Financial Planning Skills Certification Grade 3 key terms

A structured sequence of steps a planner follows with a client, typically establishing the relationship, gathering data, analysing the situation, developing and presenting recommendations, implementing them, and monitoring progress over time.

A written agreement setting out the scope of work, the services to be delivered, fees or compensation method, responsibilities of both parties, and any limitations, signed before advice begins.

The ongoing stage of the planning relationship in which the planner checks whether the plan still fits the client's circumstances, goals and market conditions, and recommends adjustments when needed.

The process of collecting and verifying information about a client's identity, financial position, objectives, risk tolerance, time horizon and constraints so that suitable advice can be given.

A snapshot listing what a client owns (assets) and owes (liabilities) on a given date, with the difference showing net worth; also called a net worth statement or balance sheet.

The difference between total assets and total liabilities at a point in time. It measures accumulated wealth rather than income, and is tracked over time to show financial progress.

A record of money coming in (income) and going out (expenses) over a period such as a month or year, used to show whether the household runs a surplus or a deficit.

A forward-looking plan that allocates expected income to spending, saving and debt repayment categories over a set period, so that household cash flow is directed toward stated goals.

Readily accessible money set aside to cover unexpected expenses or loss of income, usually held in cash or near-cash accounts rather than investments exposed to market risk.

The ease and speed with which an asset can be converted into cash without a significant loss of value. Cash and money market holdings are highly liquid; property is not.

The proportion of income that is not spent but kept for future use, calculated as savings divided by gross or net income over the same period, expressed as a percentage.

The process of translating a client's wishes into specific, measurable, time-bound financial targets, each with an estimated cost and a priority ranking, so progress can be tracked.

The length of time over which an investment is held before the money is needed. It strongly influences how much short-term volatility an investor can reasonably accept.

The structured evaluation of a client's willingness and financial ability to accept investment losses, combining psychological attitude with capacity factors such as income stability and time horizon.

The financial ability to absorb losses without jeopardising essential goals, driven by income stability, wealth, liquidity needs and time horizon rather than by personal attitude toward risk.

The systematic process of identifying exposures to loss, measuring their potential impact, then choosing to avoid, reduce, retain or transfer each risk at an acceptable cost.

A contract in which an insurer accepts a defined risk in exchange for premiums, pooling many similar exposures so that an individual's large uncertain loss becomes a small predictable cost.

The amount a policyholder pays, usually periodically, to an insurer in exchange for coverage. It reflects the insured risk, the sum insured, the deductible and the policy terms.

The amount the policyholder must pay toward a covered loss before the insurer pays anything. A higher deductible usually lowers the premium but raises out-of-pocket cost at claim time.

The maximum amount an insurer will pay under a policy, or the value of the asset insured. Setting it too low leaves a shortfall; setting it too high wastes premium.

The principle that insurance should restore the policyholder to roughly the financial position held before a loss, not produce a profit, which is why payouts are capped at actual loss.

Dividing an investment portfolio among asset classes such as cash, bonds, property and equities, in proportions chosen to balance expected return against acceptable risk.

Spreading money across different assets, sectors and regions so that a loss in one holding has a smaller effect on the whole portfolio. It reduces specific risk, not overall market risk.

Risk that affects the whole market, such as interest rate shifts, inflation or recession, and therefore cannot be removed by holding more securities; also called market risk or undiversifiable risk.

Periodically buying or selling holdings to bring a portfolio back to its target asset allocation after market movements have shifted the weights away from the plan.

Growth earned on both the original principal and on previously accumulated interest, so that the balance accelerates over time and small differences in return matter greatly over long periods.

The general rise in prices over time, which reduces the purchasing power of money. Planners must use real, inflation-adjusted returns when projecting the cost of future goals.

The estimated annual spending a client will require after stopping work, adjusted for inflation and expected lifestyle, used to size the retirement savings target.

A savings arrangement that builds a fund during working years and pays an income in retirement. It may be employer-sponsored or personal, with defined contribution or defined benefit structures.

A pension arrangement where contributions are fixed and the retirement benefit depends on investment performance. The employee bears the investment risk and does not know the final income in advance.

A pension that promises a specified benefit, usually based on salary and years of service, with the employer carrying investment and longevity risk and funding any shortfall.

The risk that a person outlives their savings, so that accumulated assets run out before death. It can be managed through annuities, delayed retirement or conservative withdrawal rates.

A product that converts a lump sum into a guaranteed stream of payments, often for life, transferring longevity and investment risk to the provider in exchange for a price.

The portion of income on which tax is actually calculated after allowable deductions and exemptions are subtracted from gross income, using the rates and bands for the relevant year.

An amount subtracted from gross income before tax is computed, so its value equals the deduction multiplied by the taxpayer's marginal rate rather than the full amount.

A direct reduction of the tax bill itself, rather than of taxable income, so each unit of credit is worth the same to every taxpayer regardless of their marginal rate.

The rate applied to the next unit of income within a progressive system. It differs from the average rate and is the rate used to judge the value of deductions and extra income.

Tax charged on the profit realised when an asset is sold for more than its cost base, often with reliefs for long holding periods or exemptions for certain asset types.

Arranging how a person's assets will be managed and distributed during life and after death, using tools such as wills, trusts, gifts and beneficiary designations to meet stated wishes efficiently.

A legal document stating how a person's assets should be distributed after death and naming guardians or executors. It can be updated while the person remains mentally capable.

A legal arrangement in which a trustee holds and manages assets for the benefit of named beneficiaries according to the trust deed, potentially reducing probate delay and controlling distribution.

A tax levied on the transfer of wealth at death, usually calculated on the estate value above a threshold, with reliefs for spouses, charities and certain business or agricultural assets.

The legal obligation to act in the client's best interests ahead of one's own, requiring loyalty, disclosure of conflicts, and care and skill appropriate to the engagement.

The requirement that a recommendation fits the client's objectives, financial situation, risk tolerance and knowledge, judged against the information gathered during the engagement.

Situations where a planner's own interests, or those of an employer or product provider, could improperly influence advice; they must be identified, disclosed and managed or avoided.