CFPN flashcards

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

Fiduciary duty

A legal and ethical obligation to act in the client's best interest, placing client interests above the planner's own, including disclosure and management of conflicts.

Suitability standard

A requirement that a recommendation be appropriate for the client's financial situation and objectives, a lower bar than fiduciary best-interest duty.

Engagement letter

A written agreement defining the scope of services, compensation method, responsibilities of planner and client, and limitations of the engagement.

Material conflict of interest

A circumstance where the planner's financial or personal interest could bias advice; it must be disclosed in writing and managed, not merely acknowledged.

Net worth

Total assets minus total liabilities at a point in time; a key measure of financial position and progress toward long-term goals.

Cash flow surplus

Income minus expenses and debt service; a positive surplus funds savings and goals, while a deficit requires asset drawdown or borrowing.

Emergency fund

Liquid reserves covering 3–6 months of essential expenses, often 6–12 months for single-income or self-employed households, held in low-risk accounts.

Current ratio

Current assets divided by current liabilities; a value below 1.0 indicates that short-term obligations exceed liquid resources, signaling liquidity strain.

Savings rate

The proportion of income not consumed, calculated as (income − consumption) ÷ income; a common planning benchmark is 10–15% of gross income.

Portfolio expected return

The weighted average of individual asset expected returns using portfolio weights; it does not by itself capture diversification benefits in risk.

Systematic risk

Market-wide risk that cannot be eliminated by diversification, such as interest rate or recession risk; investors are compensated through the equity risk premium.

Risk tolerance

The combination of willingness (psychological comfort) and ability (financial capacity) to bear risk; the lower of the two governs the appropriate allocation.

Sharpe ratio

Excess portfolio return over the risk-free rate divided by portfolio standard deviation; a higher value indicates better risk-adjusted performance.

Rebalancing

Periodically returning portfolio weights to targets, using calendar (e.g., annual) or threshold (e.g., ±5%) triggers to control drift and risk.

Risk transfer

Shifting the financial consequence of a risk to another party, most commonly through insurance, in exchange for a premium.

Human life value

A life insurance need method estimating the present value of the insured's future earnings available to dependents, used to size coverage.

Own-occupation disability

A disability policy definition that pays benefits when the insured cannot perform the duties of their own occupation, generally broader than any-occupation.

Long-term care trigger

Benefit eligibility typically requires inability to perform two of six activities of daily living or evidence of cognitive impairment, as defined in the policy.

Umbrella liability policy

Excess liability coverage above auto and homeowners limits; the insured must maintain specified underlying limits for the umbrella to respond.

Marginal tax rate

The tax rate applied to the next dollar of taxable income; it differs from the average rate, which is total tax divided by taxable income.

Long-term capital gain

Gain on an asset held more than one year, taxed at preferential 0%, 15%, or 20% rates rather than ordinary income rates.

Wash sale rule

A rule disallowing a capital loss if substantially identical securities are purchased within 30 days before or after the sale.

Tax loss harvesting

Realizing losses to offset realized gains and up to $3,000 of ordinary income annually, with excess losses carried forward to future years.

Roth IRA

A retirement account funded with after-tax dollars; qualified withdrawals are tax-free and no lifetime required minimum distributions apply to the owner.

Required minimum distribution

Mandatory annual withdrawals from traditional retirement accounts beginning at age 73 for those born 1951–1959, and age 75 for those born 1960 or later.

Sequence-of-returns risk

The risk that poor investment returns early in retirement deplete assets faster than the same average return earned in a different order.

Replacement ratio

The percentage of pre-retirement income needed in retirement, commonly estimated at 70–80%, with lower-income households often needing more.

Four percent rule

A heuristic stating that a 4% initial withdrawal from a diversified portfolio, adjusted for inflation, has historically sustained 30-year retirements.

Probate

The court-supervised process of validating a will and distributing estate assets; it is public and can be slow, and is avoided by beneficiary designations and trusts.

Intestacy

Dying without a valid will, causing state law to determine asset distribution, which may not match the deceased's wishes.

Irrevocable trust

A trust that cannot be amended or revoked by the grantor; assets are generally removed from the taxable estate but control is surrendered.

Portability

A provision allowing a surviving spouse to use the deceased spouse's unused estate tax exemption, subject to timely filing requirements.