FPWMP key terms

A legal obligation to act solely in the client's best interest, placing the client's interests ahead of the adviser's own. It covers duties of loyalty, care, disclosure of conflicts, and best execution of advice.

A requirement that a recommendation be reasonably fit for a client's objectives, time horizon, risk tolerance, and financial situation. It is a lower bar than fiduciary duty because it permits some adviser-benefiting recommendations when still suitable.

Informing clients in plain language about arrangements, compensation, or relationships that could bias advice, so the client can judge the advice knowing the adviser's incentives. Disclosure alone does not cure a prohibited conflict.

The practice of collecting and documenting a client's goals, finances, obligations, risk tolerance, time horizon, and experience before giving advice. It underpins suitability and fiduciary analysis and must be updated as circumstances change.

A client's emotional and financial willingness to accept investment losses or volatility in pursuit of goals. It combines attitude toward risk with actual capacity to absorb loss without derailing the plan.

The objective ability of a client's finances to withstand losses without threatening essential goals, driven by income stability, liquidity needs, and time horizon. It can differ sharply from the client's stated willingness to take risk.

The period over which money is invested before it is needed for a goal. Longer horizons generally allow more volatility and equity exposure; short horizons favor liquidity and capital preservation.

Dividing a portfolio among asset classes such as equities, bonds, and cash to balance expected return against volatility. The mix, more than individual security selection, drives most of a portfolio's risk and return.

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

A measure from -1 to +1 of how closely two investments move together. Low or negative correlation between holdings improves diversification benefits for a given level of expected return.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for investment volatility. Higher values signal a wider range of likely outcomes and greater short-term uncertainty.

Periodically buying and selling holdings to restore a portfolio to its target asset mix after market moves. It controls drift in risk exposure and enforces a disciplined sell-high, buy-low discipline.

A written document setting out a client's goals, constraints, target allocation, and review procedures. It guides decisions during market stress and documents the agreed basis for advice.

A snapshot listing assets and liabilities at a point in time, with the difference being net worth. It reveals leverage, liquidity, and concentration and is a foundation of the planning engagement.

A record of income received and expenses paid over a period, showing whether the household runs a surplus or deficit. It drives savings capacity, debt payoff plans, and goal funding.

Liquid savings set aside to cover unexpected expenses or income loss, typically three to six months of essential spending. It prevents forced selling of investments or new high-cost debt during shocks.

Total monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders use it to judge repayment capacity, and planners use it to flag over-indebtedness.

The schedule by which a loan is repaid through level payments split between interest and principal. Early payments are mostly interest, so prepayment saves more the earlier it occurs.

The value of the best alternative forgone when a resource is committed to one use. In planning it frames trade-offs such as paying down debt versus investing the same money.

Growth earned on both the original principal and previously accumulated interest, producing exponential rather than linear growth. Time and rate both magnify the effect, which underpins retirement and education funding.

The value today of a future sum or stream of payments, discounted at an assumed rate. It lets a planner compare goals, pensions, and lump sums on a common basis.

The general rise in prices that erodes purchasing power over time. Plans must use a realistic inflation assumption, and long-dated goals need growth that outpaces it.

Investment return after subtracting inflation, reflecting the actual growth in purchasing power. It is the appropriate rate for projecting whether a portfolio can fund future spending.

The ease and speed with which an asset can be converted to cash without a significant loss in value. It is essential for emergency reserves and near-term goals but often earns lower returns.

Coverage that pays a death benefit if the insured dies during a fixed period, with no cash value. It is the lowest-cost way to protect dependents against a temporary income gap.

Coverage lasting the insured's lifetime that accumulates cash value and may allow policy loans. Higher premiums buy longevity protection and tax-deferred savings, but complexity and cost require scrutiny.

An estimate of the present value of a person's future earnings and services to dependents, used to size a life insurance need. It is one method alongside needs analysis and capital retention approaches.

The amount an insured pays out of pocket before insurance covers a claim. Raising it lowers premiums but increases retained risk, so it should be set against available emergency reserves.

A cost-sharing arrangement in which the insured pays a fixed percentage of covered costs after the deductible. It shifts part of the loss to the insured and affects out-of-pocket planning.

Excess liability coverage that sits above auto and homeowners limits and may fill gaps such as libel or rental claims. It is inexpensive protection against a catastrophic judgment.

An individual retirement account funded with pre-tax or after-tax money; pre-tax contributions grow tax-deferred and withdrawals are taxed as ordinary income. Early withdrawals before age 59½ generally face a 10% penalty plus tax.

A retirement account funded with after-tax dollars whose qualified withdrawals, including growth, are tax-free. It offers tax diversification and no lifetime required distributions for the original owner.

The minimum amount that must be withdrawn annually from most tax-deferred retirement accounts after a specified age, based on account balance and life expectancy tables. Missing it triggers a steep excise penalty.

The danger that poor investment returns early in retirement permanently impair a portfolio, even if average returns later are normal. Withdrawals during downturns lock in losses and deplete capital faster.

The percentage of a portfolio that can be withdrawn annually with low risk of running out of money over a stated period. It depends on asset mix, horizon, fees, and inflation assumptions.

Holding savings across taxable, tax-deferred, and tax-free accounts so withdrawals can be drawn from the most favorable bucket each year. It gives flexibility to manage brackets in retirement.

The rate applied to the last dollar of taxable income, governing the tax effect of an additional dollar earned or deducted. It differs from the average rate and drives most planning decisions.

An income range taxed at a specific rate in a progressive system. Moving into a higher bracket does not raise the rate on all income, only on income within that band.

A fixed amount subtracted from income before tax that most taxpayers claim instead of itemizing. It sets a floor on the benefit of itemized deductions such as mortgage interest or charitable gifts.

Tax on the profit from selling an asset, with preferential long-term rates applying to assets held beyond a minimum holding period. Realized losses can offset gains, so timing of sales matters.

Realizing losses on investments to offset realized gains or ordinary income while maintaining market exposure through a replacement security. Wash-sale rules restrict repurchasing substantially identical securities within 30 days.

The rule that resets an inherited asset's cost basis to its value at the owner's death, erasing prior gains for the heir. It strongly favors holding appreciated assets until death over lifetime gifting.

A tax on the transfer of wealth at death above an exemption threshold, with rates applied to the taxable estate. Portability and spousal transfers can double available exemptions for married couples.

A per-donor, per-recipient amount that can be given each year free of gift tax and without using lifetime exemption. Gifts above it generally require filing a return and consume exemption.

A legal arrangement in which a trustee holds and manages assets for beneficiaries under stated terms. Trusts can control distributions, avoid probate, and address tax or creditor concerns.

A document authorizing another person to act on one's financial or legal affairs, either immediately or on incapacity. A durable version survives incapacity and is central to incapacity planning.

A contract provision naming who receives an account or policy on the owner's death, generally overriding a will. Outdated designations are a frequent cause of unintended transfers.

The court-supervised process of validating a will and distributing assets that pass through it. It is public and slow, so planners use trusts and beneficiary designations to avoid it.

The tendency for losses to feel roughly twice as painful as equivalent gains feel good. It can cause clients to hold losing investments too long or abandon sound plans during downturns.

Over-relying on an initial reference point, such as a purchase price or past high, when judging later decisions. It can keep clients from selling a poor investment or adjusting a stale plan.

Seeking and weighting information that agrees with existing beliefs while discounting contrary evidence. It can make clients overconfident in concentrated holdings and resistant to diversification advice.

Concentrating fully on a client's words and meaning, reflecting back what was heard, and asking clarifying questions. It surfaces unstated goals and builds the trust needed for candid disclosure.

A holistic state of financial health combining control over daily finances, resilience to shocks, and freedom to pursue goals. It extends planning beyond returns to behavior, stress, and life satisfaction.

A written agreement defining the scope of services, fees, responsibilities, and term of the planner's relationship with a client. It manages expectations and reduces disputes about what was promised.

A model in which the adviser is paid solely by the client, through retainers, hourly rates, or asset-based fees, and receives no commissions. It reduces conflicts compared with commission-based models.

Required policies and procedures for identifying clients, monitoring transactions, and reporting suspicious activity. Firms must verify identity and keep records to comply with financial crime rules.

The obligation to safeguard nonpublic personal data and share it only as authorized or required by law. Firms must give privacy notices and maintain safeguards against unauthorized access.