FINA4352 GP Chapters 1-3 Key Terms

asset accumulation phase

a client is usually in this phase until approximately age 45 or later if the client's children are not yet independent

code of ethics and standards of conduct

establishes the level of professional practice that is expected of cfp professionals

conservation or protection phase

a client is usually in this phase from approximately age 45-60 or immediately preceding the client's planned retirement date

distribution or gifting phase

a client is usually in this phase from approximately age 60, or the planned retirement date, until the date of death

financial advice

the development of a financial plan

financial planning

the integrated, coordinated management of an individual's financial situation

practice standards for the financial planning process

a section of the code and standards in which the financial planning process is divided into seven distinct steps

relevant elements

incorporated into the financial planning process when financial planning takes place

active listening

paying full attention to what their clients are saying and responding by paraphrasing the clients' comments

affinity bias

the tendency to make decisions based on how individuals believe the outcomes will represent their interests and values

anchoring

individuals making irrational decisions based on information that should have no influence on the decisions at hand

attitudes

reflect a person's opinions, values, and wants

auditory learning style

retain information by hearing or speaking

behavioral finance

a field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people act irrationally during the financial decision-making process

beliefs

a type of attitude because they reveal the understanding of some aspect of a person's life

body language

involves facial expressions, eye contact, gestures, and body posture; it actually impacts how clients receive messages more than any other type of communication

closed-ended questions

the types of questions that limit data gathering because they only require a "yes" or "no" answer

cognitive dissonance

mental discomfort when newly acquired information conflicts with pre-existing understanding

cognitive errors

decision-making based on well-known concepts that may or may not be correct

confirmation bias

when individuals look for new information or distort new information to support an existing view

conservatism bias

when individuals initially form a rational view but fail to change that view as new information becomes available

context

includes past history or any conditions that presently exist

emotional biases

decision-making based on well-known concepts that may or may not be correct, not related to conscious thought and stem from feelings, impulses, or intuition

emotional intelligence

the ability to recognize emotional expressions in themselves and their clients, as well as selecting socially appropriate responses to the circumstances and their clients' emotions

endowment bias

when an asset is felt to be special and more valuable simply because it is already owned

framing bias

asserts that people are given a frame of reference—a set of beliefs or values that they use to interpret facts or conditions—as they make decisions

herding

when investors trade in the same direction or in the same securities, and possibly even trade contrary to the information they have available

hindsight bias

a selective memory of past events, actions, or what was known in the past

illusion of control bias

when clients believe they can control or affect outcomes of, say, the market when they cannot

interpersonal communication

communicating one on one, is important throughout the financial planning process

judgment

making conclusions about what has been perceived

kinesthetic learning style

understand concepts better using a hands-on approach

leading responses

guide clients to give more details, making a meeting of the minds more likely

loss aversion theory

clients fearing losses much more than they value gains, and prefer avoiding losses to acquiring the same amount in gains

mental accounting

the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts

mirroring

a technique that imitates clients' gestures and physical positions or by using a similar verbal style, used to improve rapport with clients

money illusion

the misunderstanding people have in relating nominal rates or prices with real (inflation-adjusted) rates or prices

money jar mentality

another term for mental accounting, the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts

open-ended questions

require clients to answer in their own words, will also facilitate effective communication between clients and planners as goals and expectations are developed

outcome bias

the tendency for individuals to take a course of action based on the outcomes of prior events

overconfidence

leads clients to believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they are

perception

an individual's personal awareness of things, people, events, or ideas

physical mirroring

the financial planner copies the clients' body language

pitch

the sound quality of highness or lowness; it is primarily dependent on the frequency of the sound wave

psychological profiles

understanding the unique profile of a client will allow the planner to accurately predict the way the clients will perceive and judge any recommendations

recency bias

new information, which is more recent, is considered more important and valuable than less current information

regret aversion bias

when individuals do nothing out of excess fear that decisions or actions could be wrong

representativeness

the tendency, when considering choices when making a decision, to recall a past experience similar to the present decision-making situation and assume one is like the other

risk capacity

the degree to which a client's financial resources can cushion risks

risk perception

the client's assessment of the magnitude of the risks being traded off

risk tolerance

the tradeoff that clients are willing to make between potential risks and rewards

self-attribution bias

an ego defense mechanism where individuals take credit for their successes and either blame others or external influences for failures

self-control bias

when individuals lack self-discipline and favor immediate gratification over long-term goals

status quo bias

when comfort with an existing situation leads to an unwillingness to make changes, even though the change is likely beneficial

tone

the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm

values

attitudes and beliefs for which a person feels strongly

verbal mirroring

the financial planner imitates the clients' word use, tone of voice, and communication method

visual learning style

tend to respond to visual objects, such as graphs, charts, pictures, and reading information

adjustable-rate mortgages (arms)

mortgage where the interest rate and payment may change every month, quarter, year, three years, or five years

back-end ratio

total debt should not exceed 36% of gross monthly income

balloon mortgages

a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage

budget

helps clients actively manage their money so they can achieve their financial goals

cash and cash equivalents

low-risk assets that may be readily converted to cash, also known as current assets

closed-end lease

the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period

consumer debt ratio

the ratio of monthly consumer debt payments to monthly net income

conventional mortgage loans

made by commercial lenders in the private sector, also known as conforming loans

current (short-term) liabilities

liabilities that are due within one year from the statement date, such as a promissory note

emergency fund

cash or cash equivalents set aside to offset the expenses of unexpected events, such as a job loss, a medical crisis, or major home repair

fair market value

the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller

federal housing administration (fha) loans

mortgages appeal to buyers who may not meet the financial underwriting requirements for a conventional home loan that the federal government guarantees

fixed outflows

relatively predictable and recurring expenses over which the client does not have much control

fixed-rate loan

a loan with an interest rate that remains constant until paid in full

fixed-rate mortgagqes

have a level interest rate for the term of the loan and a fixed payment amortization schedule

front-end ratio

housing costs should not exceed 28% of gross monthly income

graduated payment mortgage

payable over a long time period, such as 30 years, and has a fixed interest rate

home equity line of credit (heloc)

provides a set amount of credit from which funds may be drawn as needed

home equity loan

receives a lump sum in the amount of the loan, borrowers repay the loan with equal monthly payments over a fixed term

housing cost ratio

the ratio of monthly housing costs to monthly gross income

inflows

include gross salaries and wages, interest and dividend income, rental income, tax refunds, and other amounts received by the client

installment loan

a loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals

interest-only mortgage

the homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds

invested assets

included in this category are stocks, bonds, mutual funds, gems, gold and other precious metals, collectibles, investment real estate, fine art, ownership interests in closely held businesses, vested pension benefits, and similar assets

investing

involves your clients using their money, or capital, to purchase an asset that offers the probability of generating an acceptable rate of return over time, providing potential for earnings while assuming more volatility

liquid assets

assets that may be quickly accessed by the client without the risk of a significant loss to principal

long-term liabilities

liabilities that are due more than one year from the statement date

long-term loan

a loan due more than one year from a specified date

mortgage insurance

a policy that protects lenders against losses that result from defaults on home mortgages

negative amortization

when the agreed-upon monthly payment is less than the accruing interest charges and unpaid interest is added to the mortgage balance, increasing the debt

net worth

the residual value after the value of liabilities has been subtracted from asset values

nonmortgage debt-to-income ratio

a generally accepted rule in personal financial planning is that monthly consumer debt payments should not exceed 20% of net monthly income

open-end lease

generally has a lower monthly payment than a closed-end lease but, at the end of the lease, the lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated

outflows

should be divided into savings and investments, fixed outflows, and variable outflows

personal use assets

includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets

prime loans

mortgages made to borrowers with good credit

pro forma cash flow statement

a planning tool that projects the anticipated inflows and outflows for a future period

reverse amortization

negative equity accumulation in the early years of the loan because the payments during that period typically are not sufficient to pay the interest due

reverse mortgages

a special type of home loan that allows senior citizens with limited income to stay in their homes

saving

the process of putting cash aside in safe, liquid accounts, such as the emergency fund

secured loan

short-term loan

a loan that is due within one year (up to and including one year from a specified date)