Financial Fundamentals - Ch 1

Question 1

What are the 7 Stages of Financial Planning ?

Answer 1

U I A D P I M
1: Understanding the Client’s Personal and Financial Circumstances.
2: Identifying and Selecting Goals.
3: Analyzing the Client’s Current Course of Action and Potential
Alternative Course(s) of Action.
4: Developing the Financial Planning Recommendation
5: Presenting the Financial Planning Recommendation
6: Implementing the Financial Planning Recommendation
7: Monitoring Progress and Updating

Question 2

CFP Board’s Code of Ethics and Standards of Conduct defines “Financial Planning” as ?

Answer 2

COLLABORATIVE process

That helps MAXIMIZE a clients potential for meeting goals

Thru FINANCIAL ADVICE

that INTEGRATES relevant elements of the clients PERSONAL and
FINANCIAL circumstances.

Question 3

Define a Financial Plan

Answer 3

Written document that list of recommendations
to achieve a set of goals and objectives
based on an understanding
of a client’s current financial and personal situation.

Question 4

Define internal and external data collection as part of process within Step 1 of the Financial Planning Process.

Answer 4

INTERNAL DATA - GOALS and VALUES of the client

EXTERNAL Date - External Environment includes current and expected future income, gift and estate taxes, investment returns, inflation and interest rates. job market,

Question 5

Financial planning concepts applied include ?

Answer 5

• Review of client’s risk management portfolio (includes risks retained and risks transferred through the use of insurance contracts)
• Financial statement preparation and analysis including cash flow analysis and budgeting
• emergency fund and debt management (short-term goals)
• long-term goal planning including:
  - achieving financial security (retirement planning)
  - education planning for children’s or grandchildren’s college
  - lump-sum purchases (major expenditures)
  - legacy planning (estate planning)
• income tax planning is integrated throughout all aspects of a financial plan
• the investment planning portfolio is used to fund many of the client’s short-and long-term goals

Question 6

What is the Role of the financial planner ?

Answer 6

EDUCATE the client,
GATHER relevant information,
ANALYZE that information,
ASSIST the client in preparing
IMPLEMENTING a financial plan
MONITOR the progress,

that will achieve the client’s financial goals within the desired time frame.

Question 7

The planner must be ________ in order to understand the attitudes and values of the client ?

Answer 7

Empathetic and assess the attitudes and values of the client as well as the ,,,
client’s risk tolerance
views regarding savings,
spending, taxation,
financial discipline.

Question 8

what should the financial planner should attempt to accomplish during the client introductory meeting ?

Answer 8

• List of DOCS & info that the client needs to bring to first meeting
• Establishing GOALS and discuss how the client’s VALUES fit into those goals.
• Discussion of client’s PERSONAL DATA and FAMILY DATA
• Discuss the planning PROCESS and FEES , provide relevant and required disclosures, and answer questions

-At end of introductory meeting the planner should prepare an ENGAGEMENT LETTER and send it to the client for approval.

Question 9

Engagement Letter

Answer 9

Legal agreement (a contract) between a professional organization (the planner) and a client that defines their business relationship.
Defines:
- Services to be provided,
- Duration of the agreement,
- Methods of communication (email, meetings),
- Expected frequency of contact.
- Conditions under which the agreement can be terminated.

Question 10

Conflicts of interest arise when ,,,

Answer 10

• Interests of one party (the planner) ,, are adverse to the interests of the other party (the client).

-Situations should be AVOIDED , or at the very least continued only with the CLIENTS INFORMED CONSENT.

Question 11

Does CFP Board require an Engagement letter ?

Answer 11

NO
While an engagement letter is NOT required by CFP Board for CFP® professionals providing financial advice or financial planning, the Board does require that certain information and disclosures be provided to clients in one or more documents.

Question 12

Activities that are typically part of a
comprehensive plan include ?

Answer 12

• Preparation and analysis of statements.
• Review of all risk management policies (including life, health, disability, long-term care, property and liability insurance) and what to do about any uncovered areas of risk.
• Evaluation of short-term financial goals including the emergency fund and debt management.
• Establishment of long-term goals including retirement,
  education funding, lump-sum (major) expenditures, and legacy planning including documents.
• Evaluation of the current investment portfolio with the objective of creating a new investment approach that helps to achieve the client’s goals within the risk tolerance of the client.
• Examination and recommendation regarding any special needs situation of the client (divorce, elderly parent, child with special needs)

Question 13

Clients Quantitative information ?

Answer 13

Quantitative information - is measurable and includes the client’s age, income, number of children, death benefit of life insurance policies, and much more
- The family
-The insurance portfolio
* Banking and investment information -about other investments such as rental or business property, including information such as the valuation, amount of debts, and cash flows.
* Taxes - all income, gift and trust tax returns for the last five years if available. * Retirement and Employee Benefits - all retirement information including Social Security statements or benefits (Form SSA 7004 can be used), employer-sponsored retirement plans, and employee benefits (get a copy of the booklets and summary description of plan).
* Estate Planning - all wills, durable powers of attorney for health care decisions, all advance medical directives and any trust documents.
* All personal financial statements

Question 14

Client’s Qualitative information ?

Answer 14

Qualitative information - how the client feels about something, or their attitude or belief, including working versus retiring and spending versus saving.
* Education goals
* Retirement goals
* Employment goals
* Savings goals
* Risk tolerance
* Charitable goals
* General attitude towards spending

Question 15

The clients EXTERNAL Data Collection process includes what data ?

Answer 15

• Interest rates
  the current and prospective outlook including savings rates and mortgage rates
• Housing market - housing is a major asset but markets are local what is the stock of available housing is it a buyer’s or seller’s market
• Job market
• Investment market
• Business cycle -what is the unemployment rate current and prospective outlook peak, contraction, trough, expansion
  where are we now
• Local insurance costs- housing, auto, liability
• Local cost of living
• Expected inflation rate, both short and long term
• Expected rate of increase in the prices of education and medical care
• Legislation that may impact certain industry sectors (e.g., healthcare)
• Current and expected income, gift, and estate tax rates

Question 16

the planner will need to help the client to express a more objectively-stated goal in terms THAT ARE ?????

Answer 16

Specific
Measurable
Achievable
Realistic

Each goal must then be examined with regard to the client’s resources and limitations or constraints.

Question 17

Financial Recommendations made by the financial planner must be based on:

Answer 17

• The scope of the engagement as set forth in the engagement letter
• The goals and objectives of the client
• The information gathered from the client by the planner
• An analysis of the economic environment,

Question 18

The following are some additional situations which typically warrant reviewing the client’s financial plan:

Answer 18

• birth of a family member
• death of a family member
• marriage of a family member
• divorce of a family member
• career change
• job loss
• inheritance
• estate and gift tax law changes
• economic recession * economic recovery

Question 19

The Benefits from Financial Planning

Answer 19

-Identify risks and to establish and prioritize goals.
-Anticipate where financial needs exist (such as, education and retirement needs) and where new risks may arise
-Confidence that with clear direction the client can accomplish their financial goals.

Question 20

Explain why a client should consider using a professional financial planner.

Answer 20

The competent financial planner has knowledge about the following: * mortality risk * disability risk * investment returns * risks associated with various asset classes * the cost of college education * the cost of retirement * the needed savings rate to drive various goals
-A financial planner brings objectivity to an otherwise subjective world.

Question 21

Recognized Certifications in Financial Planning

Answer 21

CERTIFIED FINANCIAL PLANNER CFP
Chartered Financial Consultant (ChFC®)
European Financial Planner (EFP)

CFP Board was founded in July 1985 as the International Board of Standards and Practices for Certified Financial Planners, Inc.,
(IBCFP) by the College for Financial Planning (College) and the Institute of Certified Financial Planners (ICFP)

Question 22

Can a financial planner prepare tax returns for a client ?

Answer 22

Yes,
If the planner is paid a fee for tax preparation, he or she must apply for a PTIN (Preparer Tax Identification Number) from the IRS and will need to renew the PTIN each year. The IRS offers a voluntary Annual Filing Program to encourage tax preparers to participate in continuing education courses each year, but does not require a competency test

Question 23

What is the regulatory authority for Investment advice ?

Answer 23

Securities and Exchange Commission (SEC) and
State securities administrator

Question 24

What is the regulatory authority for the Sale of securities ?

Answer 24

-SEC
-Financial Industry Regulatory Authority (FINRA)
-State securities administrator

Question 25

What is the regulatory authority for Sale of insurance ?

Answer 25

State insurance commission

Question 26

What is the regulatory authority for Banking ?

Answer 26

-Office of the Comptroller of Currency (OCC)
-Federal Reserve Board (FED)
-Office of Thrift Supervision (OTS)

Question 27

What is the regulatory authority for being the Adviser to ERISA qualified retirement plans ?

Answer 27

• Department of Labor (DOL)
• Internal Revenue Service (IRS)

Question 28

What is the regulatory authority for Municipal securities ?

Answer 28

Municipal Securities Rulemaking Board (MSRB)

Question 29

Errors and Omissions (E&O) insurance ?

Answer 29

• Covers all of the duties that the planner performs such as providing investment advice, selling insurance, or selling alternative investments.
• written on a claims-made basis, meaning that the policy provides coverage if the claim is made while the policy is in force.

Question 30

What is ERISA liability coverage ?

Answer 30

-Fiduciary Insurance that protects Planners who are fiduciaries of qualified retirement plans.

Question 31

What is a Fiduciary ?

Types of fiduciary relationships in financial planning include the following:

Answer 31

-A fiduciary is a person in a position of trust and confidence who is required to act for the benefit and best interests of another person.
-Must make full and fair disclosure of all material facts

1. An executor or personal representative of an estate has a duty to act in the best interests of the beneficiaries of the estate.
2. A trustee must act in the best interests of the trust beneficiaries. 3. Guardians are appointed to act in the best interests of the person who is their ward. 4. An agent under a Power of Attorney document is a fiduciary who must act in the best interests of the principal.
3. Advisers to retirement plans have the duty to act in the best interests of the plan participants and beneficiaries.
4. Registered investment advisers are required to provide advice that is in the best interests of the clients

Question 32

What are some Fiduciary Duties ?

Answer 32

1. To act for the benefit of beneficiaries in regard to matters within the scope of the fiduciary relationship.
2. To refrain from delegating acts that can be performed by the fiduciary. 3. To make full disclosure of all facts in any transaction with the beneficiary; any transaction must be fair to the beneficiary, or it can be set aside.
3. To refrain from any self-dealing at the expense of the beneficiaries and to remain loyal to beneficiaries.
4. To preserve property and to make it productive. 6. To invest property prudently according to state laws that may consist of a prudent-person rule, legal-list statute, or Uniform Prudent Investor Act.
5. To be impartial toward beneficiaries so as not to favor income beneficiaries over remainder beneficiaries.

Question 33

Duties of an Executor ?

Answer 33

The executor or personal representative is appointed by a court to gather the decedent’s assets, resolve claims and disputes against the estate, invest assets during the period of administration, prepare an accounting of the estate assets, and make distributions to the beneficiaries according to the will or intestacy laws.

Question 34

Duties of the Trustee ?

Answer 34

Trustee invests the property, collects income, and makes distributions to the beneficiaries, according to the directions of the trust provisions.

Question 35

Duties of the Guardian ?

Answer 35

Appointed by a court to manage the property of an incompetent person during the period of incompetency.

Question 36

Duties of the Agent (POA) ?

What is a Durable Power of Attorney ?

Answer 36

The agent is a fiduciary who must act in the best interest of the principal in fulfilling his or her duties under the POA document.

A durable power of attorney (one that survives the incapacity of the principal) is commonly used in planning for incapacity as part of estate planning.

Question 37

Duties of Fiduciaries Under ERISA ?

Answer 37

1. exercise discretionary authority over the management of qualified retirement plans,
2. exercise any authority over the management or disposition of the plan’s assets,
3. offer investment advice for a fee or other compensation with respect to plan funds or property, or
4. hold any discretionary authority or responsibility in the plan’s administration.

Question 38

ERISA requires that a fiduciary act ?

Answer 38

Solely in the interest of the participants and beneficiaries” and with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent man acting in a like capacity

Question 39

Effective February 15, 2021, FINRA Rule 3241 prohibits “registered persons” (any associated person with a member firm who is registered with the Financial Industry Regulatory Authority (FINRA)) from ???

Answer 39

being named as a beneficiary or as a fiduciary such as executor, trustee, or agent under a power of attorney on behalf of a customer unless written notice is provided

Question 40

A fiduciary is a person of trust and confidence who is required to act in the best interest of another person.

Fiduciary relationships in financial planning include what ROLES ?

Answer 40

A fiduciary is a person of trust and confidence who is required to act in the best interest of another person.
Fiduciary relationships in financial planning include what ROLES :

• Planner to client
• Executors or estate representatives to beneficiaries of the estate
• Trustees to trust beneficiaries
• Guardian to the ward
• Agent to principal under a POA
• Advisers to retirement plans to beneficiaries of the plan
• Registered Investment Advisers (RIAs) to clients

Question 41

How does the CFP effectively communicate with a client ?
4 main points

Answer 41

How does a planner effectively communicate with a client?

• Address the client formally
• Actively listen to the client
• Respect the client’s time
• Show empathy

Question 42

Does the Investment Advisers Act of 1940 specify that Advisors act as a fiduciary ?

Answer 42

The Investment Advisers Act of 1940 specified the relationship between registered investment advisers and their advisory clients as a fiduciary relationship

Question 43

Can a Fiduciary be held liable for failing to take care and manage an account ?

Answer 43

Yes, A fiduciary who breaches a duty to beneficiaries may be held personally liable for any loss to the beneficiaries.

Question 44

Is a Fiduciary working as a CFP legally liable for damages ?

Answer 44

NO, The duties prescribed by CFP Board for CFP® professionals are not grounds for legal liability, but are instead required in the terms of agreement to use the CFP® marks.

Question 45

What activities are in this step ?

STEP 1

UNDERSTANDING Understanding the Client’s Personal and Financial

Answer 45

Step 1: UNDERSTANDING - Personal & Financial Circumstances.
Work with client

1. GATHER INFO - Qualitative & Quantitative information for client.
   - Quantitative info :__________________________
   Family
   Insurance
   Banking and Investment information
   Taxes
   Retirement and employee benefits
   Estate Planning
   Review all Financial statements

Qualitative info::_______________________________
Clients attitudes and beliefs regarding
Education goals, retirement goals, Employment goals, Savings goals, Rick tolerance, Charitable goals, spending attitude

2. ANALYZE Information
3. INCOMPLETE DATA - addressed

Document the External Data at time of engagement:
Markets, interest rates, job market, business cycle, local cost of living, tax law and changes.

Question 46

What activities are in this step ?

Step 2: IDENTIFYING & SELECTING GOALS .

Answer 46

Step 2: Work with client IDENTIFYING & SELECTING GOALS .

• IDENTIFY - NEEDS & GOALS ( work with client )
• SELECT and PRIORITIZE GOALS with the help of the adviser
• Help client identify potential goals, especially as it relates to goals that are mutually exclusive.
• SELECT and PRIORITIZE GOALS with the help of the adviser
• Discuss how some goals might impact others

Question 47

What activities are in this step ?

Step 3: ANALYZING the Client’s Current Course of Action and Potential Alternative Course(s) of Action.

Answer 47

Step 3: CPF ANALYZING Client’s Current Course of Action and Potential Alternative Course(s) of Action.

• use FINANCIAL PLANNING APPROACHES TO
  ANALYZE , EVALUATE AND MAKE RECOMMENDATIONS
• ANALYZE ADVANTAGES & DISADVANTAGES of the Client’s current
  course of action.
• Potential ALTERNATIVE COURSE of action to consider and analyze

Question 48

What activities are in this step ?

Step 4: DEVELOPING the Financial Planning Recommendation(s).

Answer 48

Step 4: DEVELOPING the Financial Planning Recommendation(s).

• SELECT RECOMMENDATIONS
  designed to maximize the potential for meeting the Client’s goals.
• Consider the ASSUMPTIONS and estimates used.

________________________________________________________________________
Suggestions by financial planner must be based on:
* The scope of the engagement as set forth in the engagement letter
* The goals and objectives of the client
* The information gathered from the client by the planner
* An analysis of the economic environment, including the current and projected tax law environment
* The alternatives available to accomplish the client’s goals

-Recommendations made and discussed with the client with further questions and investigation before an agreement on final plan recommendations can be made.

Question 49

What activities are in this step ?

Step 5: PRESENTING the Financial Planning Recommendation(s).

Answer 49

Step 5: PRESENTING the Financial Planning Recommendation(s). In this step, the adviser presents his or her recommendations to the client.

• PRESENT SELECTED RECOMMENDATIONS & information required to be considered when developing the recommendations.

Question 50

What activities are in this step ?

Step 6: IMPLEMENTING the Financial Planning Recommendations

Answer 50

Step 6: IMPLEMENTING the Financial Planning Recommendation(s).

• RESPONSIBILITIES - decide who is doing what
• Identify, analyze and SELECT ACTIONS , products and services.
• RECOMMEND ACTIONS, products and services for implementation.
• START - with actions, products, or services..
• Discuss the basis for actions, products, or service, as well as the timing for implementation.

Question 51

What activities are in this step ?

Step 7: MONITORING Progress & Updating

Answer 51

Step 7: MONITORING Progress and Updating.

• Monitor & Update RESPONSIBILITIES
• Monitor PROGRESS towards goals
• get CURRENT qualitative and quantitative information.
• UPDATE goals, recommendations, or implementation decisions.
• If the adviser has responsibility, then he or she must analyze, at appropriate intervals, the progress toward achieving the client’s goals.
• Working with the client, the adviser would make recommendations to modify the plan as needed and assist with implementing those recommendations.

Question 52

According to the cash flow approach, all of the following recommendations may have a positive impact to cash flow except:

A. Raise insurance deductibles.
B. Reduce the amount of insurance coverage.
C. Payoff existing debt with balance sheet assets.
D. Purchase new insurance to cover an existing risk

Answer 52

D. Purchase new insurance to cover existing risk

Question 53

During which step of the financial planning process would a planner review financial statement information?

A. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
B. Identifying and Selecting Goals
C. Understanding the Client’s Personal and Financial Circumstances.
D. Developing the financial plan recommendations.

Answer 53

D> Understanding the Client’s Personal and Financial Circumstances.