CISI PCIAM key terms

The obligation to ensure a recommendation or discretionary decision matches a client's objectives, risk tolerance, financial situation, knowledge and experience, so that unsuitable products are not advised or bought.

The process of gathering and recording information about a client's circumstances, goals, time horizon, attitude to risk and experience before advice is given, forming the basis of suitability and ongoing reviews.

The UK regulatory principle requiring firms to deliver good outcomes for retail customers across products, price and value, consumer understanding and consumer support, treating fair treatment as an outcome rather than a process.

A client whose personal circumstances, such as health, bereavement, low literacy or financial difficulty, reduce their ability to make informed decisions, requiring firms to adapt communication and support rather than exclude them.

The degree of investment volatility and potential loss a client is willing and financially able to accept, combining emotional attitude with capacity for loss, and used to set an appropriate asset allocation.

A client's financial ability to absorb falls in value without derailing their goals, distinct from willingness to take risk, and assessed from income, assets, liabilities and time horizon.

The structured process, often using a questionnaire, of scoring a client's attitude to risk and mapping the result to a defined risk band and matching model portfolio.

The division of a portfolio among asset classes such as equities, bonds, property and cash, which is the primary driver of long-term return and volatility and is set with reference to the client's objectives.

Spreading investments across assets, sectors, issuers and geographies so that any single loss has limited impact on the whole portfolio, reducing unsystematic risk without necessarily lowering expected return.

Market-wide risk that cannot be removed by diversification, such as changes in interest rates, inflation or recession, also called market risk, and which investors are compensated for bearing.

Risk unique to a single company or issuer, such as a profit warning or fraud, which can be largely eliminated by holding a diversified portfolio and is therefore not usually rewarded with extra return.

A measure of how much a security or portfolio tends to move relative to the market, where a beta above one implies greater sensitivity and below one implies lower sensitivity than the index.

The statistical dispersion of returns, usually expressed as standard deviation, indicating how widely a value may fluctuate over time; higher volatility means a wider range of possible outcomes.

The excess return of a portfolio relative to the return explained by its market exposure, used as a measure of the value added or lost by active management after adjusting for risk.

A risk-adjusted performance measure calculated as excess return over the risk-free rate divided by standard deviation, showing how much return is earned per unit of total volatility taken.

A statistical measure of the spread of a set of returns around their average, widely used as the headline number for investment risk and for comparing the consistency of funds.

A measure from minus one to plus one of how closely two investments move together, used in portfolio construction because combining assets with low correlation reduces overall portfolio volatility.

The long-term target mix of asset classes chosen to meet a client's objectives and risk profile, against which shorter-term tactical positions and rebalancing decisions are measured.

Short-term deliberate deviations from the strategic asset mix, based on views about markets or valuations, intended to add value but adding risk if the views prove wrong.

The periodic buying and selling needed to restore a portfolio to its target weights after market movements have shifted them, controlling drift in risk and enforcing a disciplined sell-high, buy-low habit.

An approach where a manager selects securities and weights in an attempt to beat a benchmark, charging higher fees but offering the possibility of outperformance and of managing risk actively.

An approach that seeks to replicate the return of an index at low cost, typically through tracker funds or exchange-traded funds, accepting that the portfolio will not outperform the market.

The standard deviation of the difference between a portfolio's returns and those of its benchmark, indicating how closely a fund follows its index or how far an active manager deviates.

A written document setting out a client's objectives, constraints, risk tolerance, target asset allocation and review arrangements, providing a reference point for decisions and for judging performance.

The length of time over which money is invested before it is needed, which determines how much short-term volatility can be tolerated and influences the appropriate mix of assets.

The process by which investment returns generate further returns over time, so that growth accelerates the longer money is left invested; a key argument for starting saving early.

The return on an investment after subtracting inflation, showing the change in purchasing power; a nominal return below inflation means the investor is effectively losing money in real terms.

The total annualised return from a bond if held to redemption, including coupon income and any gain or loss from buying at a price different from par, assuming coupons are reinvested.

A measure of a bond's sensitivity to interest rate changes, expressed in years; a duration of five means the price falls roughly five per cent for a one per cent rise in yields.

The risk that rising interest rates reduce the value of fixed-income investments and other rate-sensitive assets, with longer-dated and lower-coupon bonds most exposed.

The risk that a bond issuer or borrower fails to pay interest or repay principal as agreed, reflected in credit ratings and in the spread an issuer must pay over government debt.

A UK government bond issued by the Debt Management Office to fund public borrowing, regarded as low credit risk and available as conventional or index-linked stock with varying maturities.

A UK government bond whose coupon and redemption value are adjusted in line with the retail prices index, offering protection against inflation but with prices that still react to real yields.

A fund listed and traded on an exchange like a share, usually tracking an index, offering low costs and intraday pricing but potentially exposing investors to dealing spreads and tracking differences.

A UK collective investment vehicle structured as a company that can issue and cancel shares as investors join or leave, priced once daily at net asset value and authorised by the regulator.

The value of a fund's assets minus its liabilities, divided by the number of shares or units in issue, giving the price at which units are created or cancelled.

A UK tax wrapper in which interest, dividends and capital gains are free of UK tax, subject to an annual subscription limit, available in cash, stocks and shares and innovative finance versions.

A UK personal pension allowing the holder to choose and manage a wide range of investments, benefiting from tax relief on contributions and tax-free growth within permitted limits.

The maximum amount of pension contributions that can attract tax relief in a tax year, reduced for high earners and subject to carry-forward of unused relief from earlier years.

The mechanism by which the government adds money to pension contributions, at the saver's marginal rate, making pensions tax-efficient for retirement saving but subject to annual and lifetime limits.

A UK tax on the profit made when disposing of an asset, charged at rates that depend on the type of asset and the taxpayer's income, with an annual exempt amount and various reliefs.

The amount of dividend income an individual can receive each tax year before dividend tax is due, with income above it taxed at rates linked to the taxpayer's band.

A technique of selling investments held outside a tax wrapper and immediately repurchasing them within an ISA, using the annual allowance to shelter future growth from tax.

The UK body that resolves complaints between consumers and financial firms free of charge, able to award compensation and whose decisions influence how firms handle similar complaints.

The UK statutory scheme that pays compensation to eligible customers when an authorised firm fails, with limits that vary by the type of business, such as deposits and investment claims.

The framework of checks, including customer due diligence and suspicious activity reporting, that firms must apply to prevent the financial system being used to launder criminal proceeds.

Someone entrusted with prominent public functions, or closely associated with such a person, who presents higher money-laundering risk and therefore requires enhanced due diligence and senior approval.

Situations where a firm's or adviser's own interests could improperly influence advice or dealings, which must be identified, avoided where possible, or disclosed and managed.

Payments or benefits, such as commission or hospitality, offered to or by third parties that could impair impartial advice; most are banned for independent advisers unless they enhance service to the client.

Advice based on a comprehensive and unbiased review of the market, free from provider ties and commission influence, in contrast with restricted advice limited to certain products or providers.

The annual cost of a fund expressed as a percentage of its assets, covering management fees and other ongoing charges, which directly reduces the return investors receive.

Investing a fixed sum at regular intervals so that more units are bought when prices are low and fewer when high, smoothing the entry price and reducing timing risk.