Korea Associate Financial Planner flashcards

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

Fiduciary duty

A duty to act in the client's best interest, disclose conflicts, and place client interests above the planner's compensation. It is stricter than the suitability standard.

Suitability standard

A requirement that a recommendation fit the client's goals, risk tolerance, and financial situation. It does not require the lowest-cost or best available option.

Know-your-client rule

The requirement to collect and document a client's personal, financial, and risk-tolerance information before making any recommendation, and to base the risk profile on that data.

Rule of 72

A shortcut estimating the years to double a sum: divide 72 by the annual return percentage. At 6%, a sum doubles in roughly 12 years.

Sharpe ratio

Excess return over the risk-free rate divided by the portfolio's standard deviation. It measures return per unit of total risk and allows comparison across portfolios.

Portfolio beta

The weighted average of the betas of the portfolio's holdings. It measures the portfolio's sensitivity to market movements relative to the market index.

Diversification benefit

Risk reduction from combining assets whose returns are less than perfectly correlated. The lower the correlation, the greater the variance reduction for the same expected return.

Real return

Nominal return minus inflation, approximately. It measures the growth of purchasing power and should be used when projecting long-horizon goals such as retirement.

Debt service ratio

Annual debt repayment divided by annual income. Korean lenders commonly cap total DSR at 40% when approving mortgage loans.

Emergency fund target

Three to six months of essential living expenses held in liquid, low-volatility accounts. Six to twelve months suits single-income, variable-income, or self-employed households.

Debt avalanche method

Repaying debts in order of highest interest rate first. It minimizes total interest paid, though it may take longer to eliminate the first balance than the snowball method.

Net worth

Total assets minus total liabilities. Tracking it quarterly separates the effect of new saving from market-driven changes in asset values.

Liquidity ratio

Liquid assets divided by monthly expenses. A ratio below three signals vulnerability to an interruption in income.

Human life value

The present value of the insured's future earnings net of self-maintenance. It is one method for sizing the death benefit needed to replace lost income.

Indemnity principle

Property insurance pays the actual loss up to the sum insured, never a profit. Life insurance is not bound by it because a life is not valued in money.

Coinsurance clause

When the sum insured is below the required amount, the claim is reduced proportionally: claim equals sum insured divided by required sum insured, multiplied by the loss.

Insurable interest

A financial relationship such that the insured benefits from the subject's continued existence or suffers loss from its damage. It must exist for a valid contract.

Replacement ratio

Target retirement income as a percentage of pre-retirement gross income, commonly 60 to 70 percent, adjusted for lower commuting and saving costs in retirement.

Sequence-of-returns risk

The risk that poor investment returns early in retirement permanently reduce the sustainable withdrawal amount, even if later returns recover.

Longevity risk

The risk that a household outlives its assets. Planning should use a horizon beyond average life expectancy, especially for couples.

Sustainable withdrawal rate

The initial percentage of a portfolio withdrawn annually, adjusted for inflation. Four percent is a common benchmark, not a guarantee of success.

Marginal tax rate

The rate applied to the next unit of income within the current bracket. It differs from the effective rate, which is total tax divided by total income.

Tax deduction versus credit

A deduction reduces taxable income and saves tax at the marginal rate. A credit reduces the computed tax directly by the stated amount.

Tax deferral

Postponing tax on income or gains so the untaxed amount compounds. The tax is paid later, so deferral is not exemption.

Ten-year aggregation rule

Gifts made within ten years of each other are summed to determine the gift tax rate. Earlier gifts therefore raise the rate applied to later ones.

Spouse deduction

An inheritance tax deduction for assets actually inherited by the surviving spouse, capped at the spouse's statutory share of the estate.

Reserved portion

The minimum statutory share of an estate guaranteed to certain heirs. Gifts that infringe it can be reclaimed by those heirs.

Qualified acceptance

An heir's acceptance of an inheritance with liability limited to the inherited assets. It protects the heir from the deceased's excess debts.

Risk tolerance assessment

Combining willingness, measured by attitude questions, with ability, measured by horizon, income stability, and liquidity needs. The plan must respect the lower of the two.

Loss aversion

The tendency for losses to feel roughly twice as painful as equivalent gains. Planners counter it by framing decisions in terms of long-term goals.

Engagement letter

A written agreement stating the scope of services, deliverables, fee basis, termination terms, and the planner's qualifications and responsibilities.

Client segmentation

Grouping clients by assets or fee revenue to set service frequency and the service model for each group, documented in the practice's procedures.