CDFA key terms

A fiduciary obligation requiring a financial professional to place the client's interests ahead of their own, avoiding self-dealing, undisclosed compensation, and conflicts of interest that could bias advice.

The highest legal standard of care in financial advice, obligating a professional to act in the client's best interest, disclose material conflicts, and provide advice that is both suitable and reasonably priced.

A regulatory requirement that a recommendation be reasonably appropriate for a client given their financial situation, objectives, risk tolerance, and needs, a lower bar than the fiduciary best-interest standard.

The process of collecting and documenting a client's financial circumstances, goals, time horizon, risk tolerance, and experience before making any recommendation or opening an account.

A structured record of a client's age, income, net worth, liquidity needs, tax situation, investment objectives, time horizon, and risk tolerance that underpins every suitability determination.

A client's willingness and financial ability to endure investment losses or volatility in pursuit of higher expected returns, combining psychological attitude with objective capacity to absorb loss.

A written document setting out a client's objectives, constraints, permitted asset classes, rebalancing rules, and review schedule, providing a benchmark against which portfolio decisions and performance are judged.

A situation where a professional's personal interest, outside compensation, or affiliation could improperly influence advice, requiring disclosure, avoidance, or informed client consent to manage.

The affirmative duty to inform clients of material facts, including fees, compensation arrangements, conflicts, risks, and the capacity in which the professional is acting, in clear and timely terms.

A regulatory filing used by investment advisers to register and to deliver required written disclosures to clients about business practices, fees, conflicts, and disciplinary history.

A firm's documented system of policies, supervision, training, testing, and recordkeeping designed to detect and prevent violations of applicable securities laws and internal standards.

The obligation of a firm and its managers to reasonably oversee the activities of associated persons, review correspondence and transactions, and act on red flags of misconduct.

The requirement to create, retain, and produce books and records such as client files, communications, order tickets, and disclosures for prescribed periods and in an accessible format.

A framework of customer due diligence, monitoring, reporting, and recordkeeping controls intended to prevent criminals from using financial accounts to disguise the origin of illicit funds.

A confidential filing made to the financial intelligence unit when a firm detects transactions that may involve fraud, money laundering, or other illegal activity, with no tip-off to the client.

A portfolio-level standard requiring a fiduciary to invest with the care, skill, and caution of a prudent professional, judging each holding in the context of the whole portfolio rather than in isolation.

The process of dividing a portfolio among asset classes such as equities, fixed income, cash, and alternatives to balance expected return against risk in line with the client's objectives.

Spreading investments across issuers, sectors, geographies, and asset classes so that any single loss has limited impact on the overall portfolio's value.

Periodically adjusting holdings back to target weights after market movements shift the allocation, restoring the intended risk level and enforcing a disciplined buy-low, sell-high process.

The danger of holding too large a position in a single security, sector, or employer stock, so that one adverse event can severely damage the client's overall financial position.

The expected period over which invested funds will remain committed before being needed, a key input that shapes appropriate risk levels and asset mix.

The ease and speed with which an asset can be converted to cash at a fair price without significant loss, and the availability of cash to meet near-term client obligations.

The degree to which an investment's returns fluctuate over time, commonly measured by standard deviation and used as a proxy for short-term investment risk.

A statistical measure of the dispersion of returns around their average, indicating how widely an investment's outcomes have varied and thus how volatile it has been.

A measure of an investment's sensitivity to movements in a broad market index, where a value above one implies greater volatility than the market and below one implies less.

A risk-adjusted performance measure calculated as excess return above the risk-free rate divided by standard deviation, indicating how much return is earned per unit of total risk.

The portion of an investment's return not explained by exposure to market risk, often interpreted as the value added or lost by active management or skill.

Market-wide risk that cannot be eliminated through diversification, such as interest rate shifts, inflation, or recession, affecting nearly all securities to some degree.

Company- or industry-specific risk, such as a product failure or lawsuit, that can be substantially reduced by holding a diversified portfolio of unrelated securities.

A statistic ranging from negative one to positive one describing how closely two investments' returns move together, used to judge the diversification benefit of combining them.

A way of evaluating performance that accounts for the amount of risk taken to achieve it, allowing fair comparison of strategies with different volatility profiles.

The process by which investment earnings are reinvested so that future returns are earned on both the original principal and previously accumulated interest, accelerating long-term growth.

The principle that a sum of money available today is worth more than the same sum in the future, because today's money can be invested to earn a return.

The current worth of a future cash flow or stream of payments, calculated by discounting those amounts at an appropriate rate to reflect time and risk.

The amount to which a present sum or series of payments will grow after earning a specified rate of return over a given number of periods.

The rate used to convert future cash flows into present value, reflecting the time value of money plus a premium for the riskiness of those cash flows.

A sustained rise in the general price level that erodes purchasing power over time, reducing the real value of fixed income and cash holdings.

An investment's return after subtracting inflation, showing the actual increase in purchasing power rather than the nominal percentage gain.

The risk that inflation will reduce the real value of an investment's returns or principal, particularly damaging to long-term holders of cash and fixed-rate bonds.

The risk that changes in prevailing interest rates will reduce the value of a bond or other fixed-income investment, with longer maturities generally more sensitive to such changes.

A measure of a bond's price sensitivity to interest rate changes, approximating the percentage price move for a one-percentage-point shift in yields.

The risk that a bond issuer or borrower will fail to make scheduled interest or principal payments, rated by agencies and priced through a credit spread.

The total annualized return an investor would earn by holding a bond to maturity, assuming all coupon payments are reinvested at that same rate.

The annual cost of running a fund, expressed as a percentage of assets, covering management fees and operating expenses and directly reducing investor returns.

The per-share value of a fund, calculated by subtracting liabilities from total assets and dividing by shares outstanding, typically struck once daily after market close.

A pooled investment vehicle that gathers money from many investors to buy a diversified portfolio, issuing redeemable shares priced at net asset value.

A pooled fund whose shares trade intraday on an exchange like a stock, typically tracking an index and offering low costs and tax efficiency.

The formal offering document for a security or fund that must describe investment objectives, strategies, risks, fees, and past performance so investors can make informed decisions.

A conflict arising when someone acting on another's behalf pursues their own interests rather than the principal's, mitigated by alignment of incentives, monitoring, and disclosure.