CFP key terms

A legal obligation to act in the client's best interest, placing the client's interests ahead of the adviser's own and disclosing conflicts. It requires loyalty, care, and full disclosure.

A requirement that an adviser have reasonable grounds to believe a recommendation fits the client's objectives, financial situation, and needs, without necessarily placing the client's interests first.

A financial or personal interest that could reasonably affect an adviser's judgment or objectivity, or that a reasonable client would consider important when deciding whether to follow advice.

The duty to protect nonpublic client information from unauthorized disclosure and to use it only for legitimate business purposes, subject to legal exceptions such as client consent or court order.

A structured, cyclical sequence of steps: establishing the relationship, gathering data, analyzing the client's situation, developing recommendations, implementing them, and monitoring progress over time.

The principle that a dollar available today is worth more than a dollar received later, because today's dollar can be invested and earn a return. It underlies present-value and future-value calculations.

The value of the next best alternative forgone when a resource, such as money or time, is committed to one use instead of another.

The difference between a person's total assets and total liabilities at a point in time. It measures financial position and progress toward long-term goals.

Readily accessible cash reserved to cover unexpected expenses or income interruption, typically three to six months of essential living costs, held in low-risk, liquid accounts.

The risk that inflation will reduce the real value of money or of investment returns, so that a given amount of cash buys fewer goods and services in the future.

A financial or legal relationship in which a person benefits from another's continued life or property and would suffer a measurable loss if that life or property were lost.

The tendency for people with higher-than-average risk to seek insurance more eagerly than low-risk people, which can raise claim costs and premiums for the insured pool.

The tendency for insured people to take fewer precautions or behave less carefully because insurance shifts part of the cost of a loss to the insurer.

A property insurance provision requiring the insured to carry coverage equal to a stated percentage of the property's value; failing that, claims are reduced proportionally.

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

A tax-free transfer of cash value from one life insurance or annuity contract to another qualifying contract, allowed under Internal Revenue Code Section 1035 without recognizing gain.

The process of dividing a portfolio among asset classes such as stocks, bonds, and cash, chosen to balance expected return against the investor's risk tolerance and time horizon.

Spreading investments across assets, sectors, or regions so that poor performance in one holding has less effect on the total portfolio's value.

A measure of how much an investment's returns tend to move relative to the overall market; a beta above one suggests greater volatility than the market.

A statistical measure of how widely an investment's returns vary around their average, commonly used as a gauge of total volatility or risk.

A risk-adjusted performance measure calculated as excess return above the risk-free rate divided by standard deviation; higher values indicate better return per unit of risk.

The theory that security prices quickly reflect all available information, making consistent excess returns from analysis difficult, especially in highly liquid public markets.

Periodically adjusting portfolio holdings back to target weights after market movements change them, which helps control risk and enforce a disciplined buy-low, sell-high approach.

The rate applied to the next dollar of taxable income, showing how much additional tax a taxpayer would owe on an extra dollar earned or deducted.

Total tax liability divided by total income or taxable income, expressing the average rate actually paid rather than the rate on the last dollar.

The amount attributed to an asset for tax purposes, generally its cost plus certain adjustments, used to calculate gain or loss when the asset is sold.

Gain from selling a capital asset held longer than one year, generally taxed at preferential rates lower than ordinary income rates.

A tax rule allowing inherited assets to receive a new basis equal to fair market value at the decedent's death, reducing gain when heirs later sell.

The minimum amount that must be withdrawn annually from most traditional retirement accounts after reaching a specified age, with penalties for failing to withdraw enough.

The schedule by which an employee gains non-forfeitable ownership of employer contributions, such as matching funds or stock, typically based on years of service.

An individual retirement account funded with after-tax dollars; qualified withdrawals of contributions and earnings are tax-free, and no lifetime required distributions apply to the owner.

The danger that poor investment returns occurring early in retirement, while withdrawals are being taken, permanently reduce portfolio longevity more than later losses would.

The court-supervised process for validating a will, paying debts and taxes, and distributing a deceased person's assets to beneficiaries or heirs.

The condition of dying without a valid will, causing state law to determine who receives the estate and who administers it.

A trust created during life that can be changed or revoked by the grantor, often used to avoid probate and manage assets during incapacity while retaining control.

An estate tax feature letting a surviving spouse use the deceased spouse's unused exclusion amount, subject to a timely filed estate tax return election.

A contractual instruction naming who receives assets from accounts such as life insurance, annuities, or retirement plans, generally overriding the will.

The tendency for people to feel the pain of a loss more strongly than the pleasure of an equal gain, which can lead to overly conservative or loss-avoiding decisions.

A cognitive bias in which a person relies too heavily on an initial reference point, such as a purchase price or forecast, when making later judgments.

The habit of treating money differently depending on its source or intended use, such as separate buckets for bonuses or refunds, which can distort spending and investing decisions.