AWMA cheat sheet
AWMA · Keep the key ideas within reach.
Wealth Management
Real after-tax return = nominal return × (1 − marginal tax rate) − inflation rate; use to compare taxable versus tax-deferred accounts.
Capital asset pricing model: expected return = risk-free rate + beta × (market return − risk-free rate); beta measures systematic risk only.
Sharpe ratio = (portfolio return − risk-free rate) ÷ portfolio standard deviation; higher is better for risk-adjusted performance.
Duration approximates bond price change: % price change ≈ −modified duration × change in yield; convexity adjusts for larger yield moves.
Intrinsic value of a stock (Gordon growth model) = next dividend ÷ (required return − dividend growth rate); growth must be less than required return.
Asset allocation explains most return variability; rebalancing to target weights enforces buy-low/sell-high discipline.
Estate tax exclusion amount is indexed annually; portability allows a surviving spouse to use the deceased spouse's unused exclusion with a timely filed estate tax return.
Charitable remainder trust: donor retains income stream, remainder to charity; charitable deduction equals present value of remainder interest.
Client Relationship and Practice Management
Fiduciary duty requires acting in the client's best interest, disclosing conflicts, and placing client interests above the firm's.
Regulation Best Interest (Reg BI) applies to broker-dealers recommending securities; care, disclosure, conflict of interest, and compliance obligations.
Know-your-customer (KYC) and suitability rules require collecting financial situation, objectives, risk tolerance, time horizon, and liquidity needs.
Client risk tolerance combines ability (financial capacity) and willingness (psychological attitude); mismatches must be resolved before recommending a portfolio.
Investment policy statement (IPS) documents objectives, constraints, and review procedures; it is the governing document for portfolio decisions.
Behavioral biases: anchoring, overconfidence, loss aversion, recency bias; recognize them to coach clients and avoid unsuitable recommendations.
Fee structures: assets under management (AUM) fee = assets × fee rate; flat fee, hourly, and performance-based fees have different conflict profiles.
Client communication best practices: document meetings, confirm instructions in writing, and set regular review intervals.