EFP key terms

A legal obligation to act solely in another party's best interest, placing the client's welfare ahead of the adviser's own compensation or firm incentives. It demands loyalty, disclosure of conflicts, and prudent, documented advice.

A requirement that a recommendation be reasonably appropriate for a client's objectives, risk tolerance, and circumstances, without obligating the adviser to subordinate their own interests as a fiduciary would.

The obligation to gather and document a client's financial situation, goals, time horizon, risk tolerance, and constraints before giving advice, and to update that profile as circumstances change.

The practice of revealing, in writing and in plain terms, any arrangement that could bias advice, such as commissions, revenue sharing, or proprietary product preferences, so the client can judge the advice fairly.

A payment model in which the adviser receives compensation solely from client fees, such as flat fees, hourly charges, or assets-under-management percentages, and accepts no commissions or third-party payments for recommendations.

A snapshot listing everything a person owns (assets) and owes (liabilities) on a given date, with the difference showing net worth. It anchors budgeting, borrowing capacity, and progress tracking.

A record of money coming in and going out over a period, usually monthly, separating income from fixed and variable expenses. It reveals surplus or deficit and where spending adjustments are possible.

Liquid savings set aside to cover unexpected expenses or income loss, typically three to six months of essential outlays, held in accessible low-volatility accounts rather than long-term investments.

Total monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders use it to gauge repayment capacity; lower ratios generally improve approval odds and pricing.

A table showing each loan payment split between interest and principal over the loan's life, with the outstanding balance after each payment. It clarifies how extra payments shorten payoff time.

A repayment strategy that directs extra funds to the highest-interest debt first while making minimum payments elsewhere, minimizing total interest paid over the repayment period.

A repayment strategy that clears the smallest balances first regardless of interest rate, generating quick wins that sustain motivation, though it may cost more interest than prioritizing high rates.

A numerical rating of creditworthiness derived from payment history, amounts owed, credit history length, new credit, and credit mix. It influences loan approval, interest rates, and sometimes insurance pricing.

A client's willingness and emotional capacity to endure investment losses or volatility in pursuit of higher returns, distinct from the financial ability to absorb such losses.

The financial ability to withstand losses without jeopardizing essential goals, driven by income stability, time horizon, liquidity needs, and the size of the portfolio relative to obligations.

The division of a portfolio among asset classes such as equities, bonds, and cash. It is the primary driver of a portfolio's long-run return pattern and volatility.

Spreading investments across assets, sectors, and regions so that any single loss has limited impact on the whole portfolio. It reduces specific risk but not broad market risk.

Market-wide risk that affects nearly all securities, such as interest-rate shifts, recessions, or geopolitical shocks, and cannot be eliminated through diversification alone.

A measure from -1 to +1 of how two investments move relative to each other. Lower or negative correlation between holdings improves diversification benefits for a given level of return.

A sensitivity measure showing how much an investment tends to move when the broad market moves. A beta above one implies greater volatility than the market; below one implies less.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for investment volatility and total risk.

Periodically returning a portfolio to its target asset mix by selling overweight holdings and buying underweight ones, which restores intended risk exposure and enforces a disciplined buy-low, sell-high habit.

A written document setting out a portfolio's objectives, target allocation, permitted investments, and review procedures. It guides decisions during market stress and documents client agreement.

The period over which money is invested before it is needed. Longer horizons generally permit more growth-oriented, volatile allocations because there is time to recover from downturns.

The process by which investment earnings generate their own future earnings, so growth accelerates over time. Starting earlier and reinvesting returns both amplify the effect.

The current worth of a future sum or stream of payments, discounted at an assumed rate. It lets a planner compare goals, lump sums, and payment streams on a common basis.

The general rise in prices over time, which erodes purchasing power. Planners must project returns above inflation so that future goals remain affordable in real terms.

The return on an investment after subtracting inflation, reflecting the actual growth in purchasing power. It is the appropriate figure for projecting long-term goal funding.

The rate applied to the next unit of income, which determines the tax saved by a deduction or the tax owed on an extra unit of earnings. It differs from the average rate.

Total tax paid divided by total income, showing the average burden across all income. It is typically lower than the marginal rate in a progressive system.

An amount subtracted from taxable income before tax is calculated, so its value equals the deduction times the marginal rate. It reduces taxable income rather than the tax bill directly.

A direct reduction of the tax owed rather than of taxable income, making it generally more valuable than a deduction of the same size. Credits may be refundable or non-refundable.

A savings vehicle in which contributions or growth are not taxed until withdrawal, allowing compounding on pre-tax amounts. Withdrawals are typically taxed as ordinary income.

A savings vehicle in which qualified withdrawals escape tax, often because contributions were made with after-tax money. It offers flexibility in retirement since withdrawals do not raise taxable income.

The minimum amount that must be withdrawn annually from certain tax-deferred retirement accounts once the account holder reaches the prescribed age, with penalties for shortfalls.

Retirement income expressed as a percentage of pre-retirement income. It estimates whether a retiree can maintain their standard of living after work stops.

A pension promising a specified retirement income, usually based on salary and years of service, with the employer bearing investment risk and funding obligations.

A retirement account, such as a workplace savings plan, where the balance depends on contributions and investment performance, so the employee bears the investment risk.

Coverage that pays a death benefit only if the insured dies within a set period, providing pure protection at low cost with no cash value accumulation.

Coverage lasting the insured's lifetime that builds cash value through premiums exceeding the cost of protection, and may allow loans or withdrawals against that value.

An estimate of the economic worth of a person's future earnings to dependents, used to size life insurance needs by capitalizing expected income over remaining working years.

A method of sizing insurance by totaling obligations such as debts, income replacement, education, and final expenses, then subtracting existing resources and coverage.

The amount an insured must pay out of pocket before insurance covers a claim. Higher deductibles usually lower premiums in exchange for greater retained risk.

A cost-sharing arrangement in which the insured pays a fixed percentage of covered costs after the deductible, while the insurer pays the remainder up to the policy limit.

The maximum amount an insurer will pay for a covered loss under a policy. Losses above the limit fall on the insured unless additional coverage exists.

The ease and speed with which an asset can be converted to cash without a significant price concession. It matters for emergency reserves and near-term spending needs.

Everything a person owns at death, including property, accounts, and personal effects, reduced by debts and expenses. Its value and structure determine taxes and distribution.

A legal document directing how a person's estate is distributed and naming guardians for minors. It requires probate and does not control assets with beneficiary designations.

A legal arrangement in which a trustee holds and manages assets for beneficiaries according to written terms, potentially bypassing probate and adding control over timing and conditions.

The court-supervised process of validating a will, settling debts, and distributing assets. It can be slow and public, so planners often use trusts and designations to avoid it.

A contract provision naming who receives an account or policy at the owner's death. It usually overrides a will, so outdated forms can defeat an otherwise sound estate plan.

A document authorizing someone to act on another's financial or legal affairs, either immediately or upon incapacity, helping avoid court-appointed control during illness.

The planned transfer of assets during life to reduce eventual estate taxes and achieve personal goals, using available annual exclusions and exemptions while preserving the donor's security.

An integrated document coordinating cash flow, insurance, investments, taxes, retirement, and estate arrangements into one prioritized strategy tied to the client's stated goals.

A short written expression of what money is for in a client's life, used to frame goals and resolve trade-offs when competing priorities or market pressure arise.

The recurring process of comparing actual results with plan assumptions, updating for life changes and market shifts, and adjusting recommendations so the plan stays current and actionable.

The difference between planned and actual spending or income in a period, used to identify overspending categories and to refine future budgeting assumptions.