FPSB Investment Planning Specialist cheat sheet

Time value of money: FV = PV × (1 + r)^n; PV = FV / (1 + r)^n; ordinary annuity PV = PMT × [1 − (1 + r)^−n] / r; annuity due multiplies that result by (1 + r).

Real return ≈ nominal return − inflation (additive form); exact form is (1 + nominal) / (1 + inflation) − 1. Use the exact form when inflation exceeds roughly 5%.

After-tax return = pre-tax return × (1 − marginal tax rate) for interest income; for equity gains, deferral lengthens the compounding base, so tax drag depends on holding period, not only rate.

Risk tolerance has two components: risk capacity (objective, balance-sheet based) and risk attitude (subjective). The binding constraint is the lower of the two.

Emergency reserve target: 3–6 months of essential expenses for stable dual incomes; 6–12 months for single income, variable commission income, or self-employment.

Human capital = present value of future earned income; it is a bond-like asset early in a career and declines toward retirement, shifting the total portfolio toward financial assets.

Savings rate needed for a goal: solve PMT = FV × r / [(1 + r)^n − 1] for annual end-of-year deposits; adjust to beginning-of-period if deposits are made at the start of each year.

The financial planning process is cyclical: establish relationship, gather data and goals, analyze, develop recommendations, implement, monitor and review. Documentation is required at every stage.

Portfolio expected return = Σ (weight × expected return). Portfolio variance is not the weighted average of variances; it includes covariance terms, so diversification reduces risk only when correlation < 1.

Capital Asset Pricing Model: E(Ri) = Rf + βi × (E(Rm) − Rf). Beta measures systematic risk only; unsystematic risk is diversifiable and earns no premium.

Sharpe ratio = (Rp − Rf) / σp; Treynor ratio = (Rp − Rf) / βp. Use Sharpe for fully diversified portfolios, Treynor for a portfolio that is one sleeve of a larger diversified total.

Strategic asset allocation sets long-run target weights from goals, horizon, and risk capacity; tactical allocation makes short-term deviations from those targets and must have pre-set rebalancing bands.

Rebalancing rule of thumb: act when an asset class drifts beyond a band (commonly ±5 percentage points absolute or ±20% relative), or on a calendar schedule, whichever comes first.

Duration approximates bond price sensitivity: % price change ≈ −duration × Δyield; for larger yield moves add the convexity term. Longer duration and lower coupon mean higher interest-rate risk.

Real (inflation-adjusted) return matters for long-horizon goals; nominal returns overstate purchasing power, and a 2% inflation rate halves purchasing power in roughly 36 years at 72/2.

Time-weighted return measures manager performance by removing cash-flow timing; money-weighted return (IRR) measures the investor's actual experience and is the correct measure when the client controls contributions.

Insurable risk requires: large and measurable potential loss, accidental and unintentional cause, a large number of similar exposure units, and no catastrophic correlation across the pool.

Retention vs. transfer: retain frequent small losses (fund them in the emergency reserve); transfer low-frequency, high-severity losses to insurance. Deductibles are a deliberate retention layer.

Life insurance need - human life value method discounts the insured's future earnings and expenses; needs analysis method subtracts existing resources (savings, group coverage, spouse income) from total obligations.

Term insurance is pure death benefit with no cash value; permanent policies combine death benefit with a cash value that grows tax-deferred. Compare on cost per unit of death benefit for pure protection needs.

Disability definition drives claim probability: 'own occupation' is broader than 'any occupation'; check the benefit period, elimination period, and whether the benefit is indexed to inflation.

Long-term care triggers are typically inability to perform 2 of 6 activities of daily living (bathing, dressing, eating, toileting, transferring, continence) or cognitive impairment; longer elimination periods lower premium.

Property and liability: replacement cost vs. actual cash value (replacement cost minus depreciation); an umbrella liability policy sits above auto and homeowners limits and is relatively low cost per unit of coverage.

Annuities: immediate annuities convert a lump sum to income now; deferred annuities accumulate tax-deferred. Mortality and expense charges plus surrender charges reduce net return in early years.

Fiduciary duty comprises duties of loyalty (act in the client's best interest, avoid or disclose conflicts) and care (competence, diligence, suitability of the recommendation to the client's goals).

Client information is confidential; disclosure is permitted only with client consent, when legally required, or when necessary to prevent a crime. Confidentiality survives termination of the engagement.

Know the client before recommending: gather goals, time horizon, risk tolerance, financial position, tax situation, and any constraints. A recommendation made without this data violates the duty of care.

Conflicts of interest must be disclosed in writing and managed, not merely acknowledged. Commission-based compensation, referral fees, and proprietary product preferences are material conflicts.

Suitability versus best interest: meeting the client's stated objective is a floor, not a ceiling; the standard requires considering reasonably available alternatives and the cost of the recommendation.

Do not misrepresent credentials, performance, or the nature of the engagement. Use of a professional designation must reflect the actual scope of the certification and current standing.

Record keeping: document the data gathered, the analysis, the recommendation and its rationale, client decisions, and review dates. Contemporaneous records are the primary evidence of compliance.

When a conflict cannot be managed in the client's favor, decline or terminate the engagement; acting in the client's interest takes precedence over the planner's compensation.