Financial Planning Skills Certification Grade 1 flashcards

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

Fiduciary duty

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

Suitability standard

A lower standard requiring only that a recommendation be appropriate for the client's objectives and profile; it permits certain conflicts that fiduciary duty restricts.

Informed consent

The client's agreement to a recommendation after receiving clear disclosure of scope, compensation, conflicts, risks, and reasonable alternatives in writing.

Financial planning process

A cyclical six-step sequence: establish the relationship, gather data, analyze, develop recommendations, present and implement, then monitor and review periodically.

Risk tolerance vs capacity

Tolerance is the client's emotional willingness to accept volatility; capacity is the financial ability to absorb loss. The plan respects the lower of the two.

SMART goal criteria

A goal test requiring the objective to be specific, measurable, achievable, relevant, and time-bound, with a stated target amount and date.

Real rate of return

The inflation-adjusted return, computed as (1+nominal)/(1+inflation) - 1, used to express future goals in today's purchasing power.

Emergency reserve rule

Hold three to six months of essential expenses in liquid assets, extended to six to twelve months for single-income or variable-income households.

Savings rate

Savings divided by gross income; a common benchmark is 10-20%, raised when projected savings cannot fund stated goals by their target dates.

Debt avalanche method

Repaying debts in order of highest interest rate first while paying minimums elsewhere; it minimizes total interest paid over the repayment period.

Liquidity ratio

Liquid assets divided by monthly expenses; below three months signals vulnerability, while above six months may indicate excess idle cash.

Zero-based budget

A budgeting method assigning every unit of income to a named category, including savings, so that income minus planned outflows equals zero.

Insurable risk conditions

Loss must be accidental, measurable, and spread across many independent exposure units, with no single event able to bankrupt the insurer.

Human life value method

A life insurance need calculation that capitalizes the insured's expected future earnings, net of taxes and self-maintenance, into a present lump sum.

DIME needs method

A life insurance sizing approach adding Debt, Income replacement, Mortgage payoff, and Education costs to estimate the required death benefit.

Own-occupation disability

A disability policy definition paying benefits when the insured cannot perform the duties of their own specific occupation, regardless of other work availability.

Portfolio expected return

The weighted average of each asset's expected return using portfolio weights; portfolio risk also depends on covariance between assets.

Sharpe ratio

Excess return over the risk-free rate divided by standard deviation; it measures return earned per unit of total portfolio risk.

Efficient frontier

The set of portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient given available assets.

Rebalancing threshold rule

Restoring target asset weights when an allocation drifts beyond a set band, such as five percentage points, rather than on a fixed calendar.

Retirement replacement ratio

Target retirement income as a percentage of pre-retirement gross income, commonly 70-80%, adjusted for reduced work costs and higher health spending.

Sequence-of-returns risk

The danger that poor investment returns early in retirement, combined with withdrawals, permanently reduces portfolio value more than later losses would.

Defined benefit plan

An employer pension paying a formula-based lifetime benefit, typically using salary and years of service, with investment risk borne by the sponsor.

Four percent withdrawal rule

A planning heuristic in which an initial 4% portfolio withdrawal, adjusted annually for inflation, historically sustained a thirty-year retirement.

Marginal tax rate

The rate applied to the next unit of income; planning decisions such as deductions and Roth conversions should be evaluated at this rate.

Tax-loss harvesting

Realizing losses to offset realized capital gains, plus a limited amount of ordinary income annually, with unused losses carried forward.

Asset location

Placing tax-inefficient assets such as taxable bonds in tax-deferred accounts and tax-efficient equity index funds in taxable accounts.

Roth versus traditional

Traditional accounts give deductible contributions and taxable withdrawals; Roth accounts use after-tax contributions and allow tax-free qualified withdrawals.

Intestacy

Dying without a valid will, causing assets to pass under statutory default rules rather than according to the decedent's stated wishes.

Probate

The court-supervised process that validates a will, settles claims, and transfers title to heirs; revocable trusts are often used to avoid it.

Marital deduction

An estate and gift tax deduction for transfers to a surviving spouse, unlimited if the spouse is a citizen, deferring tax until the survivor's death.

Step-up in basis

At death, appreciated assets receive a basis equal to fair market value, eliminating capital gains accrued during the decedent's lifetime.

Goal funding ratio

The present value of resources allocated to a goal divided by the present value of the goal; below one indicates a shortfall requiring adjustment.

Plan monitoring triggers

Events such as marriage, job change, illness, tax law changes, or a goal date within three years that require reviewing and updating the plan.