AFP flashcards
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31 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Net worth
- Total assets minus total liabilities at a point in time. It measures accumulated wealth and is the starting point for a personal financial statement.
- Cash flow surplus
- Income minus expenses, taxes, and debt payments over a period. A positive surplus funds savings and goals; a deficit requires spending or debt changes.
- Emergency fund target
- Liquid reserves covering 3 to 6 months of essential expenses, extended to 6 to 12 months for single-income or variable-income households.
- Future value formula
- FV = PV × (1 + r)^n, where r is the periodic rate and n the number of periods. Used to project a lump sum forward in time.
- Present value formula
- PV = FV ÷ (1 + r)^n. It discounts a future amount to today at rate r over n periods, used for goal funding and capital needs.
- Annuity future value
- FV = PMT × [((1 + r)^n − 1) ÷ r] for end-of-period payments. Solving for PMT gives the annual savings needed to reach a goal.
- Real return
- Nominal return adjusted for inflation: approximately nominal minus inflation, or exactly (1 + nominal) ÷ (1 + inflation) − 1. It measures purchasing-power growth.
- Rule of 72
- Approximation for doubling time: 72 divided by the annual percentage return. At 6% a sum doubles in roughly 12 years.
- Human life value
- Present value of the client's future earnings net of self-maintenance costs. Used to size income-replacement life insurance needs.
- Needs analysis method
- Insurance need equals income replacement plus debts, education, and final expenses, minus existing resources such as savings and current coverage.
- Education cost projection
- Inflate today's cost by (1 + education inflation)^years, then discount at the assumed return to derive the required annual contribution.
- Asset allocation
- Division of a portfolio among asset classes based on time horizon, risk tolerance, and liquidity needs. It drives most long-term return variability.
- Rebalancing
- Restoring portfolio weights to target levels after market drift. It controls risk rather than chasing recent performance.
- Liquidity need
- Cash required within a short horizon for emergencies or goals. It must be held in stable assets, not long-term volatile investments.
- Time horizon
- The period until funds are needed. Longer horizons permit more equity exposure; short horizons require capital preservation.
- Risk tolerance
- A client's willingness and ability to accept investment losses. It constrains the appropriate asset allocation and product selection.
- Fiduciary duty
- The obligation to act in the client's best interest through duties of loyalty and care, placing client interests ahead of personal or firm interests.
- Duty of loyalty
- Requires putting the client's interest first, avoiding or managing conflicts, and not using the relationship for personal gain.
- Duty of care
- Requires competence, diligence, and a reasonable basis for recommendations, including understanding the client's situation and the product.
- Conflict of interest
- Any interest that could bias a recommendation, such as commissions or referral fees. It must be disclosed and managed, not merely tolerated.
- Priority of duties
- When duties conflict, order is client, then integrity of the profession and markets, then employer, then self-interest.
- Confidentiality
- Client information may not be disclosed without consent except where required by law or to prevent a crime.
- Suitability
- A recommendation must fit the client's objectives, risk tolerance, time horizon, liquidity needs, and financial constraints, based on known facts.
- Know your client
- Gathering and updating information on financial situation, goals, risk tolerance, and constraints before making any recommendation.
- Referral fee disclosure
- Payments for client referrals must be disclosed to the client and, where required, to the employer; undisclosed compensation is a violation.
- Misrepresentation
- Stating false or misleading information about credentials, services, or performance. It breaches integrity standards even without intent to deceive.
- Fair performance presentation
- Reporting returns accurately, comparably, and with sufficient disclosure so clients are not misled about results or risk.
- Recordkeeping
- Retaining documentation supporting recommendations and client communications for the period required by the employer or regulator.
- Escalation before acting
- When an ethical issue is unclear, consult a supervisor or compliance and document the decision and rationale before proceeding.
- Independence and objectivity
- Judgments must not be compromised by gifts, pressure, or outside relationships; modest gifts may require disclosure or refusal.
- Client interest first
- The core ethical standard: where the client's interest conflicts with the professional's or firm's interest, the client's interest prevails.