General Principles Definitions Flashcards
529 ABLE Accounts
Tax-advantaged savings accounts for individuals with disabilities
Fiduciary Liability
The legal responsibility of fiduciaries to act in the best interest of their clients or beneficiaries
Financial Leverage
The use of borrowed funds to increase potential returns on an investment. While leverage can amplify gains
Financial Objectives
Specific
Financial Planning
The process of creating a comprehensive strategy to manage financial resources in alignment with life goals. It typically includes setting objectives
Definition
A structured approach to managing finances that encompasses budgeting
Education
Learning opportunities and certifications available for those pursuing a career in financial planning
Objectives
Goals that guide financial planning
Practice Standards (CFP Board)
Guidelines set by the CFP Board to ensure consistent
Process
The structured steps taken in financial planning
Report
The documentation of a financial plan
Financial Services Professionals
Licensed individuals who provide financial advice
Financial Statements
Personal
Fiscal Policy
Governmental actions regarding taxation and spending intended to influence economic growth
Form ADV
A registration form filed by investment advisors with the SEC
Future Value
The amount an investment or a sum of money will grow to over a period at a specified interest rate
Gain or Loss
Reporting
General Business Tax Credits
Tax incentives available to businesses that reduce federal income tax liability
Generation-Skipping Transfer Tax
A federal tax imposed on transfers to individuals two or more generations below the transferor
Gift Tax
A federal tax on transfers of money or property to others without receiving full value in return
Guidelines for Selecting an Insurance Agent
Factors to consider when choosing an insurance agent
Guidelines for Selecting an Insurance Company
Criteria for evaluating insurance companies
Death Taxes
State
Debt-to-Income Ratios
A financial ratio used to assess an individual’s ability to manage monthly debt payments. Calculated by dividing total monthly debt payments by gross monthly income
Deductions
Prepaid
Defined-Benefit Plan (Distributions)
Payments made from a defined-benefit plan to participants
Defined-Benefit Plan (Generally)
A retirement plan that guarantees a specific payout at retirement
Defined-Contribution Plan (Distributions)
The amounts paid out to participants from a defined-contribution plan
Defined-Contribution Plan (Generally)
A retirement plan where contributions are defined
Consumer Financial Protection Bureau (CFPB)
A U.S. government agency responsible for overseeing financial products and services offered to consumers. It enforces laws aimed at protecting consumers in financial markets.
Office of Financial Research
A federal office within the Department of the Treasury that supports the Financial Stability Oversight Council by providing data
Office of National Insurance
A federal office that monitors the insurance industry and advises the Treasury on insurance-related issues
Disability Income Insurance
Insurance coverage that provides income replacement benefits to individuals who are unable to work due to illness or injury
Distribution Planning
A strategy in retirement planning focused on managing the withdrawal of assets to optimize tax efficiency
Diversification
An investment strategy that spreads assets across various types of investments (e.g.
Dividends
Payments made to shareholders from a corporation’s earnings
Dodd-Frank Wall Street Reform and Consumer Protection Act
Legislation aimed at increasing transparency and accountability in the financial system
DOL Fiduciary Rule
A U.S. Department of Labor regulation that expands the fiduciary responsibility of financial advisors who provide retirement investment advice
Economic Benefit
Refers to any benefit received from an economic activity
Economic Concepts
Includes foundational ideas such as business cycles
Business Cycle
The fluctuation of economic activity over time
Competitive Market Structures
Various types of market organization (e.g.
Consumer Price Index (CPI)
A measure that examines the average change over time in the prices of a basket of goods and services consumed by households
Deflation
A decrease in the general price level of goods and services
Disinflation
A reduction in the rate of inflation
Economic Indicators
Statistics
Inflation
An increase in the overall price level of goods and services in an economy over time
Macroeconomics
The study of the overall economic structure
Microeconomics
The study of individual markets
Monetary Policy
Central bank actions
Opportunity Cost
The value of the next best alternative foregone when making a decision
Price Elasticity
A measure of how much the quantity demanded of a good responds to a change in price
Rational Expectations
The assumption that individuals form forecasts based on available information
Scarcity
A fundamental economic problem of having limited resources to meet unlimited wants
Supply and Demand
The relationship between the availability of a good (supply) and the desire for it (demand)
Time Value
The concept that money available now is worth more than the same amount in the future due to its earning potential.
Yield Curves
Graphs showing the relationship between interest rates and bonds of varying maturities
Education Funding
Financial strategies and tools to meet education expenses
529 Plans
State-sponsored education savings plans with tax advantages
Coverdell Education Savings Account (ESA)
A tax-advantaged account for educational expenses with contribution limits
Gift-Leaseback Technique
A tax planning strategy where a parent gifts property to a child
UGMA/UTMA Accounts
Custodial accounts that allow minors to own securities
Equal Credit Opportunity Act
A federal law prohibiting discrimination in credit transactions based on race
Estate Administration
The process of managing and settling an estate after death
Estate Planning
Preparing for the management and transfer of assets after death
Executor
The person appointed to administer an estate
Letter of Instructions
A non-legally binding document left by the decedent to provide guidance to survivors on various matters not covered by a will.
Ethics
Guidelines and codes of conduct governing professional behavior
Code of Ethics (NAPFA)
A set of ethical guidelines established by the National Association of Personal Financial Advisors for fee-only financial planners.
Exchange-Traded Funds (ETFs)
Investment funds traded on stock exchanges
Health and Medical Insurance
Insurance coverage that helps pay for medical and surgical expenses incurred by the insured. Coverage can include various plans such as HMOs
Consumer Driven Health Plan (CDHP)
A health plan that allows individuals to use tax-advantaged accounts
Exclusive Provider Organization (EPO)
A managed care plan where services are only covered if the patient uses doctors
Health Maintenance Organization (HMO)
A health insurance plan that requires members to receive healthcare services from a designated network of providers
Independent Practice Association (IPA)
An organization of independent physicians that contracts with HMOs and other insurance providers to deliver healthcare services to insured individuals
Point of Service (POS)
A health plan that combines characteristics of HMO and PPO plans
Preferred Provider Organization (PPO)
A type of health insurance plan that offers a network of healthcare providers
Health
Disability
Homeowner Insurance
Insurance that covers a residence and its contents against risks like fire
ICFP
International Certified Financial Planner (CFP) designation
Identity Theft
The fraudulent acquisition and use of a person’s private identifying information
Improper Disposition of Assets
The misuse or inappropriate allocation of an individual’s assets
Inadequate Resources
A situation where an individual’s financial resources are insufficient to meet financial goals or obligations
Income
The total amount of money received by an individual or entity
Character of
The classification of income for tax purposes
Defined
Income includes any increase in wealth that is recognized for tax purposes
Shifting
The transfer of income from one tax entity to another
Timing and Recognition of
Refers to when income is recognized for tax purposes
Income Tax
A tax imposed on the financial income of individuals
Alternative Minimum Tax (AMT)
A separate tax system designed to ensure that high-income earners pay a minimum level of tax
Kiddie Tax
A tax on the unearned income of a child under age 19 (or 24 for full-time students)
Planning
The process of strategically managing income
Rate Structure
The graduated scale used to calculate tax liability
Inflation
Deflation
Inflation-Adjusted Income & Asset Analysis
A method of analyzing income and asset values by adjusting for inflation
Installment Sales
A sale in which payments are made over time
Insurance Regulation
The body of laws and regulations governing the insurance industry to ensure fair practices
Internal Rate of Return (IRR)
The discount rate that makes the net present value (NPV) of an investment zero
Joint Tenancy with Right of Survivorship
A form of co-ownership in which each tenant has an equal share and right to the property. Upon the death of one tenant
Leasing
A financial arrangement where the lessee pays the lessor for the use of an asset over time
Leverage
The use of borrowed funds to increase the potential return on an investment
Life Insurance
Insurance that pays out a sum of money to designated beneficiaries upon the insured’s death.
Beneficiaries
Individuals designated to receive benefits from the life insurance policy.
Purpose
Primarily to provide financial security to dependents in the event of the insured’s death.
Settlements
Life and Viatical
Survivorship
A policy covering two lives
Term
A policy providing coverage for a specific term
Universal
A flexible premium policy with a cash value component that allows adjustments to premium and death benefits.
Variable Universal
A type of universal life insurance with investment options for the cash value
Variable
A policy with a cash value invested in sub-accounts similar to mutual funds
Whole
Permanent life insurance with fixed premiums
Lifetime Learning Credit
A tax credit available for qualified tuition and related expenses for eligible students enrolled in postsecondary education courses
Limited Liability Companies (LLCs)
A business structure combining the liability protection of a corporation with the tax flexibility of a partnership
Long-Term vs. Short-Term Debt
Classifications of debt based on the repayment period
Lottery Winnings
Money won from lottery games
Lump-Sum Distributions
A one-time payment of the entire balance from a retirement account
Margin Trading
The practice of buying securities with borrowed funds
Market Timing
An investment strategy attempting to predict market direction and make buy or sell decisions based on those predictions
Medicaid
A government-funded program providing healthcare coverage to low-income individuals and families
Medicare
A federal health insurance program primarily for individuals aged 65 and older
National Association of Personal Financial Advisors (NAPFA)
An organization for fee-only financial advisors
National Association of Securities Dealers (NASD)
A regulatory body responsible for overseeing the practices of broker-dealers and the operation of the Nasdaq Stock Market. Merged into the Financial Industry Regulatory Authority (FINRA) in 2007.
National Flood Insurance Program (NFIP)
A federal program that provides flood insurance to property owners in participating communities
Negotiable Instruments
Written documents guaranteeing the payment of a specific amount of money
Net Present Value (NPV)
The difference between the present value of cash inflows and outflows over a period
New York Insurance Regulation 187
A regulation requiring that recommendations made by life insurance agents and brokers must be in the best interest of the consumer
Ownership of Property
Refers to the legal rights over property
Community Property
Property acquired during marriage and owned jointly by spouses in community property states.
Life Estate
An interest in property that lasts for the duration of an individual’s life
Outright
Complete ownership of property without any limitations on the owner’s right to use or transfer it.
Remainder
The interest in property that takes effect after the termination of a life estate.
Tenancy by the Entirety
A form of property ownership available only to married couples
Tenancy in Common
A form of co-ownership where each tenant holds a separate
Partnerships
A business structure where two or more individuals share ownership
Passive Activity
A business or trade activity in which the taxpayer does not materially participate
Personal Financial Statements
Documents that outline an individual’s financial situation
Power of Attorney
A legal document allowing one person (the agent) to act on behalf of another (the principal) in specified or all financial or legal matters.
Present Value
The current value of a future sum of money
Principal Asset Classes
Categories of investments
Probate
The legal process of administering a decedent’s estate
Professional Corporations
A corporate structure for licensed professionals such as doctors or lawyers
Professional Liability
The responsibility professionals have to uphold standards in their practice
Professional Limited Liability Company (PLLC)
A business entity offering limited liability to owners
Promissory Estoppel
A legal principle that prevents a party from withdrawing a promise if the other party has reasonably relied on it to their detriment.
Purchasing Power
Erosion of
Qualified Domestic Relations Order (QDRO)
A legal order related to divorce or separation that divides a retirement plan
Qualified Small Employer HRA (QSEHRA)
A Health Reimbursement Arrangement for small employers
Rate of Return
The gain or loss on an investment over a specified period
Ratio Analysis
A tool for evaluating a company’s financial health
Real Estate Mortgage Investment Conduit (REMIC)
An investment vehicle that holds a pool of mortgages and issues multiple classes of interests in them to investors.
Registered Investment Adviser (RIA) Definition
An individual or firm registered with the SEC or state regulators to provide investment advice
Registered Investment Advisors Act of 1940
A law that establishes the regulatory framework for investment advisors
Regulation T
A Federal Reserve regulation that governs margin accounts
Rehabilitation Tax Credits
Federal or state tax incentives provided to encourage the rehabilitation and preservation of historic buildings.
Restricted Property
Assets subject to certain conditions or limitations
Retirement Plan Distributions
The withdrawals or disbursements made from a retirement account
Retirement Planning
The process of preparing for financial independence during retirement
Annuity Payments
Taxation of
Couple
Planning for
Death Benefits
Payments made to beneficiaries upon the death of a retirement plan participant
Early Retirement
The decision to retire before the typical retirement age
Economic Environment
The broader financial conditions affecting retirement planning
Inflation Rate Assumptions
Estimations of future inflation rates
Lump Sum vs. Deferred Payments
Options for receiving retirement benefits either as a single payment or over time
Retirement Income
Sources of funds for retirement
Role of Insurance
Insurance products that support retirement security
Social Security Retirement Age
The age at which individuals become eligible for full Social Security retirement benefits
Risk Management
The identification
Avoidance
A strategy of eliminating risk by not engaging in activities that expose an individual or entity to potential loss.
Retention
A strategy where individuals or businesses keep and manage risks
Transfer
A risk management technique where the responsibility of risk is transferred to a third party
S Corporations
A type of corporation with pass-through taxation
Savings and Loan Institutions
Financial institutions primarily focused on accepting savings deposits and providing mortgage and other loans
SEC (Securities and Exchange Commission)
The federal regulatory body overseeing securities markets
Secured vs. Unsecured Debt
Secured debt is backed by collateral
Securities Exchange Act of 1934
A federal law that governs securities transactions on the secondary market and established the SEC to enforce securities regulations.
SFSP (Society of Financial Service Professionals)
A professional association providing resources
Social Security
A federal program providing retirement
Disability Benefits
Monthly benefits provided to eligible individuals who cannot work due to a qualifying disability.
Nontraditional Relationships
Considerations for Social Security benefits eligibility and claiming strategies for individuals in nontraditional relationships.
Retirement Age
The age at which individuals are eligible for full retirement benefits
Society of Financial Service Professionals (SFSP)
An association offering education and support for financial professionals to promote ethical and competent services.
Sole Proprietorships
A business structure where a single individual owns and operates a business
Special Needs
Planning for
Split-the-Pot Approach
A financial strategy dividing available funds among multiple goals or beneficiaries in proportionate shares.
Standard Deviation
A statistical measure of investment volatility
Standard of Living
A measure of wealth
State Death Taxes
Taxes levied by individual states on the estate or inheritance
Statute of Frauds
A legal doctrine requiring certain types of contracts to be in writing to be enforceable
Structured Settlements
A financial arrangement in which a person receives a series of tax-free periodic payments over time as compensation for a legal claim.
Tax Basis
The original value of an asset for tax purposes
Terminal Illness
Planning for
Terrorism and Insurance
Insurance policies addressing risks and coverage related to terrorism
Time Value of Money
The principle that a specific amount of money today has a different value than the same amount in the future
Annuities
Financial products that provide a series of periodic payments to the holder over time
Annuity Due
An annuity where payments are made at the beginning of each period.
Inflation/Growth Adjusted
An analysis adjusting for inflation or growth rates to maintain purchasing power or real value over time.
Ordinary Annuity
An annuity where payments are made at the end of each period.
Serial Payments
Regular payments that increase over time
Torts
Legal wrongdoings that result in injury or harm
Trust Protector
A fiduciary role in a trust arrangement with the authority to oversee or modify trust provisions
Trusts
Legal arrangements where one party holds and manages property for the benefit of another
Truth in Lending
A federal law requiring lenders to disclose credit terms and costs to borrowers
UGMA (Uniform Gifts to Minors Act)
Legislation allowing minors to own assets under the supervision of a custodian
Umbrella Liability Insurance
Additional liability coverage that extends beyond the limits of underlying policies like home or auto insurance.
Uniform Transfers to Minors Act (UTMA)
Similar to UGMA
Unit Trusts
Investment vehicles that pool funds from investors to purchase a diversified portfolio of securities
Wills
Legal documents specifying how a person’s assets should be distributed after death.
Codicil
A legal document used to make changes or additions to an existing will.
Components
The key parts of a will
Contesting
The legal process of challenging the validity of a will
Modification
The process of updating or changing a will to reflect changes in circumstances or preferences.
Requirements
Legal criteria that a will must meet to be valid
Revocation
The act of canceling or voiding a will
Safeguarding
The practice of securely storing a will to prevent tampering
Zero Coupon Bond
A bond that does not make periodic interest payments and is instead sold at a discount
Accumulation
The phase in which an individual is actively contributing to and growing their investment portfolio or retirement accounts
Adjusted Rate of Return (ARR)
The rate of return that has been adjusted for taxes
ADV
See Form ADV
Agency
A fiduciary relationship where one person
Alternative Dispute Resolution
A means of resolving disputes outside of court through methods such as mediation or arbitration
Alternative Minimum Tax (AMT)
A parallel tax system designed to ensure that individuals and corporations with high incomes pay a minimum amount of tax by limiting certain deductions and credits.
American College
An accredited institution providing education and certification programs for professionals in financial planning
American Opportunity and Lifetime Learning Credit
A tax credit available for qualified higher education expenses
American Opportunity Tax Credit
A tax credit available for the first four years of postsecondary education
Amortization
See Mortgage Loans
Annual Percentage Rate (APR)
See Mortgage Loans
Future Value Annuity
The projected value of an annuity at a specific future date
Joint and Survivor Annuity
An annuity type that continues to provide payments for the lifetimes of two individuals
Period Certain Annuity
An annuity that guarantees payments for a specified period
Present Value Annuity
The current value of future annuity payments
Time Value Annuity
The concept that money available now is worth more than the same amount in the future
Arbitration (See Alternative Dispute Resolution)
A process where disputes are resolved by one or more arbitrators who provide a binding decision
Asset Allocation
The process of dividing an investment portfolio among different asset categories
At Risk Rules
Tax rules that limit the amount of loss a taxpayer can claim to the amount they have actually invested or are at risk of losing in an activity
Automobile Insurance
Insurance coverage for vehicles that provides financial protection against physical damage
Bank Geographic Structure
The physical and organizational arrangement of a bank’s branches
Bankruptcy
A legal process through which individuals or businesses who are unable to repay their debts may seek relief. Bankruptcy can involve reorganizing debts or liquidating assets to pay creditors
Banks
in the Economy
Basis
The original value or cost of an asset for tax purposes
Behavior
Stereotypical
Best Interest
A fiduciary standard requiring financial professionals to act in the best interest of their clients by providing recommendations and services that align with the client’s financial goals
Zero Coupon Bonds
Bonds that do not pay periodic interest. Instead
Book and Records - Inspections
Regulatory inspections that involve reviewing a financial firm’s books and records to ensure compliance with legal and regulatory requirements
Brochure Rule
A regulatory requirement mandating that investment advisers provide clients with a written disclosure document (brochure) that outlines the adviser’s services
Broker-Dealers Federal Regulation
Oversight of broker-dealers at the federal level
Broker-Dealers State Regulation
Broker-dealers are also regulated by state securities administrators
Brokerage Firms
Financial firms that facilitate the buying and selling of securities on behalf of clients
Budgeting
The process of creating a financial plan for allocating income towards expenses
Bunny Bonds
Bonds that allow interest to be reinvested in additional bonds rather than being paid out as cash. This feature can help investors compound their returns over time.
Business Cycle
The economic cycle of expansion
Business Entities
Different organizational forms for conducting business
C Corporations
A type of corporation in which the business is taxed separately from its owners. C corporations are subject to corporate income tax
Capital Gains (Losses)
The profit (or loss) realized when an asset is sold for more (or less) than its original purchase price. Capital gains are subject to tax
Carryover Basis
A tax basis of an asset received as a gift
Certified Financial Planner Board of Standards (CFP Board)
The professional regulatory organization that sets standards for certified financial planners
Financial Planning Practice Standards
Guidelines set by the CFP Board to establish the process and standards that CFP® professionals should follow when providing financial planning services
Bequests
Gifts made to charitable organizations through a will or estate plan. Bequests allow individuals to make a charitable contribution as part of their legacy.
Charitable Gift Annuity
A contract between a donor and a charity in which the donor contributes assets and
Charitable Lead Trust
A trust in which a charity receives income payments for a set period
Charitable Remainder Trust
A trust that provides income to the donor or another beneficiary for a specific time
Donor Advised Funds
A charitable giving vehicle where a donor contributes assets
Outright Gifts
Direct donations made to a charity
Percentage Limitations
IRS limits on the deductibility of charitable contributions based on a percentage of a taxpayer’s adjusted gross income (AGI)
Pooled Income Fund
A charitable fund in which multiple donors contribute assets that are pooled together
Private Foundation
A nonprofit organization typically funded by an individual
College for Financial Planning
An educational institution offering professional certification and degree programs for financial professionals
College Funding
See Education Funding
Commercial Flood Insurance
Insurance coverage that protects businesses against losses due to flooding
Community Property
A legal framework in some states in which property acquired during marriage is considered equally owned by both spouses
Consumer Credit Protection Act of 1968
A federal law designed to safeguard consumers by requiring clear disclosure of loan terms
Contracts
Legally binding agreements between two or more parties
Coverdell Education Savings Accounts
Tax-advantaged accounts designed to help families save for education expenses
Credit and Debt Management
The process of managing credit responsibly to build creditworthiness
Credit Counseling
A service that helps consumers address financial issues
Credit Reports
Summaries of a consumer’s credit history
Credit Scoring
A system used by lenders to evaluate an individual’s credit risk based on credit history and current debt. Scores impact loan eligibility
Credit Unions
Member-owned
