FPSB Investment Planning Specialist flashcards

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

Real Return Formula

Exact real return = (1 + nominal return) / (1 + inflation rate) − 1. The additive approximation (nominal minus inflation) is acceptable only when inflation is low, typically under about five percent.

Future Value of Annuity

FV = PMT × [(1 + r)^n − 1] / r for end-of-period deposits. For beginning-of-period deposits, multiply the result by (1 + r) because every payment compounds one extra period.

Risk Capacity versus Attitude

Risk capacity is the objective ability to absorb loss, driven by balance sheet, income stability, and horizon. Risk attitude is the subjective willingness. The lower of the two governs the plan.

Human Capital

The present value of a person's future earned income, treated as a bond-like asset. It declines with age, so younger clients can hold more equity in their financial portfolio.

Emergency Reserve Sizing

Hold three to six months of essential expenses for stable dual incomes; six to twelve months for single earners, commission-based income, or self-employment. Keep funds liquid and low volatility.

After-Tax Return

Return retained after tax. For interest income, multiply pre-tax return by (1 − marginal rate). For capital gains, deferral extends compounding, so tax drag depends on holding period as well as rate.

Savings Rate for a Goal

Annual deposit needed = target amount × r / [(1 + r)^n − 1]. Solve for the payment, then adjust for beginning-of-period deposits or for contributions already in progress.

Planning Process Cycle

Establish the relationship, gather data and goals, analyze, develop recommendations, implement, then monitor and review. The cycle repeats as circumstances change, and each stage requires documentation.

Portfolio Expected Return

The weighted average of asset expected returns: sum of weight times expected return. Unlike variance, expected return is linear in weights, so it needs no covariance terms.

Diversification and Correlation

Risk reduction depends on correlation, not the number of holdings. Portfolio variance includes covariance terms, so benefits are largest when correlation is low or negative. Correlation of one gives none.

Capital Asset Pricing Model

E(Ri) = Rf + beta × (E(Rm) − Rf). Only systematic risk is priced because unsystematic risk can be diversified away and earns no expected premium in equilibrium.

Sharpe Ratio

(Portfolio return − risk-free rate) / portfolio standard deviation. It measures excess return per unit of total risk, so it suits portfolios that represent the investor's entire holdings.

Treynor Ratio

(Portfolio return − risk-free rate) / portfolio beta. It measures excess return per unit of systematic risk, so it suits one sleeve of a larger already-diversified total portfolio.

Bond Duration

A weighted average time to cash flows that approximates price sensitivity: percent price change ≈ −duration × change in yield. Longer duration and lower coupons mean greater interest-rate risk.

Rebalancing Bands

Pre-set thresholds that trigger a return to target weights, commonly plus or minus five percentage points absolute or twenty percent relative. Bands avoid trading on every small drift.

Strategic versus Tactical Allocation

Strategic allocation sets long-run target weights from goals, horizon, and risk capacity. Tactical allocation makes deliberate short-term deviations from those targets and must be governed by written limits.

Time-Weighted Return

A return that removes the effect of external cash-flow timing, isolating manager performance. Money-weighted return (IRR) instead reflects the investor's actual experience when the client controls contributions.

Insurable Risk Conditions

The loss must be measurable and accidental, exposure units numerous and similar, and losses not catastrophic to the pool at once. Speculative and highly correlated risks are generally uninsurable.

Retention versus Transfer

Retain frequent, low-severity losses and fund them from reserves. Transfer low-frequency, high-severity losses to insurers. Deductibles are a deliberate retention layer that lowers premium.

Human Life Value Method

An insurance need calculation that discounts the insured's expected future earnings net of personal consumption to a present value, representing the economic loss survivors would suffer.

Needs Analysis Method

Total obligations such as debt, education, and income replacement, minus existing resources including savings, group coverage, and spouse income. The shortfall is the additional death benefit required.

Term versus Permanent Insurance

Term provides pure death benefit for a set period with no cash value. Permanent coverage combines a death benefit with tax-deferred cash value. Compare cost per unit of death benefit for protection needs.

Own Occupation Definition

A disability policy clause paying benefits when the insured cannot perform their own specific occupation. It is broader and more expensive than any-occupation, which pays only if no suitable work is possible.

Long-Term Care Triggers

Benefits typically begin when the insured cannot perform two of six activities of daily living, or has cognitive impairment. A longer elimination period reduces premium but raises self-funded cost.

Actual Cash Value

Replacement cost minus depreciation. It pays less than replacement cost coverage after a loss, so check which basis the policy uses when sizing property coverage limits.

Umbrella Liability Policy

Excess liability coverage sitting above auto and homeowners limits, plus gaps such as libel or personal injury. It is relatively inexpensive per unit of coverage for high-net-worth clients.

Deferred Annuity Charges

Mortality and expense charges plus administrative fees reduce net return, and surrender charges apply in early years. These costs matter most when the contract is held for a short period.

Fiduciary Duty

A duty of loyalty and care: act in the client's best interest, disclose or avoid conflicts, and apply competence and diligence. It exceeds a mere suitability standard.

Client Confidentiality

Client information may be disclosed only with consent, when legally required, or to prevent a crime. The duty continues after the engagement ends and covers former clients.

Know Your Client

Gather goals, time horizon, risk tolerance, financial position, tax situation, and constraints before recommending. Recommending without this data breaches the duty of care.

Conflict of Interest Disclosure

Material conflicts such as commissions, referral fees, and proprietary product preferences must be disclosed in writing and managed in the client's favor, not merely acknowledged.

Suitability versus Best Interest

Suitability asks whether a recommendation fits the stated objective. Best interest is higher: it requires considering reasonably available alternatives and the cost of the recommendation.