Financial Planning Skills Certification Grade 2 flashcards

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

Fiduciary duty

The obligation to act in the client's best interest with loyalty and care, disclosing conflicts of interest and avoiding recommendations that benefit the planner at the client's expense.

Net worth

Total assets valued at fair market value minus total liabilities at outstanding balance; the core measure of a client's financial position in the statement of financial position.

Emergency fund target

Typically three to six months of essential expenses, extended toward six to twelve months for single-income households, variable income, or self-employment.

Debt service ratio

Total annual debt payments divided by gross annual income; sustained levels above roughly 35 to 40 percent indicate over-leverage and reduced capacity to absorb shocks.

Insurable interest

A financial or legal stake in the continued life or property of the insured, required at policy inception; without it the insurance contract is generally unenforceable.

Co-insurance clause

A property insurance provision that reduces the claim payment when the insured value falls below a required percentage of replacement cost, penalizing under-insurance.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by portfolio standard deviation; it measures excess return earned per unit of total risk taken.

Rebalancing threshold

A pre-set deviation, such as five percent of a holding or twenty percent of its target weight, that triggers a trade back to the strategic allocation.

Defined benefit plan

A pension promising a formula-based benefit, often years of service times a percentage times final or career-average salary, with the employer bearing investment risk.

Replacement ratio

Retirement income target expressed as a percentage of pre-retirement gross income, commonly 60 to 80 percent after adjusting for work-related expenses and taxes.

Marginal tax rate

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

Tax-loss harvesting

Realizing losses to offset gains and a limited amount of ordinary income, with unused losses carried forward and wash-sale rules disallowing repurchase within the window.

Probate

The court-supervised process of validating a will and distributing estate assets; assets with beneficiary designations or held in trust typically bypass it.

Stepped-up basis

A reset of an inherited asset's cost basis to its date-of-death value, which favors holding appreciated assets until death rather than gifting them during life.

Informed consent

The client's understanding and approval of a recommendation, including its risks, costs, and alternatives, obtained before action and documented in the client file.

Suitability standard

A requirement that a recommendation be consistent with the client's objectives, time horizon, risk tolerance, and financial circumstances at the time it is made.

Funding ratio

Assets dedicated to a goal divided by the present value of the goal's cost; a ratio below one indicates a shortfall requiring trade-offs among amount, timing, or savings.

Sensitivity analysis

Re-running a projection under varied assumptions such as lower returns, higher inflation, or longer longevity to identify which recommendations are fragile and which are robust.

Loss aversion

The tendency to feel losses roughly twice as strongly as equivalent gains, which can cause clients to hold losing positions or exit prematurely during downturns.

Mental accounting

Treating money differently depending on its source or intended use even though money is fungible, which can distort saving and spending decisions.

Time-weighted return

A performance measure that removes the effect of client cash flows, isolating the manager's results for comparison against a benchmark.

Money-weighted return

A return measure that reflects the timing and size of the client's own contributions and withdrawals, showing the actual experience of the investor.

Buy-sell agreement

A contract specifying how a business owner's interest is valued and transferred on death, disability, or departure, often funded with life or disability insurance.

Key-person insurance

Coverage owned by a business on an essential individual, with the business as beneficiary, protecting against the financial loss caused by that person's death.

Current ratio

Current assets divided by current liabilities; a low ratio signals short-term liquidity strain and limited ability to meet obligations as they fall due.

Education inflation

The rate at which tuition and related costs rise, often exceeding general inflation, used to project future education funding needs.

Fisher equation

The precise relationship between nominal and real rates: one plus nominal equals one plus real multiplied by one plus inflation; the approximation is nominal minus inflation.

Duration

A measure of a bond's price sensitivity to interest rate changes; longer duration means a larger percentage price move for a given rate change.

Expense ratio

The annual fund cost expressed as a percentage of assets; it compounds against the investor and should be compared on a total-cost basis.

Automatic enrollment

A retirement plan design feature that enrolls eligible employees by default, substantially raising participation; automatic escalation further raises savings rates over time.

Estate liquidity analysis

A comparison of liquid assets with expected taxes, debts, and expenses at death to determine whether illiquid holdings would have to be sold under pressure.

Asset-based fee

Advisory compensation calculated as a percentage of assets under management, which can create an incentive to grow assets rather than reduce debt or spend down efficiently.