Financial Planning Skills Certification Grade 2 key terms

The structured process of collecting and documenting a client's financial position, goals, time horizon, risk tolerance, and constraints before any advice is given. It underpins suitability and is revisited when circumstances change.

A method of gauging how much investment volatility a client can emotionally and financially withstand, combining questionnaire results with evidence from actual past behaviour during market declines.

The objective, quantifiable ability of a household to absorb investment losses without derailing essential goals. It differs from willingness to take risk and can override it when the two conflict.

A written document setting out objectives, target asset mix, permitted and prohibited investments, rebalancing rules, and review triggers. It anchors decisions to agreed policy rather than to short-term market sentiment.

The obligation to recommend only products and strategies consistent with a client's documented objectives, financial situation, and risk profile. Records of the reasoning behind each recommendation are essential evidence of compliance.

A legal obligation to act in the client's best interest ahead of the adviser's own, encompassing loyalty, care, full disclosure of conflicts, and avoidance of undisclosed personal gain from client transactions.

Situations where an adviser's personal, commercial, or affiliated-party interest could bias advice. They must be identified, disclosed in writing, and managed, for example by rebate transparency or product restrictions.

A client's agreement to a recommended course of action given after receiving clear, complete explanations of costs, risks, alternatives, and consequences. Documented consent protects both parties if outcomes disappoint.

Total household income received in a period minus total outgoings in the same period. A positive figure funds savings and debt reduction; a persistent negative figure signals structural overspending requiring plan adjustment.

A structured record classifying household income and expenditure by source and purpose over a defined period, used to reveal spending patterns, surplus capacity, and irregular or seasonal outlays.

Liquid reserves set aside to cover unexpected expenses or income interruption without borrowing or selling long-term investments. Typically sized at three to six months of essential spending, adjusted for income stability.

The share of gross income consumed by required loan repayments. Lenders use it as an affordability test, and planners use it to judge how much borrowing capacity remains for goals such as a home purchase.

Comparing planned spending with actual spending to identify where and why the household deviated, then adjusting either behaviour or the budget. It converts a static budget into a feedback loop.

Organising advice around specific client objectives, each with a target amount, time horizon, priority ranking, and funding strategy. It links cash flow decisions to measurable outcomes rather than to products.

The period over which money is invested before it is needed. Longer horizons generally permit more growth assets, while short horizons demand capital stability because there is little time to recover from losses.

Dividing a portfolio among asset classes such as equities, bonds, property, and cash. The chosen mix is the dominant driver of long-run return and volatility and should follow from goals and risk capacity.

Spreading exposure across assets, sectors, and regions so that no single adverse event dominates results. It reduces unsystematic risk but cannot remove market-wide systematic risk.

A measure from minus one to plus one of how closely two assets move together. Combining assets with low or negative correlation lowers portfolio volatility for a given level of expected return.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for investment volatility. Higher values indicate a wider range of likely outcomes in any single period.

Periodically returning a portfolio to its target weights by selling overweight holdings and buying underweight ones. It controls drift in risk exposure and imposes a disciplined, rule-based response to market moves.

The danger of holding too much wealth in one security, employer, sector, or property. It magnifies the impact of a single failure and often requires a staged, tax-aware diversification plan.

The risk that an asset cannot be sold quickly at a fair price, or that cash needs force a sale at a discount. It matters most for property, private holdings, and thinly traded securities.

The danger that poor investment returns early in a drawdown phase permanently impair a portfolio, even if long-run average returns are adequate. It is most acute just before and after retirement.

The risk that death occurs earlier than expected, leaving dependants without the income or capital the household plan assumed. Life insurance is the standard tool for transferring this risk.

The risk of illness or injury causing lost income, prolonged care needs, or medical costs. It is addressed through health, disability, and critical illness cover rather than through savings alone.

A life insurance calculation that capitalises the insured's expected future earnings, net of personal consumption and taxes, to estimate the amount dependants would need to replace lost income.

An insurance calculation that totals the capital dependants require for expenses, debts, and goals, then subtracts existing resources and cover to find the shortfall to be insured.

Pure protection cover paying a stated sum if death occurs within a fixed period, with no cash value. It delivers the largest death benefit per unit of premium for temporary needs.

The rule that insurance should restore the insured to the financial position held before a loss, not create profit. It explains why sum insured, limits, and excesses are set as they are.

The insurer's process of assessing an applicant's risk factors, such as health, occupation, and hobbies, to decide whether to accept the risk, at what premium, and with what exclusions.

Cover that replaces a proportion of earned income when illness or injury prevents work. Benefit periods, waiting periods, and the definition of disability determine how much protection is actually delivered.

The shortfall between the projected capital needed to sustain a desired retirement lifestyle and the projected value of existing savings and pension entitlements. It quantifies the additional saving required.

Retirement income expressed as a percentage of pre-retirement income. It is a quick benchmark for adequacy, since spending usually falls modestly but discretionary costs can rise.

The percentage of a portfolio that can be withdrawn annually with a high probability of lasting through retirement under stated return and inflation assumptions. It is a planning estimate, not a guarantee.

The risk that a person outlives their retirement assets because lifespan exceeds planning assumptions. Annuities, delayed pension commencement, and conservative withdrawal rates are common mitigants.

The erosion of purchasing power over time, which reduces what a fixed sum or fixed income stream will buy. It is especially damaging to long retirement periods and to cash-heavy portfolios.

Investment return after deducting inflation, showing the actual growth in purchasing power. Planning in real terms avoids overstating how far a nominal return will stretch over decades.

Tax levied on the profit realised when an asset is sold for more than its cost base, often with reliefs for long holding periods or primary residences. Timing sales across tax years can reduce the liability.

A savings or investment vehicle given preferential tax treatment, such as deductible contributions, tax-free growth, or tax-free withdrawals. Contribution limits and access rules usually apply.

Deliberately timing income, deductions, and asset sales so taxable income stays within lower marginal bands. It can spread gains across years and coordinate with pension withdrawal decisions.

Investment returns that accumulate without being taxed annually, with tax payable only when funds are withdrawn. Deferral boosts compounding but creates a future liability to plan for.

Everything a person owns at death, including assets, entitlements, and interests in trusts, after deducting debts. Its composition determines how much passes under the will and how much tax may apply.

Dying without a valid will, so that statute rather than personal choice decides who receives the estate. Distribution may not match the deceased's wishes and can cause family hardship.

A nomination on a pension, insurance policy, or account stating who receives the proceeds. It can override the will, so it must be reviewed whenever family circumstances change.

A trust created by a will that takes effect on death, holding assets for named beneficiaries under a trustee's control. It can protect vulnerable heirs and control the timing of distributions.

A legal authority allowing a nominated person to act on another's financial or personal affairs, either immediately or only on loss of capacity. It is a core component of incapacity planning.

An agreed schedule and format for ongoing contact, covering review frequency, reporting, preferred channels, and escalation for urgent matters. It keeps advice current and expectations aligned.

A systematic pattern of thinking that distorts financial decisions, such as loss aversion, overconfidence, or anchoring. Recognising it helps advisers design guardrails instead of relying on willpower.

A modelling technique that runs thousands of randomised return paths to estimate the probability of achieving a goal. It communicates uncertainty as a range of outcomes rather than a single projection.

Reconciling recommendations across cash flow, risk, investment, retirement, tax, and estate work so they reinforce rather than contradict each other. Conflicts are resolved against the client's stated priorities.