RFP Module 5 key terms

A legal obligation to act solely in another party's best interest, placing the client's needs above the adviser's own and requiring loyalty, care, and full disclosure of conflicts.

A requirement that a recommendation fit the client's financial situation, objectives, and risk tolerance; historically a lower bar than fiduciary duty because it does not demand putting the client first.

The process of collecting and documenting a client's financial position, goals, time horizon, and risk tolerance so that recommendations can be justified and periodically reviewed.

A client's willingness and financial capacity to accept investment losses or volatility in pursuit of objectives; willingness and capacity must both be assessed and can diverge.

The period over which invested funds are expected to be needed, which shapes how much short-term volatility an investor can reasonably absorb before withdrawing money.

The division of a portfolio among asset classes such as equities, bonds, and cash, and the main driver of a portfolio's long-run risk and return characteristics.

Spreading investments across assets, sectors, and issuers so that any single loss has limited effect on the total portfolio; it reduces specific risk but not overall market risk.

A measure from -1 to +1 of how closely two assets move together; lower or negative correlation between holdings gives greater diversification benefit for the same amount of risk.

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

A measure of how much a security or portfolio tends to move relative to the broad market; a beta above one implies greater sensitivity to market swings.

The degree to which returns fluctuate over time, commonly measured by standard deviation; higher volatility means a wider range of possible outcomes around the expected return.

A statistical measure of dispersion around an average, used in finance as a numeric gauge of an investment's total volatility and the spread of its historical returns.

How quickly an asset can be converted to cash at a fair price without significant loss; illiquid assets may need to be sold at a discount under pressure.

Readily accessible cash set aside to cover unexpected expenses or income loss, protecting long-term investments from forced sales during market downturns.

A written document setting out a client's objectives, constraints, risk tolerance, and permitted investments, providing a benchmark for evaluating whether later recommendations remain appropriate.

Periodically adjusting holdings back to target weights after market movements shift the mix, restoring the intended risk level and enforcing a disciplined buy-low, sell-high process.

A situation where an adviser's personal gain, outside affiliation, or compensation arrangement could improperly influence recommendations; it must be disclosed and managed, not merely avoided.

The obligation to give clients complete, timely, and understandable information about fees, conflicts, risks, and material facts so they can make informed decisions.

The way an adviser or firm is paid, such as commissions, fees based on assets, flat retainers, or hourly charges; the structure can create incentives that clients should understand.

A compensation model in which the adviser receives payment solely from the client and accepts no commissions or third-party payments, reducing certain conflicts of interest.

The set of laws, procedures, and controls designed to prevent criminals from disguising the proceeds of illegal activity as legitimate funds through the financial system.

The process of identifying and verifying a client's identity, understanding the nature of the relationship, and monitoring activity for consistency with the client's expected profile.

A confidential filing made to the appropriate authority when a firm detects transactions that may indicate money laundering, fraud, or other criminal activity; tipping off the client is prohibited.

The requirement to retain client agreements, transaction records, disclosures, and compliance documentation for specified periods so that conduct can be reconstructed and audited.

The function and set of controls that ensure an organization and its representatives follow applicable laws, regulations, and internal policies, including supervision and testing of controls.

The obligation of a firm to oversee representatives' activities, review communications and transactions, and correct problems, so that misconduct is detected and addressed promptly.

A transaction in which a firm buys or sells a security from its own inventory to or from a client rather than acting as an agent in the market; it requires disclosure and often client consent.

A transaction in which the firm acts as an intermediary, executing an order on behalf of a client in the market and typically charging a commission for the service.

The duty to seek the most favorable terms reasonably available for client orders, considering price, speed, likelihood of settlement, and order size rather than price alone.

Significant information about an issuer that has not been disclosed to the public; trading or tipping on it can constitute insider trading and violate securities law.

Buying or selling securities while in possession of material nonpublic information, or passing such information to someone who trades, in breach of a duty of trust.

An internal information barrier separating departments, such as investment banking and research, to prevent the improper flow of confidential or material nonpublic information.

A standard requiring a fiduciary to invest as a prudent person would, judging each investment in the context of the whole portfolio rather than in isolation.

The exercise of voting rights attached to shares held for clients; fiduciaries generally must vote in the client's best interest and disclose their voting policies and records.

Payment made to a third party for introducing a client; it must be disclosed to the client and is often prohibited or restricted unless the client consents in writing.

A single bundled charge covering advisory services and execution costs, which can obscure the true cost of trading and should be explained clearly to clients.

Caps on the value of gifts or hospitality a representative may accept from or give to third parties, intended to prevent improper influence over business decisions.

Any employment, ownership, or role a representative holds outside the firm; it generally must be disclosed and approved in advance because it can create conflicts or reputational risk.