AFP key terms

A collaborative process that helps a client identify and reach personal and financial goals through the appropriate use of financial products, services, and strategies over time.

A written document describing a client's current situation, assumptions, goals, and the recommended actions and products intended to meet those goals.

A plan that addresses all major areas of a client's finances, such as cash flow, risk, investments, taxes, retirement, and estate planning, rather than a single topic.

A limited engagement in which the planner addresses only one or a few specific areas of a client's finances, such as retirement projections or education funding.

A summary of money coming in and going out over a period, used to show whether a client is saving or spending more than is earned.

A snapshot listing what a client owns and owes on a given date, with net worth equal to total assets minus total liabilities.

Money set aside in readily accessible accounts to cover unexpected expenses or loss of income, typically several months of living costs.

The principle that a sum of money available today is worth more than the same sum received later, because today's money can be invested and earn a return.

The amount that a future cash flow or stream of payments is worth today when discounted at an assumed rate of return.

The amount that a current sum or series of payments will grow to at a future date when compounded at an assumed rate of return.

Growth that occurs when interest is earned not only on the original principal but also on previously accumulated interest, causing balances to accelerate over time.

The rate of return used to convert future amounts into today's dollars, reflecting the opportunity cost and risk of waiting for the money.

A general rise in prices over time that reduces the purchasing power of money, so a plan must project rising costs for future goals.

The quantity of goods and services a given amount of money can buy; it falls as prices rise and rises as prices fall.

An investment return measured after subtracting inflation, showing the actual increase in purchasing power rather than the stated nominal gain.

A client's willingness and emotional ability to accept investment losses or volatility in pursuit of higher potential returns.

A client's financial ability to withstand losses without jeopardizing goals, based on income stability, time horizon, and other resources.

The structured process of gathering information about a client's goals, finances, knowledge, and attitudes to judge suitable levels of investment risk.

The length of time before money is needed for a goal; longer horizons generally allow more volatility and growth-oriented investments.

Dividing a portfolio among asset categories such as stocks, bonds, and cash to balance risk and expected return for a client's goals.

Spreading investments across assets, sectors, or regions so that any single loss has a limited effect on the total portfolio.

Periodically buying and selling holdings to restore a portfolio to its target asset mix after market movements have shifted the weights.

Market-wide risk that affects all investments of a type, such as changes in interest rates or the economy, and cannot be removed by diversification.

A projection of the income a client will need in retirement compared with expected sources, such as savings, pensions, and government benefits.

The percentage of pre-retirement income a retiree needs to maintain a comparable lifestyle, often estimated at roughly 70 to 80 percent.

Planning for future schooling costs by projecting expenses, choosing savings vehicles, and setting aside money over an appropriate time horizon.

How quickly and cheaply an asset can be converted to cash without a significant loss in value, important for emergency reserves and short-term goals.

The estimates a planner uses in projections, such as inflation, returns, and life expectancy, which must be reasonable and disclosed to the client.

The legal and ethical obligation to act in the client's best interest, placing the client's interests ahead of the professional's own.

A requirement that advice and recommendations serve the client's interests rather than merely being suitable, and that conflicts be managed or disclosed.

The judgment that a recommendation fits a client's goals, financial situation, risk tolerance, and time horizon based on information gathered.

The practice of collecting and updating facts about a client's finances, goals, attitudes, and experience before giving advice or making recommendations.

A situation in which a professional's personal or business interests could improperly influence advice, requiring avoidance, management, or clear disclosure.

Telling clients plainly about fees, compensation, conflicts, credentials, and limitations so they can make informed decisions about the relationship.

How a planner is paid, such as fees, commissions, or a combination, which must be explained because it can create conflicts of interest.

A compensation arrangement in which the planner is paid solely by the client, usually through flat, hourly, or asset-based fees, and receives no commissions.

A client's agreement to a course of action after receiving a clear explanation of the recommendation, its risks, costs, and alternatives.

Facts that a reasonable client would consider important when deciding whether to act, which must not be omitted or misstated in advice.

Making a false or misleading statement, or omitting key facts, about services, credentials, products, or performance, which violates professional standards.

The duty to keep a client's personal and financial information private and to share it only with consent or when required by law.