FINA4352 GP Chapters 1-3 Key Terms

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109 Terms

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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
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code of ethics and standards of conduct
establishes the level of professional practice that is expected of cfp professionals
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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
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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
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financial advice
the development of a financial plan
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financial planning
the integrated, coordinated management of an individual's financial situation
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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
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relevant elements
incorporated into the financial planning process when financial planning takes place
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active listening
paying full attention to what their clients are saying and responding by paraphrasing the clients' comments
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affinity bias
the tendency to make decisions based on how individuals believe the outcomes will represent their interests and values
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anchoring
individuals making irrational decisions based on information that should have no influence on the decisions at hand
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attitudes
reflect a person's opinions, values, and wants
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auditory learning style
retain information by hearing or speaking
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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
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beliefs
a type of attitude because they reveal the understanding of some aspect of a person's life
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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
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closed-ended questions
the types of questions that limit data gathering because they only require a "yes" or "no" answer
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cognitive dissonance
mental discomfort when newly acquired information conflicts with pre-existing understanding
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cognitive errors
decision-making based on well-known concepts that may or may not be correct
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confirmation bias
when individuals look for new information or distort new information to support an existing view
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conservatism bias
when individuals initially form a rational view but fail to change that view as new information becomes available
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context
includes past history or any conditions that presently exist
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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
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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
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endowment bias
when an asset is felt to be special and more valuable simply because it is already owned
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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
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herding
when investors trade in the same direction or in the same securities, and possibly even trade contrary to the information they have available
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hindsight bias
a selective memory of past events, actions, or what was known in the past
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illusion of control bias
when clients believe they can control or affect outcomes of, say, the market when they cannot
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interpersonal communication
communicating one on one, is important throughout the financial planning process
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judgment
making conclusions about what has been perceived
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kinesthetic learning style
understand concepts better using a hands-on approach
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leading responses
guide clients to give more details, making a meeting of the minds more likely
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loss aversion theory
clients fearing losses much more than they value gains, and prefer avoiding losses to acquiring the same amount in gains
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mental accounting
the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts
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mirroring
a technique that imitates clients' gestures and physical positions or by using a similar verbal style, used to improve rapport with clients
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money illusion
the misunderstanding people have in relating nominal rates or prices with real (inflation-adjusted) rates or prices
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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
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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
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outcome bias
the tendency for individuals to take a course of action based on the outcomes of prior events
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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
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perception
an individual's personal awareness of things, people, events, or ideas
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physical mirroring
the financial planner copies the clients' body language
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pitch
the sound quality of highness or lowness; it is primarily dependent on the frequency of the sound wave
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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
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recency bias
new information, which is more recent, is considered more important and valuable than less current information
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regret aversion bias
when individuals do nothing out of excess fear that decisions or actions could be wrong
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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
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risk capacity
the degree to which a client's financial resources can cushion risks
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risk perception
the client's assessment of the magnitude of the risks being traded off
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risk tolerance
the tradeoff that clients are willing to make between potential risks and rewards
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self-attribution bias
an ego defense mechanism where individuals take credit for their successes and either blame others or external influences for failures
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self-control bias
when individuals lack self-discipline and favor immediate gratification over long-term goals
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status quo bias
when comfort with an existing situation leads to an unwillingness to make changes, even though the change is likely beneficial
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tone
the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm
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values
attitudes and beliefs for which a person feels strongly
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verbal mirroring
the financial planner imitates the clients' word use, tone of voice, and communication method
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visual learning style
tend to respond to visual objects, such as graphs, charts, pictures, and reading information
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adjustable-rate mortgages (arms)
mortgage where the interest rate and payment may change every month, quarter, year, three years, or five years
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back-end ratio
total debt should not exceed 36% of gross monthly income
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balloon mortgages
a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage
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budget
helps clients actively manage their money so they can achieve their financial goals
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cash and cash equivalents
low-risk assets that may be readily converted to cash, also known as current assets
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closed-end lease
the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period
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consumer debt ratio
the ratio of monthly consumer debt payments to monthly net income
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conventional mortgage loans
made by commercial lenders in the private sector, also known as conforming loans
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current (short-term) liabilities
liabilities that are due within one year from the statement date, such as a promissory note
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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
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fair market value
the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller
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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
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fixed outflows
relatively predictable and recurring expenses over which the client does not have much control
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fixed-rate loan
a loan with an interest rate that remains constant until paid in full
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fixed-rate mortgagqes
have a level interest rate for the term of the loan and a fixed payment amortization schedule
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front-end ratio
housing costs should not exceed 28% of gross monthly income
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graduated payment mortgage
payable over a long time period, such as 30 years, and has a fixed interest rate
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home equity line of credit (heloc)
provides a set amount of credit from which funds may be drawn as needed
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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
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housing cost ratio
the ratio of monthly housing costs to monthly gross income
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inflows
include gross salaries and wages, interest and dividend income, rental income, tax refunds, and other amounts received by the client
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installment loan
a loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals
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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
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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
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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
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liquid assets
assets that may be quickly accessed by the client without the risk of a significant loss to principal
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long-term liabilities
liabilities that are due more than one year from the statement date
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long-term loan
a loan due more than one year from a specified date
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mortgage insurance
a policy that protects lenders against losses that result from defaults on home mortgages
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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
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net worth
the residual value after the value of liabilities has been subtracted from asset values
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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
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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
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outflows
should be divided into savings and investments, fixed outflows, and variable outflows
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personal use assets
includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets
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prime loans
mortgages made to borrowers with good credit
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pro forma cash flow statement
a planning tool that projects the anticipated inflows and outflows for a future period
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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
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reverse mortgages
a special type of home loan that allows senior citizens with limited income to stay in their homes
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saving
the process of putting cash aside in safe, liquid accounts, such as the emergency fund
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secured loan

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