CISI Chartered Wealth Manager flashcards

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

Net worth

The difference between total assets and total liabilities at a point in time. It is a stock measure, unlike cash flow, which measures movement over a period.

Emergency fund rule

Hold three to six months of essential expenditure in liquid, capital-certain assets. Use the upper end for single-income, variable-income or self-employed households.

Human capital

The present value of a client's future earnings. It is usually largest when young and declines over time, allowing more risk in financial capital while human capital remains high.

Risk capacity versus attitude

Capacity is the objective ability to bear loss, based on the balance sheet and horizon. Attitude is psychological willingness. Where they conflict, the lower governs.

SMART goal

A goal that is specific, measurable, achievable, relevant and time-bound, with a target amount and date, so it can be converted into a funding calculation.

Real versus nominal return

Real return removes inflation, using (1 + nominal)/(1 + inflation) - 1. Use real returns when funding goals expressed in today's purchasing power.

Lifetime cash flow analysis

A year-by-year projection of income, expenditure, tax and lump sums to life expectancy, testing whether assets and future savings can fund all goals.

Diversification effect

Combining assets with correlation below +1 reduces portfolio volatility below the weighted average of individual volatilities. The lower the correlation, the greater the reduction.

Portfolio variance formula

For two assets: w1 squared times sigma1 squared plus w2 squared times sigma2 squared plus twice w1 w2 sigma1 sigma2 rho12. Correlation drives the cross term.

Sharpe ratio

Excess portfolio return over the risk-free rate divided by portfolio standard deviation. It measures return per unit of total risk and suits undiversified or whole portfolios.

Beta

A measure of an asset's sensitivity to market movements, capturing systematic risk only. Unsystematic risk can be diversified away and is not compensated with higher expected return.

CAPM formula

Expected return equals the risk-free rate plus beta multiplied by the market risk premium, where the premium is expected market return minus the risk-free rate.

Efficient frontier

The set of portfolios offering the highest expected return for each level of risk. Adding a risk-free asset creates the capital market line and a tangency portfolio.

Modified duration

Approximates a bond's percentage price change for a small yield change: minus modified duration times the yield change. Convexity refines the estimate for larger moves.

Rebalancing bands

Pre-set tolerance ranges around target weights that trigger a trade when breached. They control risk drift and enforce selling winners and buying laggards.

Strategic asset allocation

The long-term target mix of asset classes set from goals, horizon and risk capacity. It drives most of a diversified portfolio's return variability over time.

Taxable income

Total income less allowable reliefs and deductions less the personal allowance. Tax bands then apply progressively, with the marginal rate applying only within each band.

Effective marginal tax rate

The rate actually paid on the next unit of income, including allowance tapering and relief withdrawal. It can exceed the headline band rate at thresholds.

Annual exempt amount

A capital gains tax allowance usable each tax year. Unused amounts cannot be carried forward, so gains should be realised to use it where sensible.

Potentially exempt transfer

A lifetime gift that becomes fully exempt if the donor survives seven years. Tax on death within that period is reduced by taper relief after three years.

Gift with reservation of benefit

A gift where the donor keeps use or enjoyment of the asset. It stays in the estate for inheritance tax despite legal ownership passing to the recipient.

Residence nil-rate band

An additional inheritance tax threshold for a main residence passed to direct descendants. It tapers away where the estate exceeds the published upper limit.

Bare trust taxation

The beneficiary owns the assets absolutely and is taxed on the income and gains as they arise. The trust itself is transparent for tax purposes.

Discretionary trust charges

Discretionary trusts face inheritance tax on entry above the threshold, periodic charges every ten years, and exit charges when capital leaves the trust.

Suitability assessment

A recommendation must fit the client's knowledge, experience, financial situation, objectives and risk tolerance, and be the best option available, not merely permissible.

Managing conflicts of interest

Identify, prevent or manage conflicts, and disclose only as a last resort. Disclosure does not replace removing or controlling the conflict itself.

Client money segregation

Client money is held separately from firm money in an approved account, with records sufficient to show at any time that client assets are accounted for.

Six principles for businesses

Integrity, skill care and diligence, management and control, financial prudence, market conduct, and customers' interests. They are overarching principles, not a checklist.

Enhanced due diligence

Additional identity and source-of-funds checks applied to higher-risk clients, including politically exposed persons and those connected to higher-risk jurisdictions.

Independent versus restricted advice

Independent advice covers the whole market without commission and without bias. Restricted advice is limited to a product panel and must be clearly labelled as restricted.

Complaint handling

Acknowledge promptly and resolve within defined time limits. If unresolved, tell the client of the free right to refer the complaint to the ombudsman service.

Continuing professional development

Recorded, role-relevant learning that keeps technical and ethical competence current. Ethical competence is part of the standard expected of a chartered wealth manager.