation coverage.
- Umbrella liability policy
- Excess liability coverage that sits above auto and homeowners policy limits. Limits should generally exceed the insured's net worth to protect accumulated assets.
- Marginal tax rate
- The rate applied to the next dollar of taxable income. It differs from the effective rate, which equals total tax divided by total taxable income.
- Tax-loss harvesting
- Realizing losses to offset realized capital gains. Excess losses may offset limited ordinary income, with the remainder carried forward to future years.
- Wash-sale rule
- A rule disallowing a realized loss if a substantially identical security is purchased within 30 days before or after the sale. The loss is deferred, not lost.
- Asset location
- Placing tax-inefficient assets such as taxable bonds in tax-deferred accounts and tax-efficient assets such as index equities in taxable accounts.
- Cost basis
- The original value of an asset for tax purposes, equal to purchase price plus commissions and improvements minus depreciation. Realized gain equals proceeds minus basis.
- Sequence-of-returns risk
- The risk that poor returns early in retirement permanently reduce portfolio longevity, because withdrawals lock in losses that later gains cannot fully recover.
- Required minimum distributions
- Mandatory annual withdrawals from tax-deferred retirement accounts beginning at a statutory age. Roth accounts generally avoid lifetime required distributions.
- Beneficiary designation
- A contract provision naming who receives account or policy proceeds at death. It overrides the will and must be updated after life events.
- Revocable living trust
- A trust created during life that can be amended or revoked. It avoids probate for trust assets but does not remove them from the taxable estate.
- Fiduciary duty
- An obligation to act in the client's best interest through loyalty and care. It is a higher standard than suitability, which only requires fitting the client's profile.
- Material nonpublic information
- Information a reasonable investor would consider important that has not been publicly disclosed. Trading on or tipping such information is prohibited.
- Know-your-customer rule
- A requirement to verify client identity, understand objectives and financial circumstances, and document the basis for recommendations before executing transactions.
- Suitability standard
- A requirement that a recommendation be reasonably fit for the client's objectives and profile. It is less demanding than a fiduciary best-interest obligation.
- Conflict of interest disclosure
- Written disclosure of compensation arrangements and other incentives that could bias advice. Disclosure must be timely, clear, and not misleading.
- Replacement ratio
- The percentage of pre-retirement income needed in retirement. It is adjusted upward for health costs and downward for work-related expenses that disappear.
- Human-life insurance approach
- A method of sizing life insurance by capitalizing the insured's future earnings. It estimates the economic value lost to dependents at death.