EFP cheat sheet

Fiduciary duty requires acting in the client's best interest, placing client interests ahead of the planner's compensation, and disclosing all material conflicts in writing.

The financial planning process follows six steps: establish the relationship, gather data and goals, analyze the situation, develop recommendations, implement, and monitor.

Material conflicts of interest must be disclosed in writing before or at the time of engagement; disclosure alone does not cure a conflict that biases advice.

Suitability versus fiduciary standard: suitability permits recommendations consistent with the client's profile; fiduciary requires the recommendation be in the client's best interest.

Competence limits: a planner must refer out or decline engagements outside their expertise, and must not hold out credentials they do not possess.

Confidentiality: client information may be shared only with consent, as required by law, or to defend against a claim; data security safeguards are an ethical obligation.

Compensation models - fee-only, fee-based, commission, hourly, AUM - each creates different conflicts; the planner must document the model in the engagement letter.

Scope of engagement must be written: what is covered, what is excluded, deliverables, timeline, and fees, so the client's expectations are anchored.

Continuing education and record retention (commonly 5–7 years depending on regulator) support competence and defensibility of advice.

Net cash flow = total income − total outflows (fixed, variable, debt service, savings). A positive figure is the surplus available for goal funding.

Emergency reserve target: 3–6 months of essential expenses; 6–12 months for single-income households, commission earners, or unstable employment.

Savings rate = savings / gross income; tracking it, not the absolute budget, is the strongest single predictor of goal attainment.

Cost of debt comparison: use the after-tax cost of debt (interest rate × (1 − marginal tax rate)) for deductible debt such as mortgage or student loan interest.

Debt avalanche pays highest interest rate first, minimizing total interest; debt snowball pays smallest balance first, maximizing behavioral momentum.

Credit utilization ratio = revolving balances / total revolving limits; keeping it below 30% (ideally below 10%) supports credit scores.

Debt-to-income ratio = total monthly debt payments / gross monthly income; lenders commonly cap at 36–43% for qualified mortgages.

Amortization: monthly payment = P × r / (1 − (1 + r)^−n), where r is the monthly rate and n the number of payments; extra principal payments shorten term nonlinearly.

Budget methods - zero-based, envelope, 50/30/20 (needs/wants/savings) - differ in control level; the choice should match the client's behavioral profile.

Risk treatment options: avoid, reduce, retain, transfer (insurance), and share; retention is appropriate only when the loss is affordable and frequency is low.

Insurable interest must exist at policy inception; for life insurance it is presumed for self, spouse, and dependents, and must be demonstrated for business relationships.

Human life value method: present value of the insured's future earnings net of self-maintenance; needs analysis method: income replacement + debts + education + final expenses − existing resources.

Term life provides pure death benefit with no cash value; permanent (whole, universal, variable) adds cash value with higher cost and surrender-charge periods.

Disability definition drives claim outcomes: own-occupation is the strongest, any-occupation the weakest; benefit period, elimination period, and residual/partial benefits matter as much as premium.

Long-term care: benefit triggers are typically inability to perform 2 of 6 activities of daily living or cognitive impairment; inflation riders materially raise cost and value.

Homeowners coverage: dwelling (Coverage A), other structures (B), personal property (C), loss of use (D), personal liability (E), medical payments (F); replacement cost vs actual cash value changes payout.

Umbrella liability sits above auto and homeowners limits and typically requires underlying limits of 250k/500k; it is low-cost protection against catastrophic judgments.

Coinsurance clause: payout = (carried / required) × loss, capped at the policy limit; underinsurance reduces recovery proportionally.

Expected portfolio return = Σ (weight × expected return); portfolio variance depends on weights, individual variances, and pairwise covariances, so diversification reduces risk without lowering expected return.

Correlation ranges from −1 to +1; the lower the correlation between assets, the greater the diversification benefit for a given level of expected return.

Risk tolerance has two components: ability (financial capacity, time horizon, liquidity needs) and willingness (psychological); the plan must satisfy the lower of the two.

Sharpe ratio = (portfolio return − risk-free rate) / standard deviation; it measures excess return per unit of total risk.

Beta measures sensitivity to market movements; CAPM expected return = risk-free + beta × (market return − risk-free).

Asset location: place tax-inefficient assets (taxable bonds, REITs, actively managed funds) in tax-deferred accounts and tax-efficient assets (broad index equity, municipal bonds) in taxable accounts.

Rebalancing to target weights controls drift; threshold (e.g., ±5% or ±20% of target) and calendar (annual/quarterly) rules are the two standard triggers.

Dollar-cost averaging reduces timing risk but does not change expected return; lump-sum investing has higher expected terminal wealth when markets rise.

Time horizon governs equity allocation: longer horizons and stable cash flow support higher equity weight; near-term spending needs must be held in low-volatility assets.

Defined benefit (DB) pays a formula-based benefit (e.g., years of service × benefit multiplier × final average pay); the employer bears investment risk.

Defined contribution (DC) pays whatever the account balance supports; the employee bears investment and longevity risk, and contributions are capped by annual limits.

Replacement ratio target commonly 70–80% of pre-retirement gross income, adjusted for lower work-related expenses and changes in tax and savings patterns.

Capital needs method: required lump sum = annual retirement shortfall / real return, or computed as the present value of an inflation-adjusted annuity for the expected retirement duration.

Social Security: full retirement age is 67 for those born 1960 or later; claiming at 62 reduces the benefit by up to 30%, delaying to 70 adds 8% per year of delay beyond FRA.

Required minimum distributions begin at age 73 for those born 1951–1959 (age 75 for those born 1960 or later); the first RMD may be delayed to April 1 of the following year.

Sequence-of-returns risk: withdrawals during an early market decline permanently impair the portfolio; mitigation includes a cash bucket, flexible spending, and guardrails.

Withdrawal rate: the 4% rule is a planning heuristic, not a guarantee; lower rates or dynamic spending are safer for long horizons and high equity valuations.

Pension lump-sum versus annuity: compare the implied annuity payout rate to prevailing annuity quotes, and consider longevity, survivor benefits, and credit risk of the plan sponsor.

Marginal tax rate applies to the next dollar of income; effective tax rate = total tax / total income; planning decisions should use the marginal rate.

Taxable income = gross income − above-the-line adjustments − standard or itemized deduction − qualified business income deduction; credits then reduce tax dollar-for-dollar.

Capital gains: short-term (held ≤1 year) taxed at ordinary rates; long-term taxed at preferential 0/15/20% rates, plus the 3.8% net investment income tax above the MAGI threshold.

Tax-loss harvesting: realized losses offset realized gains, then up to $3,000 of ordinary income per year, with the remainder carried forward; the wash-sale rule disallows the loss if a substantially identical security is bought within 30 days before or after.

Asset location and tax bracket management: accelerating income into low-bracket years (e.g., Roth conversions in early retirement) can reduce lifetime tax.

Roth versus traditional: traditional contributions deduct now and are taxed on withdrawal; Roth contributions are after-tax and qualified withdrawals are tax-free; the comparison hinges on current versus future marginal rates.

Basis step-up at death: heirs receive a basis equal to fair market value at the date of death, eliminating capital gains on pre-death appreciation for most assets.

Charitable strategies: qualified charitable distributions from IRAs (from age 70½) satisfy RMDs and are excluded from income; donor-advised funds front-load deductions.

Estimated tax: underpayment penalties are avoided by paying 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeds $150,000).

Gross estate includes all assets owned at death, life insurance proceeds where the insured held incidents of ownership, and certain transfers within three years of death.

Unlimited marital deduction defers estate tax between spouses, but assets passing to the surviving spouse may be included in the survivor's estate unless a bypass/credit shelter trust is used.

Annual exclusion gifts avoid gift tax reporting; the lifetime gift and estate exemption is unified, and lifetime taxable gifts reduce the exemption available at death.

Portability allows a surviving spouse to use the deceased spouse's unused exemption, but only if a timely estate tax return is filed.

Step-up in basis: assets included in the decedent's estate generally receive a new basis, making low-basis assets good candidates to hold until death.

Intestacy: dying without a valid will distributes assets by state statute, ignoring the decedent's wishes and often creating guardianship and liquidity problems.

Trust roles: grantor creates, trustee holds legal title and manages, beneficiary holds equitable interest; revocable trusts avoid probate but not estate tax, irrevocable trusts remove assets from the estate.

Beneficiary designations override the will for retirement accounts and life insurance; failure to update them is a leading cause of unintended transfers.

Liquidity needs at death: final expenses, estate taxes, and debts must be funded; life insurance or a sinking fund avoids forced asset sales.

Integration test: recommendations across domains must be mutually consistent - e.g., a tax-driven Roth conversion must not breach the emergency reserve or the retirement funding target.

Financial plan components: goals and assumptions, net worth statement, cash flow statement, risk management review, investment policy statement, retirement projection, tax and estate summaries, and an implementation schedule.

Sensitivity analysis: rerun the projection under lower returns, higher inflation, and longer life expectancy; a plan that fails under modest stress needs contingency provisions.

Monte Carlo simulation reports probability of success; a common planning threshold is 75–90%, with the required level rising for clients with less spending flexibility.

Assumptions must be documented and reviewed annually: inflation, return, longevity, tax rates, and spending. Unstated assumptions are the most common source of plan failure.

Client communication: use plain language, confirm understanding with teach-back, present options rather than a single mandate, and document the client's decisions and rationale.

Behavioral biases to manage: loss aversion, recency bias, anchoring, overconfidence, and herding; framing and pre-commitment rules reduce their impact.

Monitoring triggers: job change, marriage or divorce, birth, death, inheritance, major health event, and market moves beyond rebalancing thresholds warrant a plan review.

Engagement documentation: scope, fees, conflicts, client responsibilities, and review frequency should be in the engagement letter and signed by the client.

Fiduciary duty: act in the client's best interest, disclose conflicts in writing, and place client interests ahead of the planner's compensation.

Six-step planning process: establish relationship, gather data and goals, analyze, develop recommendations, implement, monitor.

Suitability standard permits recommendations consistent with the client profile; fiduciary standard requires the recommendation be in the client's best interest.

Material conflicts must be disclosed in writing at or before engagement; disclosure does not cure a conflict that biases the advice.

Compensation models - fee-only, fee-based, commission, hourly, AUM - create different conflicts and must be documented in the engagement letter.

Competence limit: refer out or decline work outside the planner's expertise; never imply credentials not held.

Confidentiality: share client information only with consent, as required by law, or to defend a claim; maintain data security safeguards.

Scope of engagement must be written: covered topics, exclusions, deliverables, timeline, and fees.

Record retention commonly 5–7 years depending on regulator; continuing education maintains competence and defensibility.

Net cash flow = total income − total outflows (fixed, variable, debt service, savings); a positive figure is the surplus for goal funding.

Emergency reserve: 3–6 months of essential expenses; 6–12 months for single-income, commission, or unstable-employment households.

Savings rate = savings / gross income; tracking it is a stronger predictor of goal attainment than the absolute budget.

After-tax cost of debt = interest rate × (1 − marginal tax rate), used for deductible debt such as mortgage or student loan interest.

Debt avalanche pays highest-rate debt first, minimizing total interest; debt snowball pays smallest balance first, maximizing behavioral momentum.

Credit utilization = revolving balances / total revolving limits; below 30% (ideally below 10%) supports credit scores.

Debt-to-income ratio = monthly debt payments / gross monthly income; qualified mortgage lenders commonly cap at 36–43%.

Amortization payment = P × r / (1 − (1 + r)^−n), with r the monthly rate and n the number of payments; extra principal shortens term nonlinearly.

Budget methods - zero-based, envelope, 50/30/20 - differ in control level; match the method to the client's behavioral profile.

Risk treatment: avoid, reduce, retain, transfer (insurance), share; retain only affordable, low-frequency losses.

Insurable interest must exist at inception; presumed for self, spouse, dependents, and demonstrated for business relationships.

Human life value = present value of future earnings net of self-maintenance; needs analysis = income replacement + debts + education + final expenses − existing resources.

Term life is pure death benefit; permanent policies add cash value with higher cost and surrender-charge periods.

Disability: own-occupation is the strongest definition, any-occupation the weakest; elimination period, benefit period, and residual benefits matter as much as premium.

Long-term care triggers: inability to perform 2 of 6 ADLs or cognitive impairment; inflation riders materially raise cost and value.

Homeowners coverages: A dwelling, B other structures, C personal property, D loss of use, E liability, F medical payments; replacement cost vs actual cash value changes payout.

Umbrella liability sits above auto and homeowners limits and typically requires underlying limits of 250k/500k.

Coinsurance payout = (carried / required) × loss, capped at the policy limit; underinsurance reduces recovery proportionally.

Expected portfolio return = Σ (weight × expected return); portfolio variance depends on weights, individual variances, and pairwise covariances.

Correlation ranges from −1 to +1; lower correlation yields greater diversification benefit at a given expected return.

Risk tolerance has ability (capacity, horizon, liquidity) and willingness (psychology) components; the plan must satisfy the lower of the two.

Sharpe ratio = (portfolio return − risk-free rate) / standard deviation, measuring excess return per unit of total risk.

CAPM expected return = risk-free rate + beta × (market return − risk-free rate); beta measures sensitivity to market movements.

Asset location: tax-inefficient assets (taxable bonds, REITs, active funds) in tax-deferred accounts; tax-efficient assets (broad index equity, munis) in taxable accounts.

Rebalancing triggers: threshold (e.g., ±5% or ±20% of target) or calendar (annual/quarterly); both control drift.

Dollar-cost averaging reduces timing risk but not expected return; lump-sum investing has higher expected terminal wealth in rising markets.

Time horizon governs equity weight: longer horizons and stable cash flow support more equity; near-term spending needs belong in low-volatility assets.

Defined benefit pays a formula benefit (years of service × multiplier × final average pay); the employer bears investment risk.

Defined contribution pays whatever the balance supports; the employee bears investment and longevity risk, and contributions are capped annually.

Replacement ratio target commonly 70–80% of pre-retirement gross income, adjusted for lower work expenses and changed tax and savings patterns.

Capital needs: required lump sum = annual shortfall / real return, or the present value of an inflation-adjusted annuity over expected retirement duration.

Social Security: full retirement age is 67 for those born 1960 or later; claiming at 62 cuts benefits up to 30%, delaying to 70 adds 8% per year beyond FRA.

RMDs begin at 73 for those born 1951–1959 and 75 for those born 1960 or later; the first RMD may be delayed to April 1 of the following year.

Sequence-of-returns risk: withdrawals during an early decline permanently impair the portfolio; mitigate with a cash bucket, flexible spending, and guardrails.

The 4% withdrawal rule is a heuristic, not a guarantee; lower rates or dynamic spending are safer for long horizons and high valuations.

Pension lump sum vs annuity: compare the implied payout rate to annuity quotes and weigh longevity, survivor benefits, and plan sponsor credit risk.

Marginal rate applies to the next dollar; effective rate = total tax / total income; planning decisions should use the marginal rate.

Taxable income = gross income − above-the-line adjustments − standard or itemized deduction − QBI deduction; credits then reduce tax dollar-for-dollar.

Short-term gains (held ≤1 year) are taxed at ordinary rates; long-term gains get 0/15/20% rates, plus the 3.8% NIIT above the MAGI threshold.

Tax-loss harvesting: losses offset gains, then up to $3,000 of ordinary income per year, with carryforward; the wash-sale rule disallows the loss if a substantially identical security is bought within 30 days before or after.

Bracket management: accelerating income into low-bracket years (e.g., Roth conversions in early retirement) can reduce lifetime tax.

Roth vs traditional: traditional deducts now and is taxed on withdrawal; Roth is after-tax with tax-free qualified withdrawals; the choice hinges on current vs future marginal rates.

Basis step-up at death: heirs receive basis equal to fair market value at date of death, eliminating pre-death appreciation for most assets.

Qualified charitable distributions from IRAs (from age 70½) satisfy RMDs and are excluded from income; donor-advised funds front-load deductions.

Estimated tax safe harbors: pay 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeds $150,000).

Gross estate includes assets owned at death, life insurance where the insured held incidents of ownership, and certain transfers within three years of death.

Unlimited marital deduction defers estate tax between spouses; a bypass/credit shelter trust keeps assets out of the survivor's estate.

Annual exclusion gifts avoid gift tax reporting; the lifetime gift and estate exemption is unified, so lifetime taxable gifts reduce the exemption at death.

Portability lets a surviving spouse use the deceased spouse's unused exemption, but only if a timely estate tax return is filed.

Step-up in basis: assets included in the decedent's estate generally get a new basis, making low-basis assets good candidates to hold until death.

Intestacy: dying without a valid will distributes assets by state statute, ignoring wishes and often creating guardianship and liquidity problems.

Trust roles: grantor creates, trustee holds legal title and manages, beneficiary holds equitable interest; revocable trusts avoid probate but not estate tax, irrevocable trusts remove assets from the estate.

Beneficiary designations override the will for retirement accounts and life insurance; stale designations cause unintended transfers.

Death liquidity needs: final expenses, estate taxes, and debts must be funded; life insurance or a sinking fund avoids forced asset sales.

Integration test: recommendations across domains must be mutually consistent - a tax-driven Roth conversion must not breach the emergency reserve or retirement funding target.

Plan components: goals and assumptions, net worth and cash flow statements, risk review, investment policy statement, retirement projection, tax and estate summaries, implementation schedule.

Sensitivity analysis reruns the projection under lower returns, higher inflation, and longer life expectancy; a plan failing modest stress needs contingency provisions.

Monte Carlo simulation reports probability of success; a common threshold is 75–90%, higher for clients with less spending flexibility.

Assumptions must be documented and reviewed annually: inflation, return, longevity, tax rates, spending. Unstated assumptions are the most common cause of plan failure.

Communication: plain language, teach-back to confirm understanding, options rather than mandates, and documented client decisions and rationale.

Behavioral biases to manage: loss aversion, recency, anchoring, overconfidence, herding; framing and pre-commitment rules reduce impact.

Review triggers: job change, marriage or divorce, birth, death, inheritance, major health event, and market moves beyond rebalancing thresholds.

Engagement documentation: scope, fees, conflicts, client responsibilities, and review frequency in a signed engagement letter.