CISI Chartered Wealth Manager cheat sheet

The financial planning process runs in six iterative stages: establish the relationship, gather client data and goals, analyse the situation, develop and present recommendations, implement, then monitor and review.

Net worth = total assets (including pension and property values) minus total liabilities; it is a stock measure at a point in time, whereas cash flow is a period measure of inflows minus outflows.

Emergency reserve sizing rule: hold three to six months of essential expenditure in liquid, capital-certain assets, with the higher end applied to single-income or variable-income households.

Human capital is the present value of future earnings; it is usually largest for younger clients and declines over time, so the asset allocation of financial capital can afford more risk while human capital is high and bond-like.

A goal is SMART only if it is specific, measurable, achievable, relevant and time-bound; each goal needs a target amount, a target date and an assumed real return before it can be funded.

Required saving for a goal: PMT = FV x r / [(1 + r)^n - 1] for end-of-year contributions, using a real (inflation-adjusted) rate if the target is expressed in today's money.

Risk tolerance has two components: risk capacity (objective, balance-sheet based) and risk attitude (psychological); where they conflict, the lower of the two governs the recommended allocation.

Inflation erodes purchasing power by 1/(1 + i)^n; at 3% inflation, money loses roughly a quarter of its value in about ten years, so nominal targets must be grossed up before funding calculations.

A lifetime cash flow (capital needs) analysis projects income, expenditure, tax and lump sums year by year to test whether assets plus future savings can fund goals to life expectancy.

Portfolio expected return is the weighted average of asset expected returns; portfolio risk is not the weighted average of risks unless correlation is exactly +1, because diversification reduces volatility.

Two-asset portfolio variance: sigma_p^2 = w1^2 sigma1^2 + w2^2 sigma2^2 + 2 w1 w2 sigma1 sigma2 rho12; the lower the correlation, the greater the risk reduction from combining the assets.

Sharpe ratio = (Rp - Rf) / sigma_p measures excess return per unit of total risk; Treynor ratio uses beta in the denominator and is appropriate for well-diversified portfolios.

CAPM: E(Ri) = Rf + beta_i [E(Rm) - Rf]; beta measures systematic risk only, since unsystematic risk can be diversified away and is not compensated.

The efficient frontier plots the highest expected return for each level of risk; adding a risk-free asset produces the capital market line, and the tangency portfolio is the optimal risky portfolio.

Duration approximates a bond's price sensitivity: percentage price change is about -modified duration x change in yield, plus a convexity adjustment for larger yield moves.

Real return is approximated by the nominal return minus inflation (Fisher: (1 + nominal)/(1 + inflation) - 1); use real returns when assessing whether goals expressed in today's money are funded.

Rebalancing back to target weights enforces a sell-high, buy-low discipline and controls drift in risk; calendar and threshold (band) approaches are the two standard triggers.

Asset allocation typically explains the majority of a diversified portfolio's return variability over time, which is why the strategic allocation is set from goals, horizon and risk capacity before manager selection.

Taxable income = total income minus allowable reliefs and deductions minus the personal allowance; tax is then applied in bands, with the marginal rate applying only to income within that band.

Marginal relief and allowance tapering mean the effective marginal rate can exceed the headline rate; always compute the effective rate at the client's specific income level rather than quoting band rates.

Capital gains tax is charged on disposals at a rate that depends on the asset type and the taxpayer's other income; the annual exempt amount should be used each year because it cannot be carried forward.

Losses must generally be set against gains of the same year before reliefs; unused trading losses may be carried forward, but capital losses have their own ordering rules, so sequence matters.

Inheritance tax is charged on the estate at death, with a nil-rate band, a residence nil-rate band subject to taper where the estate exceeds the threshold, and spouse exemption for transfers between spouses.

Potentially exempt transfers (PETs) become exempt if the donor survives seven years; taper relief reduces tax on the excess over the nil-rate band for gifts made three to seven years before death.

Gift with reservation of benefit: if the donor keeps use or enjoyment of an asset given away, it remains in the estate for inheritance tax despite legal ownership having passed.

Pensions sit outside the estate for inheritance tax in most UK circumstances, making them a key estate-planning lever, but the tax treatment of benefits depends on the recipient's circumstances and age at death.

Trusts split legal and beneficial ownership; bare trusts are transparent for tax, whereas discretionary trusts are subject to their own entry, periodic and exit charges, so the choice of trust changes the tax outcome.

Treating customers fairly requires outcomes-based evidence across six areas: culture, products and services, price and value, consumer understanding, consumer support, and advice suitability.

Suitability is judged against the client's knowledge, experience, financial situation, objectives and risk tolerance; a recommendation must be the best fit among available options, not merely a permissible one.

Conflicts of interest must be identified, prevented or managed and disclosed; disclosure alone is a last resort, not a substitute for removing the conflict.

Client money must be segregated from firm money and held in an approved account; firms must maintain records sufficient to show at any time that client assets are properly accounted for.

The six principles for businesses are integrity, skill care and diligence, management and control, financial prudence, market conduct, and customers' interests; they are principles, not a checklist.

Know your client and anti-money-laundering duties require customer due diligence, ongoing monitoring, and enhanced due diligence for politically exposed persons and higher-risk jurisdictions.

Independence means no commission, no restricted product panel and no influence that could bias advice; restricted advice must be clearly labelled as such to the client.

A complaint must be acknowledged promptly and resolved within defined time limits; if unresolved, the client must be told of the right to refer it to the ombudsman service free of charge.

Continuing professional development must be recorded and relevant to the role; ethical competence, not only technical knowledge, forms part of the standard expected of a chartered wealth manager.