CFP flashcards

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

Fiduciary duty

A duty requiring the advisor to act in the client's best interest, placing client interests ahead of the advisor's own and disclosing material conflicts.

CFP Board Practice Standards

A seven-step process for financial planning engagements: establish relationship, gather data, analyze, develop recommendations, present, implement, and monitor.

Material conflict of interest

A circumstance that could reasonably impair an advisor's objectivity or loyalty, such as compensation tied to a product recommendation, requiring written disclosure.

Client confidentiality

The obligation not to disclose nonpublic client information without consent, except when required by law or necessary in a legal or disciplinary proceeding.

Future value formula

FV equals present value multiplied by one plus the periodic rate raised to the number of periods: FV = PV(1 + r)^n.

Real return

The inflation-adjusted return, calculated as (1 + nominal return) divided by (1 + inflation rate) minus one; it measures purchasing-power growth.

Emergency fund

Liquid reserves set aside for unexpected expenses or income loss, commonly three to six months of essential expenses, with larger reserves for variable income.

Risk capacity

A client's financial ability to absorb a loss or volatility without jeopardizing goals, distinct from the client's psychological willingness to take risk.

Indemnity principle

Insurance restores the insured to approximately the pre-loss financial position, not to a better position; it prevents profiting from an insured loss.

Coinsurance clause

A property insurance provision requiring a minimum limit; recovery equals insurance carried divided by insurance required, multiplied by the loss, capped at the policy limit.

Own-occupation disability

A disability policy definition that pays benefits when the insured cannot perform the material duties of their own occupation, even if able to work elsewhere.

Personal umbrella policy

Excess liability coverage that responds after underlying auto or homeowners liability limits are exhausted and may also cover some exposures those policies exclude.

Standard deviation

A statistical measure of the dispersion of returns around their average; higher values indicate greater total volatility and less predictable outcomes.

Beta

A measure of a security's sensitivity to movements in the broad market; a beta of one implies average systematic risk relative to the market.

Sharpe ratio

A risk-adjusted performance measure calculated as portfolio return minus the risk-free rate, divided by the portfolio's standard deviation; higher values indicate better compensation for volatility.

Duration

A bond price sensitivity measure; for a small yield change, approximate percentage price change equals negative duration multiplied by the change in yield.

Marginal tax rate

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

Tax deduction vs credit

A deduction reduces taxable income, while a credit reduces tax owed dollar for dollar; credits generally provide more benefit per dollar.

Adjusted basis

The original cost of property plus capital additions and certain costs, minus depreciation and other reductions; used to compute gain or loss on sale.

Wash sale rule

A capital loss is disallowed if substantially identical securities are bought within 30 days before or after the sale; the disallowed loss adjusts the new basis.

Sequence-of-returns risk

The danger that poor investment returns early in retirement, combined with withdrawals, permanently reduce principal and lower the chance of funding later goals.

Required minimum distribution

A minimum annual withdrawal from certain tax-deferred retirement accounts after the required beginning age; the amount is account balance divided by a life expectancy factor.

Defined benefit plan

An employer pension that promises a specified retirement benefit, often based on salary and years of service, with the employer bearing investment risk.

Roth conversion

Moving funds from a traditional IRA or pre-tax retirement account to a Roth account; the converted amount is generally taxable income, but later qualified withdrawals are tax-free.

Gross estate

The total value of a decedent's property and certain includible transfers and insurance proceeds for federal estate tax purposes, before deductions and credits.

Probate

The court-supervised process that validates a will, pays debts and taxes, and distributes probate assets according to the will or state intestacy law.

Marital deduction

An unlimited federal estate and gift tax deduction for qualifying property transferred to a surviving spouse, delaying tax until the survivor's death.

Step-up in basis

A tax rule that generally resets the basis of inherited capital assets to fair market value at death, reducing gain if heirs later sell.

Loss aversion

The tendency for losses to feel more painful than equivalent gains feel pleasurable, which can lead clients to hold losing investments too long.

Anchoring bias

Relying too heavily on an initial reference point, such as a purchase price or forecast, when making later financial judgments or decisions.

Confirmation bias

The tendency to seek, interpret, and remember information that supports existing beliefs while ignoring or discounting contradictory evidence.

Mental accounting

Treating money differently depending on its source or intended use, which can lead to inconsistent spending, saving, and investing decisions.