NZ CFS L5 Investment key terms

New Zealand's core securities and financial services statute. It governs how financial products are offered, how advisers and providers are licensed, disclosure duties, and fair dealing obligations owed to investors.

A licence granted by the Financial Markets Authority allowing a business to give regulated financial advice. The licence holder must ensure advisers operate within its scope, keep records, and maintain complaint and compliance systems.

An individual who gives regulated financial advice on behalf of a licensed financial advice provider. They must meet competence, knowledge, skill and ethical standards and operate within the provider's licence conditions.

An individual appointed by a financial advice provider to give advice on its behalf. They must be registered on the Financial Service Providers Register and meet the same conduct and competence duties as other advisers.

A public online register of businesses and individuals providing financial services in New Zealand. Consumers and advisers can check whether a provider, adviser or nominated representative is registered and what services they are registered for.

New Zealand's market conduct regulator for financial services. It licenses financial advice providers, issues guidance and standards, monitors conduct, and can investigate and enforce breaches of the FMC Act.

A mandatory code setting ethical and competence standards for financial advice, including duties to act with care, diligence and skill, in the client's interests, and to treat clients fairly. Breaching it can lead to disciplinary action.

The obligation to prioritise the client's interests ahead of the adviser's own when giving regulated advice. It requires identifying conflicts, avoiding incentives that distort recommendations, and justifying why a recommendation suits the client.

Telling a client about any commission, incentive, ownership link or other interest that could influence advice. Disclosure must be clear, timely and specific enough for the client to judge how the conflict might affect the recommendation.

The duty to give clients prescribed information before or when advice is given, such as the provider's identity, licensing status, fees, conflicts, and the nature and scope of the advice service offered.

The defined boundary of what an adviser is engaged to consider, such as a single product, a product class, or a full financial needs analysis. Recommendations outside that boundary may require a fresh engagement.

Legal duties requiring financial institutions to identify customers, verify identity and address, monitor transactions, and report suspicious activity. Advisers must complete customer due diligence before establishing a business relationship.

The process of identifying a client and verifying their identity and address, and understanding the nature of their business, before providing services. Enhanced checks apply to higher-risk clients, trusts and politically exposed persons.

New Zealand law governing how personal information is collected, used, stored and disclosed. Advisers must collect information only for a lawful purpose, keep it secure, and respect clients' rights to access and correct it.

The practice of gathering and documenting a client's circumstances, goals, financial position, time horizon, risk tolerance and knowledge. It underpins suitability and is the factual basis for every recommendation.

A client's willingness and emotional capacity to accept investment losses or volatility. It is distinct from risk capacity and is usually assessed through structured discussion and a documented questionnaire.

A client's financial ability to absorb losses without jeopardising their goals. It depends on income stability, liquidity needs, time horizon and the size of the portfolio relative to required spending.

A documented summary of a client's risk tolerance, risk capacity and investment objectives, often expressed as a category such as conservative, balanced or growth. It guides the target asset allocation.

The period over which money is invested before it is needed. Short horizons favour liquidity and capital stability, while long horizons can support growth assets because there is time to recover from market falls.

A written document recording a client's goals, constraints, target allocation, risk parameters and review arrangements. It provides a benchmark for future decisions and helps manage expectations when markets move.

The requirement that a recommendation matches the client's goals, financial situation, risk profile and needs. An adviser must be able to explain why the advice is appropriate and record the reasoning.

A written record given to the client summarising the recommendation, the reasons it suits them, the product features, fees and risks, and any conflicts. It supports informed decision-making and later review.

Dividing a portfolio among asset classes such as cash, bonds, property and shares. The mix is a primary driver of both expected return and volatility and is set from the client's goals and risk profile.

The long-term target weighting to each asset class, based on the client's objectives and risk tolerance. It is reviewed periodically rather than changed in response to short-term market movements.

Short-term deviations from the strategic target weights to take advantage of expected market conditions. It adds active risk and should only be used where the mandate and client expectations allow it.

Spreading investment across assets, sectors and markets so that no single loss dominates the portfolio. It reduces unsystematic risk but cannot remove market-wide systematic risk.

A measure from -1 to +1 of how closely two investments move together. Low or negative correlation between assets improves diversification benefits within a portfolio.

The degree to which an investment's returns fluctuate over time, commonly measured by standard deviation. Higher volatility means a wider range of possible outcomes and greater short-term uncertainty.

A statistical measure of the dispersion of returns around their average. In portfolio analysis it is used as a proxy for total risk, with roughly two-thirds of outcomes falling within one standard deviation.

A risk-adjusted return measure calculated as excess return over the risk-free rate divided by standard deviation. A higher ratio indicates more return earned per unit of volatility taken.

The return on an investment considered to have negligible default risk, typically a short-dated government bond or bank term deposit. It is the baseline against which risky investments are compared.

Market-wide risk that affects all investments, such as recessions, interest-rate shifts or geopolitical events. It cannot be eliminated through diversification, so investors are compensated with a risk premium.

An ownership stake in a company, usually held as shares. Returns come from dividends and capital gains, and shareholders rank behind creditors if the company fails.

A loan to a government or company that pays interest and repays principal at maturity. Prices fall when market interest rates rise, and credit risk depends on the issuer's ability to pay.

The risk that changes in market interest rates reduce the value of a fixed-income investment. Longer-dated bonds and lower coupon bonds are generally more sensitive to rate changes.

The risk that a borrower or bond issuer fails to pay interest or repay principal as agreed. It is assessed through credit ratings and issuer financial analysis and is higher for lower-rated issuers.

A pooled investment vehicle where many investors' money is combined and managed according to a stated strategy. Investors own units priced at net asset value and pay management and administration fees.

A prescribed document describing a financial product's features, risks, fees, and how it works. It must be given to retail investors before they acquire the product and is a key input to suitability analysis.

An ongoing charge deducted from a fund's assets to pay for investment management and administration, usually expressed as a percentage of net asset value per year. It directly reduces investor returns.

An investment approach where a manager selects securities or times markets in an attempt to beat a benchmark. It typically costs more and may underperform a passive approach after fees.

An approach that aims to replicate a market index rather than beat it. It usually has lower fees and lower tracking error, and relies on market efficiency over the long term.

The volatility of the difference between a portfolio's return and its benchmark return. It measures how closely a fund follows its index or how much active risk a manager is taking.

The tax rate applied to taxable income of a portfolio investment entity, based on the investor's income and that of their dependants. Investors must notify the correct rate or may face penalties and tax adjustments.

A New Zealand tax structure for pooled investments that taxes investors at their prescribed investor rate. It caps the tax rate on gains from certain Australasian shares and simplifies tax for many investors.

New Zealand has no general capital gains tax, but gains from property bought with a dominant purpose of resale, and certain other disposals, can be taxable. The intention at purchase is often decisive.

A rule that taxes gains on residential property sold within a set period after acquisition, subject to main-home and other exclusions. The applicable period depends on the purchase date.

Income subject to tax after allowable deductions, including salary, interest, dividends, rental income and taxable gains. It determines marginal tax rates and may affect eligibility for the prescribed investor rate.

A credit attached to a New Zealand dividend representing company tax already paid on the underlying profit. It reduces the investor's tax payable and prevents double taxation of company earnings.

A distribution of company profit to shareholders, usually in cash. It may carry imputation credits and is generally taxable income to the recipient, though some jurisdictions treat it differently.

A payment made to an adviser or intermediary by a product provider for a sale or ongoing service. It creates a conflict of interest that must be disclosed and managed under the client-first duty.

Adjusting portfolio holdings back to target weights after market movements or cash flows change the mix. It controls risk drift and can be done on a calendar, threshold or cash-flow basis.

How quickly an asset can be converted to cash at a fair price without a significant discount. Cash and listed shares are liquid; direct property and some private assets are not.

The ongoing process of checking whether a portfolio and plan still match the client's circumstances, goals and risk profile. It includes scheduled reviews, trigger-based reviews and documentation of agreed changes.