Investment Advisor key terms

A legal obligation to act in the client's best interest, placing the client's interests ahead of the adviser's own and disclosing or avoiding conflicts of interest.

A requirement that a recommendation be reasonably fit for a client's objectives, financial situation, and risk tolerance, a lower bar than acting in the client's best interest.

The registration and disclosure document advisers file with regulators, with Part 1 covering business details and Part 2 the plain-language brochure given to clients.

A narrative client-facing document describing an adviser's services, fees, conflicts of interest, disciplinary history, and other information a client needs to evaluate the relationship.

The total market value of client assets an adviser manages on a discretionary or non-discretionary basis, reported on Form ADV and used to set registration thresholds.

Written permission from a client allowing the adviser to buy and sell securities in the account without obtaining approval for each individual transaction.

The requirement to tell clients plainly about arrangements, such as commissions or revenue sharing, that could bias the adviser's recommendations, and to manage them appropriately.

A payment model in which the adviser receives only fees paid directly by the client, such as asset-based or hourly charges, and no commissions or third-party payments.

An arrangement charging a single bundled fee that covers advisory services, brokerage execution, and often custody, rather than separate commissions and advisory charges.

A rule requiring advisers holding client funds or securities to use a qualified custodian, notify clients, and undergo surprise examinations by an independent accountant.

A bank, broker-dealer, or similar regulated institution that holds client assets and delivers account statements directly to the client.

A set of internal controls, customer due diligence, and reporting procedures designed to detect and prevent the use of an advisory business to launder illicit funds.

A structured summary of a client's willingness and ability to bear investment losses, combining psychological tolerance with financial capacity and time horizon.

The degree of volatility and potential loss an investor is emotionally and psychologically willing to accept in pursuit of return.

The objective financial ability of an investor to absorb losses without jeopardizing essential goals, driven by income, assets, liabilities, and time horizon.

The length of time an investor expects to hold assets before needing the money, which strongly influences how much short-term volatility can be tolerated.

The obligation to collect and document information about a client's finances, goals, experience, and risk profile before making recommendations or opening accounts.

A written document setting out a client's objectives, constraints, target asset mix, and rebalancing rules, providing a benchmark for evaluating the portfolio and disciplining decisions.

The division of a portfolio among asset classes such as equities, bonds, and cash, which is the primary driver of long-term return variability.

A long-term target mix of asset classes based on the client's objectives and risk profile, maintained with periodic rebalancing rather than frequent shifts.

Short-term deliberate deviations from the strategic mix, intended to exploit perceived market opportunities or manage near-term risk.

The process of returning a portfolio to its target weights after market movements shift them, typically by selling overweight holdings and buying underweight ones.

Spreading investments across securities, sectors, and asset classes so that any single loss has a limited effect on the total portfolio.

A measure from -1 to +1 of how closely two assets' returns move together; lower correlation between holdings improves the risk reduction from diversification.

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

A measure of a security's sensitivity to movements in the overall market, where a value above one implies greater volatility than the market.

Excess return above the risk-free rate divided by standard deviation, expressing how much return an investor earned per unit of total risk taken.

The portion of a portfolio's return not explained by market exposure, often interpreted as the value added or lost by active management.

Market-wide risk such as interest rate or recession shocks that cannot be eliminated through diversification, also called undiversifiable or market risk.

Company- or industry-specific risk, such as a product failure or lawsuit, that can be largely reduced by holding a diversified portfolio.

The return available on a default-free investment, typically a short-term government security, used as the baseline in return and risk-adjusted performance calculations.

A measure of a bond's price sensitivity to interest rate changes, roughly the percentage price move for a one percentage point change in yield.

A graph plotting yields of similar bonds against their maturities, whose shape signals market expectations about interest rates and growth.

The extra yield a bond offers over a comparable government bond, reflecting the issuer's default risk and market liquidity conditions.

The per-share value of a fund calculated by subtracting liabilities from total assets and dividing by shares outstanding, usually computed once daily.

A pooled fund whose shares trade intraday on an exchange, typically tracking an index and combining diversification with stock-like trading flexibility.

The annual cost of running a fund, expressed as a percentage of average net assets and deducted from returns before they reach investors.

A financial contract whose value derives from an underlying asset, rate, or index, used for hedging, income generation, or leveraged speculation.

Taking an offsetting position, often through derivatives, to reduce exposure to an identified risk such as a rate rise or currency move.

Using borrowed money or derivatives to control a position larger than the capital committed, which magnifies both gains and losses.

A framework stating that expected return equals the risk-free rate plus beta times the market risk premium, used to estimate required returns and cost of capital.

An approach holding that investors can build portfolios maximizing expected return for a given level of risk by combining assets with imperfect correlation.

The set of portfolios offering the highest expected return for each level of risk, forming a curve from which rational investors choose.

The study of how psychological biases, such as overconfidence or loss aversion, cause investors to depart from purely rational decision-making.

The tendency for people to feel the pain of a loss more strongly than the pleasure of an equivalent gain, often leading to overly cautious or stubborn holding behavior.

The constant yearly rate at which an investment would have grown from its starting to ending value over a period, smoothing out yearly fluctuations.

The principle that money available today is worth more than the same amount later because it can be invested and earn a return.

The general rise in prices over time, which erodes purchasing power and reduces the real return on investments.

Investment return after subtracting inflation, showing the actual increase in purchasing power achieved over the period.

The market in which new securities are issued and sold to investors, with proceeds going to the issuer rather than to a previous holder.

The market where already-issued securities trade between investors, providing liquidity and price discovery without raising new capital for the issuer.

The first sale of a company's shares to the public, moving its stock from private ownership into trading on an exchange.

The ease and speed with which an asset can be sold at a fair price, with thin markets and wide spreads indicating lower liquidity.

The gap between the highest price a buyer will pay and the lowest a seller will accept, a transaction cost that widens when trading is thin.