Professional Knowledge Flashcards

Under the AAFM code of ethics, what should a financial professional do first when a personal interest may conflict with a client's interest?

Answer: Disclose the conflict to the client

Ethical standards require prompt, full disclosure of any conflict of interest to the affected client.

A client in the accumulation phase of retirement planning with a 30-year horizon is best suited to which asset allocation?

Answer: Growth-weighted, higher equity exposure

A long time horizon allows greater equity exposure to capture growth and ride out volatility.

What does 'time value of money' fundamentally state?

Answer: A dollar today is worth more than a dollar in the future

Money available now can be invested to earn returns, making it more valuable than the same amount later.

Diversification primarily reduces which type of risk?

Answer: Unsystematic (company-specific) risk

Diversification spreads exposure across assets, mitigating firm-specific risk but not overall market risk.

Which document outlines a client's complete financial situation, goals, and recommended strategies?

Answer: A comprehensive financial plan

A financial plan consolidates the client's data, objectives, and the advisor's recommendations.

What is the primary purpose of an emergency fund in personal financial planning?

Answer: Cover unexpected expenses without incurring debt

An emergency fund provides liquid reserves so unplanned costs don't force high-cost borrowing or asset sales.

A fiduciary duty requires a financial professional to act in whose best interest?

Answer: The client's

Fiduciaries are legally and ethically bound to place the client's interests above their own.