EFP flashcards

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

Fiduciary Duty

A legal and ethical obligation to act in the client's best interest, place client interests ahead of the planner's own compensation, and disclose all material conflicts in writing.

Six-Step Planning Process

Establish the relationship, gather client data and goals, analyze the current situation, develop recommendations, implement the plan, and monitor progress over time.

Suitability Standard

A requirement that a recommendation be consistent with the client's financial situation, objectives, and risk tolerance; it is less stringent than the fiduciary best-interest standard.

Material Conflict Disclosure

Written notice of any arrangement, compensation, or relationship that could bias advice; disclosure is required but does not by itself legitimize a conflicted recommendation.

Net Cash Flow

Total income minus all outflows, including fixed expenses, variable expenses, debt service, and savings. A positive result is the surplus available to fund financial goals.

Emergency Reserve Target

Three to six months of essential expenses, extended to six to twelve months for single-income households, commission earners, or clients with unstable employment.

Debt Avalanche Method

Repayment strategy that directs extra payments to the highest-interest-rate debt first, minimizing total interest paid over the life of the obligations.

Debt Snowball Method

Repayment strategy that pays the smallest balance first, then rolls each freed payment to the next debt, maximizing behavioral momentum rather than interest savings.

Amortization Payment Formula

Monthly payment equals principal times the monthly rate divided by one minus one plus the monthly rate raised to the negative number of payments.

Insurable Interest

A financial or familial relationship that justifies insuring another person's life; presumed for self, spouse, and dependents, and must be demonstrated for business relationships.

Human Life Value Method

Life insurance needs calculation based on the present value of the insured's future earnings net of self-maintenance, representing the economic loss survivors would suffer.

Own-Occupation Disability

The strongest disability definition, paying benefits when the insured cannot perform the material duties of their own occupation, even if able to work elsewhere.

Coinsurance Clause

Property insurance provision paying the ratio of carried coverage to required coverage times the loss, capped at the policy limit; underinsurance reduces recovery proportionally.

Umbrella Liability Policy

Excess liability coverage sitting above auto and homeowners limits, typically requiring underlying limits of 250,000 and 500,000 dollars, protecting against catastrophic judgments.

Portfolio Expected Return

The weighted average of each asset's expected return using portfolio weights; diversification lowers risk through covariance but does not change this weighted expected return.

Sharpe Ratio

Portfolio return minus the risk-free rate, divided by the portfolio standard deviation; it measures excess return earned per unit of total risk taken.

Capital Asset Pricing Model

Expected return equals the risk-free rate plus beta times the market risk premium, where beta measures the asset's sensitivity to market movements.

Asset Location

Placing tax-inefficient assets such as taxable bonds and REITs in tax-deferred accounts, and tax-efficient assets such as broad index equity in taxable accounts.

Rebalancing Threshold Rule

A rule that triggers trades when an asset's weight drifts from target by a set amount, commonly five percentage points or twenty percent of the target weight.

Defined Benefit Pension

A retirement plan paying a formula-based benefit, often years of service times a multiplier times final average pay, with the employer bearing investment risk.

Replacement Ratio

The percentage of pre-retirement gross income needed in retirement, commonly targeted at seventy to eighty percent after adjusting for lower work expenses and savings.

Sequence-of-Returns Risk

The danger that withdrawals during an early market decline permanently impair a retirement portfolio, mitigated by cash buckets, flexible spending, and guardrails.

Required Minimum Distributions

Mandatory annual withdrawals from tax-deferred retirement accounts beginning at age seventy-three for those born 1951 to 1959, and age seventy-five for those born later.

Social Security Delayed Claiming

Claiming after full retirement age increases the benefit by eight percent per year of delay up to age seventy; claiming at sixty-two reduces it by up to thirty percent.

Marginal Tax Rate

The rate applied to the next dollar of income; financial planning decisions such as Roth conversions or deduction timing should be evaluated at this rate.

Wash-Sale Rule

A rule disallowing a realized loss if a substantially identical security is purchased within thirty days before or after the sale, including purchases in retirement accounts.

Basis Step-Up at Death

Heirs receive a cost basis equal to fair market value at the date of death, eliminating capital gains tax on appreciation that occurred during the decedent's lifetime.

Qualified Charitable Distribution

A direct transfer from an IRA to a charity, available from age seventy and a half, excluded from income and usable to satisfy required minimum distributions.

Unlimited Marital Deduction

An estate and gift tax deduction allowing unlimited transfers between spouses, deferring tax but potentially enlarging the survivor's taxable estate unless a bypass trust is used.

Portability Election

A surviving spouse's ability to use the deceased spouse's unused estate tax exemption, available only if a timely estate tax return is filed.

Intestacy

Dying without a valid will, causing assets to pass under state statute rather than the decedent's wishes, often creating guardianship and liquidity problems.

Monte Carlo Simulation

A projection method running many randomized return paths to estimate the probability a plan funds all goals; common planning thresholds range from seventy-five to ninety percent.