Financial Planning Skills Certification Grade 1 cheat sheet

Fiduciary duty requires placing the client's interest above the planner's own; suitability alone is a lower standard that permits conflicts of interest.

The planning process is cyclical: establish relationship, gather data, analyze, develop recommendations, present and implement, monitor and review.

Informed consent requires disclosing compensation method (fee-only, commission, fee-plus-commission), conflicts, and scope of engagement in writing.

Material conflicts of interest must be disclosed before engagement; disclosure does not cure a conflict that biases the recommendation.

Client confidentiality is limited by legal compulsion, client authorization, and the need to coordinate with third-party professionals.

Competence rule: a planner must refer out matters beyond their expertise rather than deliver advice outside their scope.

Documentation standard: the file should let a third party reconstruct the client's goals, data, assumptions, alternatives considered, and rationale.

Terminology: 'financial planner' is generally unregulated as a title; certification marks are owned by the issuing body and use is licensed.

Quantitative data: income, expenses, assets, liabilities, insurance policies, tax returns, pension statements; qualitative data: goals, risk tolerance, health, family obligations.

Risk tolerance (attitude) is distinct from risk capacity (ability to absorb loss); the plan must respect the lower of the two.

SMART goal test: specific, measurable, achievable, relevant, time-bound; each goal needs a target amount, date, and priority ranking.

Time horizon drives the discount rate and asset mix: short (<3 years), medium (3-10 years), long (>10 years).

Required saving formula: PMT = (FV - PV(1+r)^n) x r / ((1+r)^n - 1), with r per period and n the number of periods.

Inflation adjustment: real rate = (1+nominal)/(1+inflation) - 1; use the real rate to express goals in today's money.

Emergency reserve target is typically 3-6 months of essential expenses, raised to 6-12 months for single-income or variable-income households.

Data quality check: reconcile stated expenses against bank and card records; understated spending is the most common planning error.

Net cash flow = total income - total outflows (living expenses, debt service, insurance premiums, taxes, savings).

Savings rate = savings / gross income; a common benchmark is 10-20% of gross income, higher when goals are underfunded.

Debt ratio = total debt service / gross income; housing cost ratio = housing payment / gross income, commonly capped near 28-36%.

Liquidity ratio = liquid assets / monthly expenses; below 3 signals vulnerability, above 6 suggests idle cash.

Debt avalanche (highest interest rate first) minimizes total interest; debt snowball (smallest balance first) maximizes behavioral adherence.

Budget methods: line-item (zero-based), 50/30/20 (needs/wants/savings), envelope, and pay-yourself-first; choose by client behavior, not theory.

Cash flow statement classifies outflows as fixed vs variable and discretionary vs non-discretionary; cuts target discretionary first.

Windfalls and bonuses should be allocated by priority: high-interest debt, emergency reserve top-up, then goal funding.

Risk treatment options: avoidance, reduction, retention, transfer (insurance), and sharing; retention is appropriate only for low-severity, high-frequency losses.

Insurable risk requires a large number of independent exposure units, accidental and measurable loss, and no catastrophic concentration.

Life insurance need methods: human life value (capitalized earnings), needs analysis (DIME: debt, income, mortgage, education), and capital retention.

Term insurance buys the most death benefit per premium dollar; permanent coverage bundles insurance with cash value and is justified by estate liquidity or lifelong dependents.

Whole life elements: face amount, cash value, policy loan, surrender charge, dividend (non-guaranteed), and paid-up additions.

Health insurance cost sharing: deductible, coinsurance, copay, out-of-pocket maximum; the out-of-pocket maximum caps annual exposure.

Disability definitions matter: 'own occupation' vs 'any occupation', elimination period, benefit period, and residual/partial benefits.

Property-liability basics: indemnity principle, actual cash value vs replacement cost, coinsurance clause, deductible, and liability limits above net worth.

Expected portfolio return = sum of (asset weight x expected asset return); portfolio risk depends on variance and covariance, not on the weighted average of risks.

Diversification benefit comes from low or negative correlation; adding assets with correlation below +1 reduces portfolio standard deviation.

Asset allocation explains the majority of return variability over time; security selection and timing explain less.

Risk measures: standard deviation (total risk), beta (systematic risk), Sharpe ratio = (Rp - Rf)/SD, alpha = excess return vs benchmark-adjusted expectation.

Modern portfolio theory: the efficient frontier plots portfolios with maximum expected return for each risk level; the optimal portfolio depends on the investor's utility.

Rebalancing to target weights controls drift; threshold (e.g., +/-5%) and calendar rules are the two common approaches.

Cost drag: expense ratio, sales load, trading cost, and tax all reduce net return; a 1% annual fee reduces a 30-year accumulation materially.

Behavioral biases affecting allocation: loss aversion, recency, overconfidence, anchoring, and herd behavior.

Replacement ratio: target retirement income is commonly 70-80% of pre-retirement gross income, adjusted for lower work expenses and higher health costs.

Accumulation formula: FV = PV(1+r)^n + PMT x ((1+r)^n - 1)/r; solve for PMT to derive required annual saving.

Defined benefit (DB) pays a formula-based lifetime benefit and shifts investment risk to the plan sponsor; defined contribution (DC) shifts risk to the participant.

Annuity accumulation vs payout: immediate annuity starts payments now; deferred annuity accumulates; payout options include life-only, life with period certain, and joint-and-survivor.

Inflation erodes purchasing power: at 3% inflation, money loses about half its value in roughly 24 years (rule of 72: 72/3 = 24).

Withdrawal sustainability: a 4% initial withdrawal rate, inflation-adjusted, historically sustained 30-year retirements; lower rates are prudent for longer horizons or high fees.

Sequence-of-returns risk: early retirement losses hurt more than later losses because withdrawals lock in losses; mitigate with a cash bucket or flexible spending.

Social security and public pension claiming: delaying claiming generally raises the monthly benefit; spousal and survivor benefits interact with the claiming decision.

Marginal tax rate applies to the next unit of income; average (effective) rate = total tax / total income; decisions should be evaluated at the marginal rate.

Taxable income = gross income - above-the-line adjustments - standard or itemized deductions - qualified business income deduction.

Capital gains: short-term gains taxed at ordinary rates; long-term gains taxed at preferential rates, with brackets and thresholds that differ by filing status.

Tax-loss harvesting offsets realized gains and up to a limited amount of ordinary income annually; excess losses carry forward.

Tax-advantaged accounts: traditional (deductible contributions, taxable withdrawals) vs Roth (after-tax contributions, tax-free qualified withdrawals).

Asset location: place tax-inefficient assets (taxable bonds, REITs) in tax-deferred accounts and tax-efficient assets (broad index funds) in taxable accounts.

Tax deferral value: postponing tax lets the pre-tax amount compound; the benefit grows with the deferral period and the difference between contribution and withdrawal rates.

Estate and gift tax interaction: lifetime exemption applies to cumulative taxable gifts and estates; annual exclusion gifts do not consume the lifetime exemption.

Intestacy: dying without a valid will means statutory distribution; a will does not control assets passing by beneficiary designation, joint tenancy, or trust.

Core documents: will, revocable living trust, durable power of attorney, health care directive, and beneficiary designations.

Probate is the court-supervised process to validate a will and transfer title; revocable trusts are used to avoid probate and preserve privacy.

Gross estate includes all assets owned at death, certain lifetime transfers with retained interests, and life insurance proceeds if the decedent held incidents of ownership.

Marital deduction defers estate tax on transfers to a surviving spouse; the portability election lets the survivor use the deceased spouse's unused exemption.

Irrevocable life insurance trust (ILIT) removes policy proceeds from the taxable estate if the insured gives up incidents of ownership and the look-back period passes.

Gifting strategy: annual exclusion gifts, tuition and medical payments made directly to the institution (unlimited, outside the annual exclusion), and charitable remainder or lead trusts.

Step-up in basis at death eliminates capital gains on appreciated assets; lifetime gifts carry over the donor's basis, a key trade-off in transfer planning.

Integration test: the plan must reconcile cash flow, insurance, investment, tax, retirement, and estate recommendations; a change in one domain must be traced through the others.

Order of operations: protect (emergency fund, insurance), then capture employer match and eliminate high-interest debt, then fund goals by priority and horizon.

Present alternatives with quantified trade-offs (goal funding ratio, probability of success, tax cost, liquidity) rather than a single recommendation.

Sensitivity analysis: test the plan under lower return, higher inflation, earlier retirement, and longevity to age 95+; report the effect on goal funding.

Monitoring triggers: change in marital status, job or income, health, tax law, market drawdown beyond a threshold, or goal date within 3 years.

Conflict resolution: when goals compete for limited cash flow, rank by non-negotiable obligations, then time-critical goals, then discretionary goals.

Scope discipline: identify issues outside the planner's competence (legal drafting, complex tax) and coordinate with the appropriate professional.

Plan documentation: assumptions page, client profile, net worth and cash flow statements, recommendations with action items, owners, and review dates.