Financial Fundamentals - Ch 2

Question 1

WHAT are 3 general schools of counseling ?

Answer 1

1. Developmental
2. Humanistic
3. Cognitive-Behavioral

Question 2

What is the The “Developmental” School of Thought of counseling ?

Answer 2

-Believes that human development occurs in stages over time. -Relationships that are formed early in life become a template for establishing relationships in adulthood
-All humans develop and progress in a predictable sequence
-Once the client can resolve those earlier conflicts or disruptions, there is more understanding and self-awareness, thus allowing the client to grow

Question 3

What is the “Humanistic” School of Thought ?

Answer 3

–A Humanistic counselor would define mental health as having congruent and aligned thoughts, feelings, and behavior.
-Goals in treatment are centered on establishing congruence and acceptance of personal responsibility.
-questioning is used, the emphasis is likely to be more weighted on process and feelings rather than details or content.
-Counselor would help clients articulate for themselves what their questions are.

Question 4

What is the “Cognitive-Behavioral” School of Thought ?

Question 5

Self-talk refers to ??

Answer 5

that ongoing internal conversation one has with oneself that can influence feelings

Question 6

Developmental School of thought characteristics ?

Answer 6

Nature of Relationship___________
* Moderately directive. * Alliance is important.
* Provides client a chance to resolve emotional needs
not met during earlier development

Emphasis of Treatment _________
* Healthy development. * Focus on past experiences in family of origin and relationship to present difficulties.
* Resolution of conflict. * Understanding and self-awareness.

Microskills Most Likely to be Used Frequently______
* Active listening. * Client observation. * Paraphrasing. * Feeling reflection. * Supportive challenging. * Reflection of meaning.

Question 7

Humanistic school of thought characteristics ?

Answer 7

Nature of Relationship___________
* Varies from nondirective (person-centered, existential) to highly directive.
* Alliance is extremely important; is the basis of the treatment (person-centered, existential).

Emphasis of Treatment _________
* Experiencing present moment.
»> * Accepting personal responsibility.
* Emphasis on freedom of choice.
* Authenticity, fully in touch with oneself.

Microskills Most Likely to be Used Frequently______
* Active listening. * Client observation. * Feeling reflection. * Reflection of meaning. * Supportive challenging.

Question 8

Cognitive-Behavioral school of thought characteristics ?

Answer 8

Nature of Relationship___________
»* Highly directive.
* Alliance only important to extent client feels engaged to participate in assignments.

Emphasis of Treatment _________
* Identification of behavioral excesses and inadequacies.
* Identification of reinforcers.
* Manipulation of the reinforcers to change the behavior and thought process.

Microskills Most Likely to be Used Frequently______
* Active listening. * Questioning. * Reflection of meaning. * Supportive challenging.

Question 9

What are the fundamental elements of communication?

Answer 9

A sign could be a word, object, gesture, tone, quality, image, substance, or other reference according to a code of shared meaning among those who use that sign for communication purposes.

Question 10

Identify non-verbal gestures that substitute for or reinforce verbal expressions.

Answer 10

-Communicate feelings and attitudes from the client to the financial adviser.
-Mainly provided from the body and the voice.
-Body position, body movement, voice tone and voice pitch

-Crying
-Sign of Joy

Question 11

Define passive listening.

Answer 11

listening in the normal or usual conversation or conversational setting to which most people are accustomed at seminars, in class, at social gatherings,
-rests entirely on another person, and the person receiving the information sits back and listens

Question 12

Define active listening.

Answer 12

-Requires the listener’s undivided attention.
-Concentration on what the speaker is saying. The listener must put aside irrelevant thoughts.
-advisers should strive to be active listeners throughout their sessions with clients.
-While it is best if the client is engaged in active listening when it comes time for input by the adviser and recommendations to the client,
-Clarifying a client’s statement is part of the process of feedback under active listening.

Question 13

Describe reflective listening

Answer 13

-Reflective listening is similar to active listening
-receiver devotes reflective attention to both the content being said and the feelings that are being expressed (or in some cases, that the client is having difficulty expressing or articulating).
- demonstration of empathy.
-Listen only with the intent to understand what is being said. There is no judgment or personal reaction on the part of the receiver

Question 14

Define open and closed questions.

Answer 14

Open questions:___________
Will result in a person answering with a lengthy response.
Begin with words such as how, what, when, where, who and why. Closed questions often lead with “is, are, do, did, could, would, or have
-The why” question may be ill-advised because it could have limited benefit for the client. It could place the client in a position of having to justify what was done, and that could put the client in a defensive posture.

Closed questions :________
Seeks a response that is very specific and commonly involves an answer that can be accomplished with a single word or two.

Question 15

Explain how thinking of a response can hamper listening.

Answer 15

You are NOT listening to the client

Question 16

Motivational interviewing (MI) is a communication technique originally developed to ??

Answer 16

The focus is on overcoming ambivalence to change by guiding the client to:
1. express the desire and reason a change is needed (their motivation for change),
2. discover their ability to change, and
3. commit to making the change. Ultimately, change will not occur until the client both makes the decision to change and is ready to take action

Question 17

4 Key Principles of Motivational Interviewing ?

Answer 17

PARTNERSHIP - a collaborative process

EVOCATION - draws out the client’s priorities, values, and wisdom to explore reasons for change and support success.

ACCEPTANCE -is nonjudgmental, seeks to understand perspectives and experiences, expresses empathy, highlights strengths, and respects a client’s right to make informed choices about changing or not changing

COMPASSION -actively promotes and prioritizes clients’ welfare and well being in a selfless manner.

Question 18

Does the CFP Board’s Financial Planning Practice Standards require that the CFP® professional explore the client’s values, attitudes, etc ??

Answer 18

YES. the CFP Board’s Financial Planning Practice Standards require that the CFP® professional explore the client’s values, attitudes, expectations, and time horizons as they affect the client’s goals.

Question 19

Define joining as it relates to client gathering of information.

Answer 19

establishing a trusting relationship is referred to as joining with the client

Question 20

Define mirroring as a type of communication.

Answer 20

Mirroring (a.k.a. matching or pacing) is another communication skill that planners can utilize to help foster trust and create rapport. Mirroring occurs when the planner synchronizes his or her verbal and nonverbal behavior, including body language, gestures, breathing (fast or slow, deep or shallow), and language and voice quality, with those of the client.

Question 21

What are the 4 Assumptions and Building Blocks of Traditional Finance or Modern Portfolio Theory (also referred to as “MPT” ) ?

Answer 21

Assumptions and Building Blocks of Traditional Finance on four basic premises: ( developed in the 1950’s and 1960’s )

1. Investors are Rational
2. Markets are Efficient
3. Mean-Variance Portfolio Theory Governs
4. Returns are Determined by Risk (Beta)

Question 22

Define the “rational investor” as it relates to the Traditional Finance framework ?

Answer 22

-more wealth as compared to less wealth.
-The source of the wealth is not important.
-The more value was obtained, or more money was realized or earned.

Question 23

Define Efficient Markets as it relates to the Traditional Finance framework ? ?

Answer 23

• a stock’s share price in the market incorporates and reflects all relevant information about that stock.
• Stocks are deemed at all times to trade at their fair value on stock exchanges, thus preventing investors from buying undervalued stocks or selling overvalued stocks

Question 24

Define Intrinsic Value of a security

Answer 24

Intrinsic value is the underlying value of a security or stock when considering future cash flows and the riskiness of the security.

Question 25

Define An unbeatable market

Answer 25

May allow for the generation of excess returns, including times of temporary overvaluation or undervaluation (i.e., mispricings).
An overvaluation (i.e., a “bubble”) can occur, but such occurrences are rare and seen as anomalies that do not present consistent opportunities for excess returns.

Question 26

Define the Mean-Variance Portfolio Theory

Answer 26

-Traditional Finance is that investors, as computer-like as they are, follow the Mean-Variance Portfolio Theory faithfully and tailor their portfolios to comply with it constantly.
-Mean-Variance investors choose portfolios by viewing and evaluating mean (averages) and variance.
-Variance in this sense is the range of expected difference between a projected return and an actual return.

Question 27

Define the Risk Yields Expected Returns

Answer 27

• Deals with Risk, in this decision-making process
• measured by “Beta.” Beta is a concept borrowed from the CAPM.
  (Capital Asset Pricing Model )
  -The difference between the return of the market (rm) and the risk-free rate of return (rf) is considered the risk premium (rm - rf).
  -The risk premium is the increase in return an investor should be compensated to take on the risk of a market portfolio versus investing in a risk-free asset.

CAPM formula is as follows: r = rf + Beta (rm - rf)

Question 28

Define the the Beta of a stock

Answer 28

-Calculation representing the volatility of an asset in relation to the volatility of the overall market
or a given representative index.
-Beta is the measure of an asset’s risk in correlation to the market or to an alternative benchmark.

Question 29

Define Behavioral Finance

Answer 29

-Attempts to understand “normal investors” and how the action or inaction of these investors reflects collectively in the overall market.

Question 30

What are the 4 main premises or assumptions in the area of Behavioral Finance ?

Answer 30

1. Investors are Normal - (make mistakes)
2. Markets are NOT efficient (collection of Normal people and
   provides deviations in price from fundamental value )
3. Behavioral Portfolio Theory governs
4. Risk alone does NOT determine returns

Question 31

Define the goal based theory called “Behavioral Portfolio Theory” ?

Answer 31

• investors segregate their money into various mental accounting layers.
  –people “compartmentalize” certain goals to be accomplished in different categories based on risk.
• Behavioral Portfolio Theory can be explained by visualizing a pyramid with layers that correspond to certain goals.
  -These goals could include food and shelter, a secure retirement, paying for college education, paying for children’s expenses like weddings, or being rich enough to fulfill a lifelong dream or desire

Question 32

Returns are determined by risk (beta) in both Traditional and Behavioral Finance.
a. True b. False

Answer 32

False

Question 33

In Traditional Finance, investors are assumed to be rational.
a. True b. False

Answer 33

true

Traditional Finance is pure and concerned with risk-reward and risk-return

Question 34

Define Covariance

Answer 34

-Measure of how two securities change or move together when combined or of how the price movements between two securities are related to each other.
-Measure of relative risk.

Question 35

In its simplest form, the Capital Asset Pricing Model could be expressed in the following equation:

Answer 35

Expected Return = F (market factor)

Question 36

The Behavioral Asset Pricing Model is expressed in the following equation:

Answer 36

Expected Return = F (market factor, book to market ratio, market capitalization, momentum, affect factor, social responsibility factor, status factor, and more)2

Question 37

What Makes Investors Normal Instead of Rational ?

Answer 37

Cognitive Biases, Errors and Being Human

Question 38

Markets are assumed to be efficient in both Traditional and Behavioral Finance.
a. True b. False

Answer 38

False

Question 39

Define heuristic.

Answer 39

• A tool used in the minds of people, also known as a “rule of thumb.”
• The heuristic serves to basically shorten the decision-making process for the decision maker, or may make the process easier

Question 40

Describe 3 common heuristics associated with financial decisions.

Answer 40

1. Affect heuristic - judging something, whether it is good or bad.
2. Availability Heuristic -relies on knowledge that is readily available in his or her memory
3. Similarity Heuristic - decision or judgment is made when a similar situation occurs. The mind of the individual goes back to a similar decision from a prior situation

Question 41

Define comfort zone in behavioral psychology,

Answer 41

Person functions without anxiety or risk, but behaviors are limited by mental boundaries.

-getting out of the comfort zone raises anxiety, yet increases focus and performance.
-Anxiety will increase to a point where an optimum performance level is reached, and then higher anxiety will cause performance to decline.

Question 42

Define 9 common “Cognitive biases” contributing to irrational or detrimental financial decision-making.

Answer 42

1. Anchoring- Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question.
2. Confirmation bias. Filter information and focus on information supporting their opinions.
3. Recency bias - occurs when too much weight is given to recent observations or stimuli versus long-term historical trends.
4. Gambler’s fallacy- In the realm of probabilities, misconceptions can lead to faulty predictions as to occurrences of events. The gambler’s fallacy is one of the incorrect assumptions from the world of probabilities.

5.Herding -People tend to follow the masses or the “herd.” They mimic the actions or decisions of a larger group, even though the individual may not have necessarily made the same choice

6. Hindsight Bias - The person who is making the investment decision believes that some past event was obvious or predictable. If it is obvious and predictable, then the decision-maker believes that the next problem will be obvious and predictable, and hence can be avoided
7. Overconfidence - mostly rely on their skills and capabilities to do their own homework or make their own decisions.Overconfidence is believed to be a driver of excess trading.
8. Overreaction - People tend to put more emphasis on their recent experience rather than on other factors.
9. Prospect Theory - people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses.

Question 43

The Disposition Effect

Answer 43

A subset of Behavior Finance

The disposition effect refers to our tendency to prematurely sell assets that have made financial gains, while holding on to assets that are losing money. We are driven to sell our winning investments in order to ensure a profit, but are averse to selling losing investments in hopes of turning them into gains

Question 44

Other types of biases (e.g., confirmation bias and disposition effect) may be overcome by ???

Answer 44

By simply educating the client about the bias from a behavior finance perspective

Question 45

Some biases (e.g., overconfidence bias, herding, etc.) may be mitigated by ??

Answer 45

By encouraging the client to serve as his own devil’s advocate by asking the client to evaluate whether this still looks like a good investment if the value decreases.

Question 46

Behavioral Finance is more subjective than Traditional Finance and does not have a single cohesive theory.
a. True b. False

Answer 46

True

Behavioral Finance, however, is far more subjective, with consideration to a wide range of cognitive biases and areas of psychology and sociology to consider

Question 47

How would Traditional Finance proponents would explain that bubbles occur?

Answer 47

Traditional Finance proponents would explain that bubbles occur

when prices are correctly placed and high priced stocks are less risky or have good cash flow prospects.

Question 48

How would Behavioral Finance proponents would explain that bubbles occur

Answer 48

Behavioral Finance proponents would explain that bubbles occur :

Because investor sentiment comes in waves and can drive up a stock price beyond its fundamental value, or if stocks are falling, that fall can lead to a crash because of panic.

Question 49

Financial psychology incorporates a broad spectrum of related disciplines and sub specialties of psychology, which may include: ??

Answer 49

Financial psychology incorporates a broad spectrum of related disciplines and sub specialties of psychology, which may include: behavioral finance,
financial therapy,
clinical and cognitive psychology,
developmental psychology,
human sciences.

Question 50

Define financial well-being.

Answer 50

Consumer Financial Protection Bureau (CFPB) defines financial well-being as:

“a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life

Question 51

Financial Therapy

Answer 51

A process informed by both therapeutic and financial competencies that helps people think, feel, communicate, and behave differently with money to improve overall well-being through evidence-based practices and interventions

Question 52

American Psychological Association (APA) Dictionary of Psychology defines socialization as ?

Answer 52

the process by which individuals acquire social skills, beliefs, values, and behaviors necessary to function effectively in society or in a particular group.”

A client’s socialization will often be reflected in the client’s goals and will impact the interaction and relationship with the financial planner and the financial planning process

Question 53

Multicultural Psychology is defined as ?

Answer 53

Multicultural Psychology is defined as

“an extension of general psychology that recognizes that multiple aspects of identity influence a person’s worldview, including race, ethnicity, language, sexual orientation, gender, age, disability, class status, education, religious or spiritual orientation, and other cultural dimensions, and that both universal and culture-specific phenomena should be taken into consideration when psychologists are helping clients, training students, advocating for social change and justice, and conducting research.

Question 54

A planner needs to be sensitive to non-financial goals that may be of equal or greater importance to a client than the financial goals.
A. true B False

Answer 54

TRUE

Question 55

Define Social Consciousness

Answer 55

Awareness of and sense of responsibility for problems or injustices that exist within society

A person’s conscience is the moral compass by which they judge situations as right or wrong, and is influenced by cultural, political, economic, and other factors.

Some example in investing include: in the form of Socially Responsible, Environmental, Social, and Governance (ESG), or Impact investing

Question 56

Define Risk Capacity

Answer 56

Amount of risk a client can afford to take on

Question 57

Define Risk propensity

Answer 57

Amount of risk a client is actually willing to take on.

It is a psychological element based upon the client’s comfort level with taking on risk and can be difficult to objectively measure.

A client’s risk propensity, or risk tolerance, doesn’t always align with his or her capacity

Question 58

1. Can the manner in which a financial communicates with clients throughout the process be influenced by the clients learning style ?

2 Name 3 learning styles and what they require of the CFP

Answer 58

1. YES
2. Visual, - Use pictures and charts
   Auditory - Explain verbally and repeat back.
   Kinesthetic (or tactile).- Hand-nos, client use software etc.

Question 59

List and describe the five stages of change.

Answer 59

1. Pre-Contemplation -No intent to change (may be unaware of or in denial that change is needed)
   2 .Contemplation -Aware that change is needed and considering making change, but not yet ready to take action
2. Preparation -Gathering information (from a
   professional) in preparation to make a change
3. Action - implement the plan (changes in behavior, environment, etc.). Bad habits transition to healthier habits
4. Maintenance- Prevention of relapse

Question 60

Comfort zone

Answer 60

a psychological state in which a person functions without anxiety or risk.

Breaking through that comfort zone can cause anxiety and stress around the potential of being judged or isolated

Question 61

Money Scripts

Answer 61

Money Avoidance - try not to think about money
Money Worship - buy things to create happiness
Money status - need to keep up the appearance of being successful
Money Vigilance - money should be saved

Question 62

Money disorders

Answer 62

Compulsive buying disorder (CBD) - excessive preoccupation with shopping and spending that leads to distress

Hoarding- accumulating and being unable to discard possessions that most people would consider worthless.

Gambling disorder - persistent and recurring problematic gambling leads to significant impairment and stress

Workaholism- anxiety or depression.

Financial dependence - the result of reliance on unearned income from another person to the extent that it creates anxiety around the fear of being cut off from that income. it may suppress their motivation and desire to succeed on their own

Financial enabling - is the opposite of financial dependence and occurs when one individual provides financial assistance that keeps others dependent

Question 63

Financial infidelity ?

Answer 63

Financial infidelity is the act of engaging in significant financial transactions without the knowledge and support of a spouse or partner.

Question 64

financial enmeshment ?

Answer 64

When parents involve children in adult financial decisions and conflicts at a time when the child is not yet emotionally and cognitively prepared to cope with such decisions and conflicts, financial enmeshment occurs.

Question 65

financial exploitation ?

Answer 65

The fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual, including a caregiver or fiduciary, that uses the resources of an older individual for monetary or personal benefit, profit, or gain, or that results in depriving an older individual of rightful access to, or use of, benefits, resources, belongings, or assets.”

Question 66

Financial enabling is the opposite of financial dependence and occurs when one individual, whether intentionally or unintentionally, provides financial assistance that keeps others dependent.
a. True b. False

Answer 66

TRUE

Question 67

Financial planning is values-driven (or values-based ?

Answer 67

when the planner seeks to develop a financial plan that serves goals reflecting the client’s spiritual, emotional, and personal needs in addition to financial needs.

The use of open-ended questions (or open-ended prompts) and guided imagery can be especially important when practicing values-driven planning.

Question 68

What is intrinsic motivation and extrinsic motivation ?

Answer 68

Intrinsic motivation comes from within and is often associated with satisfaction and enjoyment while extrinsic motivation comes from an outside reward (you expect to get something in return) or avoidance of punishment.

Question 69

What are the Basic Needs that Determine Motivation ?

Answer 69

Competence
Relatedness
Autonomy

Question 70

positive psychology ?

Answer 70

positive psychology is described as “the scientific study of the strengths that enable individuals and communities to thrive. The field is founded on the belief that people want to lead meaningful and fulfilling lives, to cultivate what is best within themselves, and to enhance their experiences of love, work, and play.”

Question 71

Difference between Financial functioning and financial flourishing

Answer 71

Financial functioning-from a typical financial planner’s viewpoint using basic progress measures such as increasing net worth, a good credit score, and consistent savings,

financial flourishing - on how money is related to five key elements drawn from well-being theory: positive emotion (happiness), engagement (hobbies and activities), relationships, meaning (purpose in life; belonging to something greater than oneself, such as religious charitable, or special interest groups), and accomplishments, to optimize overall well-being

Question 72

Solution Focused Therapy (SFT) is focused on the client’s hopes for the future. a. True b. False

Answer 72

TRUE

Question 73

What is choice architecture ?

Answer 73

Choice architecture refers to the structure surrounding the manner in which choices are presented and recognizing that the context in which choices are presented influences the decision maker. A choice architect is someone who designs the environment in which choices are made.

choice architecture -creating an environment where clients are nudged in the direction of the choice with the most advantageous outcome while preserving the right to choose, the planner, in some circumstances, may be able to design the presentation of options with a default choice that will create the most desirable outcome

Question 74

Describe a “ nudge” in choice architecture ?

Answer 74

“nudge” to describe choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives, but stipulate that to be a nudge the intervention must be easy and cheap to avoid.

. Nudges are best used only in situations where clients are least likely to make good choices, and where the planner has carefully evaluated the costs and benefits involved.

Question 75

describe Framing

Answer 75

Choice architecture refers to the structure surrounding the manner in which choices are presented and recognizing that the context in which choices are presented influences the decision maker. A choice architect is someone who designs the environment in which choices are made.

Framing a glass as half full versus half empty or framing hamburger as 75 percent lean versus 25 percent fat are simple examples of framing.

Question 76

Key Techniques Associated With Solution Focused Therapy (SFT) ?

Answer 76

1. Recognizing and affirming pre-session change.
   2 Discussing past attempts
2. Asking the miracle question
   4.Developing goals
   5.Asking scaling questions
   6.Complimenting clients
   7.Taking a curious, unassuming stance as the therapist
3. Developing a collaborative therapeutic relationship

Question 77

1. Main responsibilities of the financial adviser is to extract the goals and desires of the client. How is this done ?
2. Explain Verbal and non-verbal communication
3. what IS ACTIVE LISTENING ?

Answer 77

1. Accomplished through VERBAL and NON VERBAL communication.
2. NON-VERBAL - BODY position /movement/Posture / GESTURES
   VOICE tone /pitch
   EYE CONTACT -
3. ACTIVE LISTENING - listen ONLY, watch body language, don’t
   interrupt Listen to the words, but understand clients’ conceptions
   of themselves.

Question 78

The CFP’s Active listening includes the 3 following actions ?

Answer 78

REFLECTING - on content and feeling presented. Empathy is used.

REPEATING -

RESTATING - what’s heard to clarify and Insure accuracy.

Question 79

1. Does the CFP board require the CFP explore
   the clients values attitudes and time horizons ?
2. DO the the clients beliefs, attitudes and desires help to determine the clients goals and objective are realistic or unrealistic ?

Answer 79

1. CFP Board’s Financial Planning Practice Standards require that the CFP® explore the client’s values, attitudes, expectations, and time horizons as they affect the client’s goals
2. YES. Personal values and attitudes shape the client’s goals and objectives, along with the priorities placed on them.
   - Adviser should understand the client’s values and attitudes along with the goals and objectives.

Question 80

People have different learning styles ?

Answer 80

VERBAL

AUDITORY

VISUAL