CFP Exam (Canada) key terms

The legal obligation of a planner to act in the client's best interest, placing the client's interests ahead of the planner's own. It requires loyalty, full disclosure of conflicts, and prudent, informed advice.

The requirement to gather and document a client's financial situation, goals, time horizon, risk tolerance, and knowledge before recommending any product or strategy. Recommendations must follow from this documented profile.

A regulatory threshold requiring that a recommendation fit the client's documented objectives, risk tolerance, and circumstances. It is less demanding than a fiduciary standard because it does not require putting the client's interest first.

The duty to tell clients, in writing and in plain language, about any arrangement that could bias advice, such as commissions, referral fees, or proprietary product incentives, so the client can judge the advice fairly.

A relationship or incentive that a reasonable client would want to know about because it could affect the objectivity of advice. It must be avoided, or disclosed and managed, under securities and planning rules.

The mandatory annual professional learning hours a licensed planner must complete to keep certification or registration. It ensures currency in tax, product, and regulatory knowledge and is verified by the governing body.

A snapshot listing everything owned (assets at fair market value) minus everything owed (liabilities), producing net worth. It anchors financial planning by showing current capacity to save, borrow, and absorb risk.

A record of money coming in and going out over a period, showing surplus or deficit. It reveals savings capacity and spending patterns, which drive budgeting, debt repayment, and investment funding decisions.

Liquid savings set aside to cover unexpected expenses or income loss, typically three to six months of essential spending held in accessible, low-risk accounts rather than long-term investments.

The share of after-tax income not spent, expressed as a percentage. It is the single strongest driver of long-term wealth accumulation and is used to test whether goals are realistically funded.

The portion of gross income consumed by required debt payments, such as mortgage principal, interest, and loan installments. Lenders use it to judge borrowing capacity and set maximum loan amounts.

The gradual repayment of a loan through scheduled payments that cover interest first and reduce principal over time. Longer amortization lowers each payment but increases total interest paid.

A client's emotional and financial ability to endure investment losses and volatility. It combines willingness to take risk with capacity to absorb it, and it constrains the appropriate asset mix.

Dividing a portfolio among asset classes such as cash, fixed income, and equities. It is the primary determinant of a portfolio's long-run return and volatility, more so than individual security selection.

Spreading money across investments whose returns do not move in perfect step, so that losses in one holding are offset by others. It reduces unsystematic risk without necessarily lowering expected return.

A measure from -1 to +1 of how closely two investments move together. Low or negative correlation between holdings is what makes diversification effective at reducing portfolio volatility.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for investment volatility and risk. Higher values mean a wider range of possible outcomes.

Market-wide risk, such as interest rate shifts or recessions, that affects nearly all securities and cannot be removed by diversifying. Investors are compensated for bearing it through expected return.

A measure of how much a security or portfolio moves relative to the overall market. A beta above one implies greater sensitivity to market swings; below one implies less.

Periodically buying and selling to restore a portfolio to its target asset mix after market movements shift the weights. It controls risk drift and enforces a disciplined buy-low, sell-high habit.

A written document setting out a portfolio's objectives, risk tolerance, target allocation, permitted investments, and review process. It guides decisions and helps prevent emotionally driven changes during market stress.

The rate applied to the next dollar of taxable income within a bracket. It drives the value of deductions, RRSP contributions, and income-splitting decisions, unlike the average rate.

Total tax paid divided by total taxable income, expressed as a percentage. It reflects the overall tax burden and is always lower than the marginal rate in a progressive system.

The amount remaining after allowable deductions from total income, on which federal and provincial tax is calculated. It differs from net income because of items such as capital gains deductions and loss carryovers.

The profit realized when an investment is sold for more than its adjusted cost base. In Canada only a portion is included in income, so the effective tax is lower than on interest.

The total cost of an investment for tax purposes, including purchase price plus commissions and reinvested distributions, adjusted for returns of capital. It is subtracted from sale proceeds to compute the gain.

An amount subtracted from income before tax is calculated, such as an RRSP contribution. Its value equals the deduction times the marginal rate, so it is worth more to higher-income taxpayers.

An amount subtracted directly from tax otherwise payable, such as the basic personal amount or dividend tax credit. A credit's value does not depend on the taxpayer's marginal bracket.

A tax-sheltered account in which contributions are deductible and growth compounds tax-free until withdrawal, when amounts are taxed as income. Contribution room is based on prior earned income.

A registered account funded with after-tax dollars in which investment growth and withdrawals are tax-free. Withdrawn room is restored the following year, making it flexible for short- and long-term goals.

A tax-deferred payout vehicle into which RRSP assets can be transferred at retirement. It requires annual minimum withdrawals that rise with age, and remaining assets pass to a named beneficiary.

The recovery tax that reduces or eliminates OAS benefits when net income exceeds an annual threshold. It raises the effective marginal rate on retirement income and shapes withdrawal sequencing.

The contributory public pension providing retirement, survivor, and disability benefits. The retirement amount depends on contributions and the age benefits start, with adjustments for early or delayed take-up.

A contract that converts capital into a guaranteed income stream for life, shifting longevity and investment risk to the insurer. Payments may be fixed or indexed, and joint options cover a spouse.

The risk that a person outlives their savings, exhausting assets before death. It is managed through guaranteed income products, conservative withdrawal rates, and planning to an advanced age.

Coverage that replaces a portion of earned income when illness or injury prevents work. Key features include the definition of disability, waiting period, benefit period, and any occupation versus own occupation terms.

A policy paying a lump sum on diagnosis of a covered condition, after a survival period. The money is unrestricted and can cover treatment, income replacement, or debt repayment.

The person or entity named in a registered plan or insurance policy to receive proceeds on death. A valid designation usually bypasses the will and avoids probate on those assets.

The court process confirming a will and appointing an executor, which validates the document and allows estate assets to be dealt with. Fees and delays depend on the estate's value and jurisdiction.

A legal arrangement in which a trustee holds assets for the benefit of named beneficiaries. It can control distributions, reduce probate exposure, and provide continuity when a beneficiary is unable to manage money.

A legal document authorizing a chosen person to make property or personal care decisions if the grantor becomes incapable. It must be validly executed and is essential to incapacity planning.

Dying without a valid will, so provincial rules determine who inherits and who administers the estate. It often produces outcomes the deceased would not have chosen and can add delay and cost.