CFA Level III: Private Wealth Glossary
22 essential terms and definitions for CFA Level III: Private Wealth. Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
A
- After-Tax Return
- After-tax return is the portfolio return that remains after accounting for taxes on income, dividends, and realized gains. It is the relevant return for taxable investors and the basis for tax-aware portfolio construction decisions.
- Asset Location
- Asset location is the tax-aware decision about which account type (taxable, tax-deferred, or tax-exempt) to hold each asset class in. Tax-inefficient assets generally belong in tax-advantaged accounts to maximize after-tax wealth.
B
- Bypass Trust
- A bypass trust uses a deceased spouse's estate-tax exemption to shelter assets from estate tax at the surviving spouse's later death. It preserves the deceased spouse's exemption that would otherwise have been wasted if everything passed outright to the surviving spouse.
C
- Charitable Remainder Trust (CRT)
- A charitable remainder trust pays an annual amount to the donor (or other non-charitable beneficiary) for life or a term, then distributes the remainder to charity. It provides income, an immediate income-tax charitable deduction, and removal of the asset from the donor's taxable estate.
- Concentrated Position Management
- Concentrated position management addresses the risks of an oversized single-stock holding (typically founder stock or inherited stock). Tools include diversification, derivative-based hedging, monetization via exchange funds, charitable transfer, and prepaid forward sales.
D
- Decumulation
- Decumulation is the phase of an individual's financial life where withdrawals from accumulated wealth fund consumption. It introduces sequence-of-returns risk because adverse early-period returns can permanently deplete the portfolio.
E
- Estate Planning
- Estate planning structures the transfer of wealth to minimize transfer taxes, achieve donor intent, and provide for heirs. Core tools are wills, trusts, lifetime gifts, beneficiary designations, and life insurance.
F
- Financial Capital
- Financial capital is the present value of an individual's accumulated investments, real estate, and savings. It is one component of total wealth alongside human capital and grows through saving and investment returns.
G
- Generation-Skipping Transfer (GST) Tax
- The GST tax is a federal transfer tax on gifts and bequests to grandchildren or more remote descendants. It is imposed on top of the estate or gift tax to prevent multi-generation tax avoidance through generation-skipping bequests.
- Goals-Based Wealth Management
- Goals-based wealth management organizes a client's portfolio into sub-portfolios mapped to specific goals (retirement, education, philanthropy). Each goal has its own time horizon and risk budget, and progress is measured against goal funding rather than benchmark-relative performance.
H
- Human Capital
- Human capital is the present value of the individual's expected future labor earnings. It typically dominates total wealth for young workers, declines with age, and is treated as a bond-like or equity-like asset depending on income volatility and correlation with markets.
I
- Inter Vivos Transfer
- An inter vivos transfer is a gift made during the donor's lifetime. It is commonly used to remove appreciating assets from the taxable estate and to leverage the annual gift-tax exclusion and the lifetime exemption.
- Investment Policy Statement (IPS) for Individuals
- An individual IPS specifies the client's return objective, risk tolerance, time horizon, tax status, liquidity needs, legal constraints, and unique circumstances. It is the written contract that governs portfolio decisions and frames performance evaluation.
L
- Liquidity Reserve
- A liquidity reserve is cash or near-cash holdings sized to fund near-term spending without forcing untimely sales of risky assets. It dampens sequence-of-returns risk during the decumulation phase.
- Loss Aversion
- Loss aversion is the behavioral finding that investors experience the pain of a loss roughly twice as strongly as the pleasure of an equal-sized gain. It explains reluctance to realize losses, irrational holding of underwater positions, and demand for downside protection.
M
- Mortality-Weighted Cash Flows
- Mortality-weighted cash flows weight each future period in a retirement or insurance projection by the probability the individual is still alive at that point. The result is a more accurate present value of contingent cash flows than ignoring survival probabilities.
R
- Required Return
- Required return is the rate of return needed to meet a client's stated goals given the client's savings rate and time horizon. If the required return is infeasible at the client's risk tolerance, the IPS process must revisit either the goals, the savings rate, or the timeline.
- Risk Capacity
- Risk capacity is the objective measure of how much loss a client can absorb without compromising goals. It is driven by time horizon, financial reserves, and human capital, and can be larger or smaller than the client's subjective willingness to take risk.
- Risk Tolerance
- Risk tolerance is the subjective measure of how much loss a client is willing to bear without changing investment behavior. When tolerance is lower than capacity, the binding constraint on the portfolio is the client's emotional comfort, not the math.
S
- Stages of Wealth
- Stages-of-wealth frameworks distinguish accumulation (working years), maintenance, and decumulation (retirement) phases of an individual's financial life. Each stage has different objectives, cash-flow profiles, and risk priorities.
T
- Tax-Loss Harvesting
- Tax-loss harvesting realizes investment losses to offset gains and reduce current-year tax liability. It is subject to the wash-sale rule, which disallows the loss if a substantially identical security is purchased within 30 days.
- Total Wealth
- Total wealth is the sum of an individual's human capital and financial capital. It is the appropriate base for diversification and risk decisions: financial-asset allocation should consider the implicit exposures already embedded in human capital.