Financial Adviser Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Best interests duty

A legal obligation requiring the adviser to act in the client's best interests, prioritise the client over the adviser, and gather sufficient client information before advising.

Conflict disclosure

Specific disclosure naming the conflict, explaining how it could influence the advice, and describing how it is managed; generic statements are insufficient.

Record retention period

The statutory minimum period, commonly five to seven years depending on jurisdiction, for keeping client files, advice documents, and transaction records.

External dispute resolution

An independent scheme that hears unresolved client complaints after internal processes; its determinations can bind the licensee.

Personal advice

Advice that considers the client's personal circumstances, objectives, and needs, and therefore attracts the full suite of conduct and disclosure obligations.

Fee disclosure

The requirement to disclose all fees, commissions, and third-party benefits in dollar amounts where practicable before the client commits to the advice.

Advice process sequence

Establish scope, gather data, analyse needs, develop strategies, present and document advice, implement, and review in a documented order.

Risk profile versus capacity

Risk profile is the client's willingness to accept risk; capacity for loss is the financial ability to absorb losses. Both must be assessed separately.

Strategic asset allocation

The long-term mix of asset classes that drives most return variability; product selection follows and should support this allocation.

Diversification limit

Diversification reduces unsystematic risk but cannot eliminate systematic market risk, which affects all assets to some degree.

Product replacement analysis

A comparison of exit and entry costs, lost benefits, tax consequences, and client objectives before recommending a switch between products.

Review triggers

Events that prompt a review of advice, including changed client circumstances, market or legislative changes, or the passage of a scheduled review date.

Loss aversion

The tendency for losses to be felt roughly twice as strongly as equivalent gains, which can cause clients to hold losing positions too long.

Anchoring bias

Over-reliance on an initial reference point, such as a purchase price, when making subsequent financial decisions.

Fiduciary duties

The duties of loyalty, care, and candour owed by an adviser acting for a client, requiring the skill of a reasonably competent professional.

Framing effect

The change in client choices caused by presenting the same outcome as a gain or as a loss; balanced framing improves decision quality.

Confirmation bias

The tendency to seek and interpret information that supports existing beliefs, which can lead advisers to premature or inadequately tested recommendations.

Ethical decision framework

A structured process: identify stakeholders and duties, gather facts, consider alternatives, consult codes, decide, act, and document the reasoning.

Risk management process

Identify risks, measure frequency and severity, select a treatment such as avoid, reduce, retain, or transfer, then implement, monitor, and review.

Insurable interest

A financial loss the policyholder would suffer if the insured event occurs; it must exist at inception and sometimes at the time of loss.

Indemnity principle

Insurance restores the insured to the pre-loss financial position, not better; valued policies and agreed-value clauses are exceptions.

Utmost good faith

The duty to disclose all material facts known to the applicant; non-disclosure or misrepresentation can allow the insurer to avoid the contract.

Subrogation

After paying a claim, the insurer may pursue recovery from the responsible party; the insured cannot recover twice for the same loss.

Contribution principle

When multiple policies cover the same loss, each insurer pays a proportionate share so total recovery does not exceed the loss.

Life insurance non-indemnity

Life insurance is not a contract of indemnity; the sum insured is paid on the insured event regardless of actual financial loss.

Rule of 72

A quick estimate of doubling time: divide 72 by the annual percentage return to approximate the number of years required.

Real return

Nominal return minus inflation, approximately; used to project long-term purchasing power and goal funding.

Marginal tax rate

The rate applied to the next dollar of taxable income within a bracket; it is not the average rate applied to all income.

Capital gain formula

Gain equals proceeds minus cost base; the cost base includes acquisition and incidental costs, and holding-period concessions may reduce the taxable gain.

Tax-advantaged savings vehicles

Accounts that defer or exempt tax on contributions and earnings, subject to caps and access rules; compare after-tax outcomes across vehicles.

Estate planning tools

Wills, trusts, beneficiary nominations, and powers of attorney; nominations must comply with scheme rules to be effective.

Cash-flow surplus

Income minus expenses minus debt servicing; allocate surplus to emergency reserves, insurance, debt reduction, and goal funding in a documented priority order.