PFS flashcards

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

Fiduciary duty

A legal obligation to act in the client's best interest, comprising duties of care, loyalty, disclosure of conflicts, and good faith. It is broader than a suitability standard.

Suitability standard

A requirement that a recommendation be reasonably appropriate for the client's objectives, financial situation, and risk tolerance, without requiring best-interest analysis.

Engagement letter

A written agreement defining the scope of planning services, compensation, client responsibilities, conflicts, and termination terms before work begins.

Qualitative client data

Subjective information such as goals, attitudes, risk tolerance, and health expectations, as opposed to objective financial figures used in analysis.

Net worth

Total assets valued at fair market value minus total liabilities at a specific date. It measures financial position, not cash flow.

Cash flow surplus

Income remaining after expenses and debt service. A surplus can fund savings or investing; a deficit requires asset draws or borrowing.

Emergency reserve

Liquid funds set aside for unexpected expenses, commonly three to six months of essential spending, or more for variable income.

Human life value

The present value of the insured person's expected future earnings net of personal consumption and taxes, used to size life insurance need.

Needs analysis method

An insurance sizing approach adding debts, income replacement, education, and final expenses, then subtracting existing resources such as savings and coverage.

Own-occupation disability

A disability policy definition that pays when the insured cannot perform the duties of their own occupation, generally the most favorable definition available.

Umbrella liability policy

Excess liability coverage above underlying auto and homeowners limits, usually with a self-insured retention, protecting against large liability claims.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by standard deviation. It measures excess return earned per unit of total risk.

Beta

A measure of a security's sensitivity to market movements. A beta of one moves with the market; above one is more volatile.

Correlation coefficient

A value from negative one to positive one describing how two assets move together. Lower correlation reduces portfolio volatility through diversification.

Rebalancing

Periodically returning portfolio weights to target allocations, often triggered by a threshold such as five percent absolute drift.

Money-weighted return

A return reflecting the timing and size of investor cash flows, unlike time-weighted return which isolates manager performance.

Marginal tax rate

The rate applied to the next dollar of taxable income. It differs from the effective rate, which is total tax divided by total income.

Wash sale rule

A rule disallowing a capital loss if a substantially identical security is purchased within thirty days before or after the sale.

Tax loss harvesting

Realizing capital losses to offset gains and a limited amount of ordinary income, with unused losses carried forward to later years.

Stepped-up basis

The basis of inherited assets generally reset to fair market value at the date of death, eliminating prior appreciation from capital gains tax.

Above-the-line deduction

An adjustment reducing gross income before the standard or itemized deduction, available regardless of whether the taxpayer itemizes.

Sequence-of-returns risk

The risk that poor investment returns early in retirement, combined with withdrawals, permanently deplete assets faster than average returns suggest.

Replacement ratio

The percentage of pre-retirement income needed in retirement, commonly modeled between seventy and eighty-five percent after work-related expenses.

Delayed retirement credits

Increases to Social Security benefits earned by delaying claiming past full retirement age, up to age seventy, permanently raising the monthly amount.

Required minimum distribution

A mandatory annual withdrawal from traditional retirement accounts after the required beginning age, calculated from the balance and a life expectancy factor.

Unlimited marital deduction

An estate and gift tax provision allowing unlimited transfers between spouses, deferring tax until the surviving spouse's estate.

Portability election

A surviving spouse's ability to use a deceased spouse's unused estate tax exclusion, claimed by timely filing an estate tax return.

Revocable living trust

A trust the grantor can amend or revoke, holding assets during life and passing them at death without probate.

Intestacy

The state law process distributing a deceased person's property when no valid will exists, following statutory priority among heirs.

S corporation

A pass-through entity with limited liability, subject to shareholder limits, one class of stock, and reasonable compensation for owner-employees.

Buy-sell agreement

A contract specifying how a business owner's interest is valued and transferred on death, disability, or retirement, often funded by insurance.

Qualified business income deduction

A deduction for pass-through business income, generally twenty percent, subject to taxable income thresholds and wage or service-business limits.

Solo 401(k) plan

A retirement plan for self-employed individuals without employees, allowing employee deferrals plus employer contributions up to combined annual limits.