CPWA key terms

The structured, documented process of learning a client's goals, assets, liabilities, cash flows, health, family situation, values, and risk attitudes before any recommendation is made.

A written governance document stating the client's return objective, risk tolerance, time horizon, liquidity needs, tax constraints, and permitted investments, plus the rules for monitoring and rebalancing the portfolio.

The legal obligation to act in another party's best interest with loyalty and care, to disclose conflicts, and to avoid self-dealing; it is stricter than the suitability standard applied to some brokerage recommendations.

A written agreement defining which services the advisor will and will not provide, the fees, each party's responsibilities, and the limits of the relationship, reducing later disputes about expectations.

Risk tolerance is the client's emotional willingness to endure volatility and loss; risk capacity is the financial ability to absorb loss without compromising goals. Advice reconciles both, usually treating the lower as the constraint.

The tendency for losses to feel roughly twice as painful as comparable gains feel pleasurable, which can cause clients to hold losing positions too long or abandon sound plans during downturns.

Over-reliance on an initial reference point, such as a purchase price or a past market high, when judging whether a current price or portfolio value is reasonable.

Treating money differently depending on its source or intended use, such as holding low-yield savings while carrying credit card debt, instead of viewing the household balance sheet as a whole.

A behavioral model in which people judge outcomes as gains or losses relative to a reference point, are loss averse, and overweight small probabilities, helping explain seemingly inconsistent financial choices.

The long-term target mix of asset classes chosen to fit the client's goals, risk tolerance, and time horizon; it is the primary driver of portfolio return variability and is documented in the investment policy statement.

Periodically returning the portfolio to its target weights by selling overweighted assets and buying underweighted ones, which controls risk drift and enforces a disciplined buy-low, sell-high behavior.

A measure from negative one to positive one of how closely two assets' returns move together; lower or negative correlation among holdings reduces total portfolio volatility for a given expected return.

A bond sensitivity measure expressed in years, approximating the percentage price change for a one-percentage-point move in interest rates; longer duration means greater price volatility when rates change.

Excess return above the risk-free rate divided by the investment's standard deviation, used to compare how much return a portfolio generated per unit of total risk taken.

The rate applied to the next dollar of taxable income, which determines the true after-tax value of a deduction, an additional dollar of wages, or a Roth conversion.

A tax rule disallowing a loss on securities sold if substantially identical securities are bought within 30 days before or after the sale, unless a later qualifying sale occurs.

A dividend on qualifying domestic or foreign stock held for the required period, taxed at long-term capital gains rates rather than at generally higher ordinary income rates.

A deferral provision allowing real property held for business or investment use to be exchanged for like-kind replacement property, postponing capital gains tax when identification and timing rules are satisfied.

The adjustment of inherited assets' tax basis to fair market value at the decedent's death, eliminating income tax on appreciation that accrued during the owner's lifetime.

The amount of a decedent's estate that can pass free of federal estate tax, indexed for inflation; transfers above it are taxed at the current federal rate unless deductions or credits apply.

An election allowing a surviving spouse to use the deceased spouse's unused estate and gift tax exclusion, but not the deceased spouse's GST exemption, by filing a timely estate tax return.

A trust that owns a life insurance policy, keeps proceeds out of the insured's taxable estate, and provides liquidity for estate taxes and expenses, provided it is properly drafted and administered.

A trust whose income is taxed to its creator under the grantor trust rules, often used intentionally so the grantor pays the tax and the trust assets compound faster for beneficiaries.

An irrevocable split-interest trust that pays a specified income stream to one or more beneficiaries for life or a term, then distributes the remainder to charity, generating an income tax deduction.

A sponsored charitable account to which a donor makes an irrevocable, deductible gift, recommends grants over time, and obtains an immediate deduction without the administration of a private foundation.

A tax-exempt charitable organization typically funded by one donor or family and controlled by its own board, subject to payout requirements, excise taxes, and strict self-dealing and disclosure rules.

A direct transfer, up to the annual limit, from an IRA owner's account to a qualifying charity after age 70 and one-half, excluded from gross income and countable toward the required minimum distribution.

A contract among business owners and the entity specifying how an owner's interest is valued and transferred on death, disability, retirement, or dispute, preventing unwanted owners and providing liquidity.

An employee stock ownership plan, a qualified retirement plan that holds employer stock and can be used to buy out a departing owner while giving employees an ownership stake and possible tax deferral.

An irrevocable trust to which a grantor transfers assets and retains an annuity for a set term; growth above the IRS hurdle rate passes to heirs gift-tax free if the grantor survives the term.

A reduction from a proportional share of enterprise value applied to minority interests or to lack of marketability, used in gifting and estate planning but challenged by the IRS if excessive.

The danger that poor investment returns early in retirement, combined with ongoing withdrawals, permanently deplete a portfolio even though long-run average returns prove adequate.

The minimum amount that must be withdrawn annually from most tax-deferred retirement accounts once the owner reaches the required beginning age, taxed as ordinary income.

A percentage of the initial retirement portfolio that historical modeling suggests can be withdrawn annually, adjusted for inflation, with low risk of exhausting assets over a typical retirement horizon.

Moving funds from a traditional IRA or employer plan to a Roth account, paying income tax now in exchange for tax-free qualified withdrawals and no lifetime required distributions for the owner.

A personal excess liability policy that pays damages above the limits of homeowners and auto policies, providing relatively inexpensive protection against large liability claims and lawsuits.

Term coverage lasts a set period with no cash value and low cost; permanent coverage lasts a lifetime and builds cash value but costs more, so the choice depends on need duration and funding capacity.

Coverage that replaces a portion of earned income during illness or injury, with key terms being the definition of disability, elimination period, benefit period, and percentage of income replaced.

Coverage for chronic care services such as home care and nursing facility care, with important features including daily benefit amount, elimination period, benefit duration, and inflation protection.