FPSB Investment Planning Specialist key terms

The principle that a sum of money available today is worth more than the same sum received later, because it can be invested to earn a return. It underpins present value, future value, and annuity calculations.

Growth earned on both the original principal and on previously accumulated interest, so the balance accelerates over time. Its frequency of compounding affects the effective annual rate a client actually experiences.

The amount that a future cash flow is worth today after discounting at an appropriate rate. Planners use it to compare goals, liabilities, and investment options on a common basis.

The rate used to convert future cash flows into today's value, reflecting the time value of money plus risk. Choosing it correctly is critical because small changes can substantially shift a computed present value.

The true annual return after accounting for compounding frequency within the year. It lets a candidate compare products quoted with different compounding conventions on a like-for-like basis.

A stated interest rate before adjusting for compounding frequency or inflation. It is often quoted in loan and deposit marketing and can overstate the real benefit to a client.

The return remaining after inflation is removed, showing the change in actual purchasing power. Clients need real returns to judge whether savings will genuinely fund future living costs.

The value of the best alternative forgone when a choice is made. In planning it explains why holding idle cash or over-insuring carries a cost beyond the visible premium or fee.

A summary of a client's inflows and outflows over a period, used to find surplus or deficit. It reveals saving capacity and is the starting point for funding goals and building an emergency reserve.

A snapshot listing assets at value and liabilities at outstanding balance, with the difference being net worth. Tracking it over time shows whether a household's financial position is strengthening or eroding.

Readily accessible money set aside to cover unexpected expenses or income loss without disrupting long-term investments. Its size depends on income stability, dependants, and fixed obligations.

A specific future need expressed with an amount, a target date, and a priority. Well-formed goals can be tested against current savings and expected returns to reveal any funding gap.

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

Spreading money across assets whose returns do not move in lockstep, so losses in one area may be offset elsewhere. It reduces unsystematic risk but cannot remove market-wide risk.

A measure from -1 to +1 of how closely two assets' returns move together. Lower correlation between holdings produces greater diversification benefit for the same level of expected return.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for total volatility. Higher values signal a wider range of possible outcomes around the expected return.

A measure of how much an asset's price tends to move relative to the overall market. A beta above one suggests greater sensitivity to market swings than the benchmark itself.

A framework stating that expected return equals the risk-free rate plus a premium for exposure to market risk, scaled by beta. It links required return to systematic risk rather than total volatility.

Market-wide risk arising from factors such as interest rates, inflation, or recession that affects nearly all securities. Diversification cannot eliminate it, so investors are compensated for bearing it.

Risk specific to a single company or industry, such as a product failure or management scandal. Holding a broad mix of securities can largely remove this risk from a portfolio.

A client's capacity and willingness to accept investment losses in pursuit of higher returns. It combines emotional attitude with financial ability and anchors the suitable asset allocation.

The financial ability to absorb losses without jeopardising essential goals, based on income, time horizon, and obligations. It can differ sharply from a client's emotional willingness to take risk.

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

Periodically adjusting holdings back to target weights after market movements have shifted the mix. It restores the intended risk level and imposes a disciplined buy-low, sell-high behaviour.

The proposition that prices quickly reflect available information, making consistent excess returns from analysis difficult. Its weak, semi-strong, and strong forms differ in what information is assumed to be priced in.

The degree to which an investment's value fluctuates over time. It is often quantified by standard deviation and matters most to clients who may need to sell in the short term.

The danger that an asset cannot be sold quickly at a fair price when cash is needed. It is especially relevant for property, private holdings, and thinly traded securities.

How easily an asset can be converted to cash at close to its market value with minimal loss. Planners balance it against higher expected returns from less liquid investments.

The amount the policyholder pays toward a loss before the insurer covers the remainder. A higher deductible usually lowers the premium but raises the client's retained exposure.

A cost-sharing arrangement in which the insured pays a fixed percentage of covered losses above the deductible. It leaves part of every claim with the client and should be modelled in cash-flow planning.

Shifting the financial consequences of a risk to another party, typically by buying insurance. It is most efficient for low-probability, high-severity events that a household could not absorb alone.

Deliberately accepting a risk and funding any loss yourself rather than insuring it. It suits small, frequent, or predictable losses where premiums would exceed the expected cost.

The risk that death occurs earlier than expected, leaving dependants without adequate income. Life insurance is the standard tool for transferring this risk to an insurer.

The risk of outliving one's savings because retirement lasts longer than planned. Annuities and careful drawdown planning help manage it, particularly where state benefits are modest.

The risk that rising prices erode the purchasing power of savings and fixed income. It hits long-dated goals hardest and argues for growth assets or inflation-linked instruments.

A legal and ethical obligation to act solely in the client's best interest, ahead of the adviser's own. It requires loyalty, care, full disclosure of conflicts, and avoidance of undisclosed gain.

The requirement that advice and recommendations fit a client's objectives, time horizon, risk tolerance, and circumstances. It must be assessed before a product is recommended and documented afterwards.

The process of gathering and updating facts about a client's finances, goals, experience, and risk attitude. Accurate information is the foundation for every later recommendation.

A situation where an adviser's personal or firm interest could compromise objectivity, such as commission-driven product choice. It must be disclosed and managed, not merely avoided in appearance.