PFS cheat sheet

Seven-step planning process: establish engagement, gather data and goals, analyze current position, develop recommendations, present the plan, implement, monitor and update.

Engagement letter elements: scope of work, client responsibilities, planner compensation, conflicts of interest, termination terms, and duration of the relationship.

Quantitative data are objective facts (income, balances, policy values); qualitative data are attitudes, risk tolerance, and goals.

Fiduciary duty components: duty of care, duty of loyalty, duty to disclose conflicts, and duty to act in the client's best interest.

Material conflict of interest must be disclosed in writing before or at the time of the engagement, not after recommendations are delivered.

Documentation standard: contemporaneous notes, signed engagement letter, and a written record of the basis for each recommendation.

Planning engagement vs. financial advice engagement: the former covers an integrated plan; the latter covers a discrete product or topic.

Monitoring frequency is set in the engagement; a common benchmark is annual review plus review after a material life event.

Net worth = total assets at fair market value minus total liabilities; it is a point-in-time measure, not a flow.

Cash flow surplus = income minus expenses minus debt service; a deficit must be funded by drawing on assets or new borrowing.

Emergency reserve target: commonly 3-6 months of essential expenses; 6-12 months for variable or single-income households.

Savings rate = (income - consumption) / gross income; it drives long-run wealth more than investment return in early years.

Debt ratio = total debt / total assets; a common warning threshold is above 0.50 for households.

Housing cost ratio = monthly housing payment / gross monthly income; lenders commonly cap total debt service near 0.36-0.43.

Liquidity ratio = liquid assets / monthly expenses; a value below 3 signals thin reserves.

Budget methods: envelope (zero-based), 50/30/20 (needs/wants/savings), and pay-yourself-first; selection depends on behavior, not math.

Risk treatment options: avoidance, reduction, retention, transfer (insurance), and sharing.

Human life value method: present value of the insured's future earnings net of personal consumption and taxes.

Needs analysis method: capital needed = debts + education + income replacement + final expenses, minus existing resources.

Term insurance has no cash value; permanent insurance (whole, universal, variable) combines death benefit with an account or cash value.

Deductible and coinsurance: higher deductible lowers premium; coinsurance is the insured's share of covered loss after the deductible.

Disability definition hierarchy: own-occupation is the strongest, then any-occupation, then gainful-occupation; check the elimination period.

Long-term care triggers are typically based on inability to perform 2 of 6 activities of daily living or cognitive impairment.

Umbrella liability sits above auto and homeowners limits; it is relatively inexpensive per dollar of coverage.

Annuity suitability: surrender charges, mortality and expense fees, and whether the contract is qualified or nonqualified affect taxation.

Expected portfolio return = weighted average of asset class expected returns; portfolio risk is not the weighted average of risks because of correlation.

Diversification reduces unsystematic risk; systematic (market) risk remains and is compensated with a risk premium.

Sharpe ratio = (portfolio return - risk-free rate) / standard deviation; it measures excess return per unit of total risk.

Beta measures sensitivity to market movements; beta of 1.0 moves with the market, above 1.0 is more volatile.

Correlation ranges from -1 to +1; combining assets with correlation below +1 lowers portfolio volatility for the same expected return.

Asset allocation is the primary driver of long-run return variability; security selection and timing contribute less.

Rebalancing to target weights enforces a sell-high/buy-low discipline; thresholds are commonly 5% absolute or 20% relative.

Standard deviation measures total volatility; a two-standard-deviation range covers roughly 95% of outcomes under a normal distribution.

Time-weighted return measures manager performance; money-weighted (dollar-weighted) return reflects the investor's actual cash flow timing.

Marginal tax rate applies to the next dollar; effective tax rate = total tax / total taxable income.

Taxable income = gross income minus above-the-line adjustments minus standard or itemized deductions.

Capital gains: short-term (held one year or less) taxed at ordinary rates; long-term taxed at preferential rates.

Tax loss harvesting offsets gains and up to a limited amount of ordinary income per year; excess carries forward.

Wash sale rule disallows a loss if a substantially identical security is bought within 30 days before or after the sale.

Traditional IRA/401(k) contributions are generally pre-tax and withdrawals are ordinary income; Roth contributions are after-tax and qualified withdrawals are tax-free.

Required minimum distributions apply to traditional retirement accounts and are based on account balance divided by the applicable life expectancy factor.

Basis of inherited assets is generally stepped up to fair market value at the date of death; gifted assets carry over the donor's basis.

Above-the-line deductions reduce gross income and are available whether or not the taxpayer itemizes.

Replacement ratio: retirement spending is commonly modeled at 70-85% of pre-retirement income, adjusted for work-related expenses.

Capital need = annual retirement gap multiplied by an annuity factor, or computed by inflating expenses and discounting at a real return.

Sequence-of-returns risk: poor returns early in retirement deplete assets faster because withdrawals lock in losses.

Social Security claiming: delaying past full retirement age increases the benefit by delayed retirement credits; claiming early permanently reduces it.

Defined benefit plans promise a benefit; defined contribution plans (401(k), 403(b)) depend on contributions and investment performance.

Contribution limits apply per person across all plans of the same type; catch-up contributions are available after age 50.

Withdrawal ordering: taxable accounts, then tax-deferred, then tax-free is a common default, but bracket management can change the order.

Inflation assumption matters: a 3% inflation rate roughly doubles the required income in about 24 years.

Gross estate includes all property owned at death plus certain lifetime transfers, life insurance proceeds, and retained interests.

Unlimited marital deduction defers estate tax between spouses; the surviving spouse's estate then includes the assets.

Annual exclusion gifts avoid gift tax reporting; gifts above it use lifetime exemption unless the donor elects otherwise.

Portability allows a surviving spouse to use the deceased spouse's unused exclusion amount by timely filing an estate tax return.

Intestacy: without a valid will, state law determines distribution; a will also names guardians and an executor.

Trust components: grantor, trustee, beneficiary, and trust property; a revocable trust avoids probate but not estate tax.

Beneficiary designations on life insurance and retirement accounts override the will; review them after every life event.

Powers of attorney (financial) and health care directives address incapacity; they do not transfer property at death.

Step-up in basis at death can make holding appreciated assets preferable to gifting them during life.

Sole proprietorship: single taxation, unlimited personal liability, and self-employment tax on net earnings.

General partnership: flow-through taxation, joint and several liability, and partners taxed on distributive shares.

Limited liability company: flow-through taxation by default, liability shield, and flexible allocation of profits under the operating agreement.

S corporation: flow-through taxation, limited liability, reasonable salary requirement, and shareholder limits.

C corporation: double taxation (entity and dividend level) but may offer fringe benefit and retained-earnings advantages.

Qualified business income deduction generally applies to pass-through income, subject to wage and service-business limitations.

Buy-sell agreements fund ownership transitions on death, disability, or retirement; cross-purchase and entity-redemption are the two structures.

Key person insurance protects the business against the loss of an essential employee; the business is the beneficiary.

Self-employed retirement plans: SEP IRA (employer contributions only) and solo 401(k) (employee deferrals plus employer contributions).

Fiduciary standard requires acting in the client's best interest; a suitability standard requires only that a recommendation be appropriate.

Duty of loyalty prohibits self-dealing and requires disclosure and management of conflicts of interest.

Duty of care requires the knowledge, skill, and diligence a prudent professional would use, including adequate fact-finding.

Compensation conflicts (commissions, revenue sharing, referral fees) must be disclosed in a manner the client can understand.

Client confidentiality: information may be shared only with consent or as required by law; it survives termination of the engagement.

Informed consent requires disclosure of material facts, capacity to understand, and voluntary agreement.

Referral arrangements: accepting compensation for a referral without disclosure is a conflict and generally prohibited.

Recordkeeping: retain engagement documents, recommendations, and client communications for the period required by regulation.

Termination: return client property, document the reason, and avoid abandoning the client without reasonable notice.