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CFP > General Principles > Flashcards

General Principles Flashcards

1
Q

Steps in the Financial Planning Process

A

1) Understanding client’s personal and financial circumstances

2) Identifying and Selecting Goals

3) Analyzing client’s current course of action and potential alternative courses of action

4) Developing financial planning recommendations

5) Presenting the financial planning recommendations

6) Implementing the financial planning recommendations

7) Monitoring progress and updating

Uber Is A Drunk Person’s Immediate Motor-vehicle

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2
Q

Code of Ethics

A

1) Act with honesty, integrity, competence, and diligence

2) Act in client’s best interests

3) Exercise due care

4) Avoid or disclose and manage conflicts of interest

5) Maintain the confidentiality and protect the privacy of client information

6) Act in a manner that reflects positively on the financial planning profession and CFP certification (macro, umbrella)

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3
Q

Fiduciary Standard

A

1) Duty of Loyalty

2) Duty of Care

3) Duty to follow client instructions

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4
Q

Nouns that can be used with CFP

A

Certificant
Practitioner
Professional
Certification
Mark (not letters!)
Exam (not test!)

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5
Q

Buying vs renting a home

A

The higher the marginal tax bracket, the greater the advantage of home ownership. Also consider the time frame. Short-time periods favor renting; long time periods favor owning

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6
Q

Federal Housing Administration (FHA)

A

government guarantees mortgages through FHA insurance for low and middle income individuals

max mortgages range from $472,030 - $1,089,300

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7
Q

Qualified residence interest rules

A

If proceeds of a mortgage loan or HELOC are used to buy, build, or improve a taxpayer’s home and if these mortgages combined with any others taken out total more than $750k ($375 MFS), only the interest paid on the first $750k is deductible.

None is deductible if not being used for the home

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8
Q

College funding years options

A

UGMA/UTMA: Subject to kiddie tax for children under age 24

EE Education Bonds: Parents own the bonds, so will not work in UGMA/UTMA

Coverdell ESA: Limited to $2k/year contribution total

529: two types - college savings or prepaid tuition
$17k contribution per year per child x 5 years = $85k

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9
Q

College grants and loans for Wealthy parents

A

Parent Loan Undergraduate students (PLUS)

Wealthy Parents are a PLUS

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10
Q

College grants and loans for Poor parents

A

Pell Grants
Supplemental Education Opportunity Grant
Subsidized Stafford Loans

PooriSh (<= $60k income cap)

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11
Q

American Opportunity Credit (AOC)

A

$2000 + 25% of the next $2000 of expenses (max $2500 credit)

MAGI phaseouts on tax sheet

first four years of college only

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12
Q

Lifetime Learning Credit

A

$2000 max

Any higher learning institution (undergrad, grad, continuing ed)

MAGI phaseouts on tax sheet

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13
Q

Coverdell withdrawal

A

Must be used before student is 30

MAGI phaseouts on tax sheet

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14
Q

529 distributions

A

No MAGI phaseouts

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15
Q

College funding options for graduate school

A

Fulbright scholarship

Stafford loan

529 distribution OR Coverdell withdrawal (coordination rules)

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16
Q

Tools of the Federal Reserve (Monetary Policy)

A

Reserve requirements that member banks must maintain

Discount rate is the rate the Fed charges its member banks to borrow to satisfy reserve requirements

To tighten credit, Fed increases reserve requirement or discount rate

To loosen credit, Fed decreases reserve requirement or discount rate

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17
Q

Open market operations (Fed)

A

BEST
Buy, Expansion; Sell, Tighten

Fed buys securities, expansionary/easy money policy

Fed sells securities, contractionary/tight money policy

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18
Q

Recession

A

two consecutive quarters of decline in real GDP

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19
Q

Depression

A

six consecutive quarters of decline in real GDP (18 months, not 12 months!!)

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20
Q

RIAs with under $100MM must register with _____

A

Their state of domicile

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21
Q

RIAs with over $100MM must register with _____

A

the SEC

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22
Q

Exemptions and exemptions to filing as an RIA

A

Banks that are not also investment companies

Lawyers, accountants, teachers – advice is incidental

Broker/dealers or registered reps whose performance is incidental and who get no special comp for advice (eg. wrap fees)

Advisor whose only clients are insurance companies

A family office (advisory services provided exclusively for family members)

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23
Q

Federal exemptions for Chapter 7 bankruptcy

A

Homestead

Some limited amount of personal property and equity in a vehicle

Wages due to head of family

Pension and retirement plan rights (ERISA plans)

Cash value of life insurance/proceeds of annuity contracts/disability benefits

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24
Q

Endowment Bias

A

Individuals value an owned object higher, often irrationally, than its real-world market value

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25
Q

Reporting requirements for charges and convictions (misconduct) to CFP board

A

30 days

In writing, with a narrative statement that describes all material facts as well as the outcome of the charge, conviction, arbitration, or lawsuit

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26
Q

What is considered a “minor rule violation” and does not require reporting to CFP board?

A

Minor rule violation of an SEC rule or a rule of a self-regulator (FINRA), where the fine is $2500 or under, and the alleged rule violator does not contest the charge of the rule violation

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27
Q

What complaints do not have to be submitted to CFP board?

A

Relative to one or more sales practice violations where customer sought an adjustment of under $5k

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28
Q

How long does a CFP practitioner have to appeal any ruling?

A

30 days

Must submit a Petition for Appeal, usually by certified mail

29
Q

Housing expense ratio

A

PITI or rent should reflect <= 28% of gross income

30
Q

Total monthly debt ratio

A

<= 36% of gross income

31
Q

Consumer debt ratio

A

<=20% of NET income

32
Q

Current Assets

A

Cash equivalents

Marketable securities

Accounts receivable

Inventory

33
Q

Current Liabilities

A

Cash Owed

Accounts payable

Credit card debt

Taxes payable

34
Q

Leading economic indicators

A

Most important:
- Initial claims for unemployment insurance
- New manufacturing orders
- New private housing units
- Stock prices, 500 common stocks
- Index of consumer expectations

Less important:
- Avg weekly hours for production workers in manufacturing
- Vendor performance measured as % of companies reporting slower deliveries
- Contracts and orders for plants and equipment
- Interest rate spread
- Money supply

35
Q

Coincident indicators

A

Industrial production

Number of employees on non-agricultural payrolls

Personal income less transfer payments (SS, welfare)

36
Q

Lagging indicators

A

Avg duration of unemployment

Avg prime rate charged by banks

Commercial and industrial loans outstanding

Ratio of consumer installment credit outstanding to personal income

Change in consumer price index for services

37
Q

What entity controls monetary policy?

A

Federal Open Market Committee (FOMC)

38
Q

Industrial production is what type of economic indicator?

A

Coincident indicator

39
Q

Number of employees on non-agricultural payrolls is what type of economic indicator?

A

Coincident indicator

40
Q

Personal income less transfer payments (SS, welfare) is what type of economic indicator?

A

Coincident indicator

41
Q

Avg duration of unemployment is what type of economic indicator?

A

Lagging indicator

42
Q

Avg prime rate charged by banks is what type of economic indicator?

A

Lagging indicator

43
Q

Commercial and industrial loans outstanding is what type of economic indicator?

A

Lagging indicator

44
Q

Ratio of consumer installment credit outstanding to personal income is what type of economic indicator?

A

Lagging indicator

45
Q

Change in consumer price index for services is what type of economic indicator?

A

Lagging indicator

46
Q

Initial claims for unemployment insurance is what type of economic indicator?

A

Leading indicator

47
Q

New manufacturing orders is what type of economic indicator?

A

Leading indicator

48
Q

New private housing units is what type of economic indicator?

A

Leading indicator

49
Q

SP500 stock prices are what type of economic indicator?

A

Leading indicator

50
Q

Index of consumer expectations is what type of economic indicator?

A

Leading indicator

51
Q

Chapter 11 Bankruptcy

A

Generally, for individuals who do not qualify under Chapter 13 because they exceed the debt limitations or do not have a regular source of income.

52
Q

Chapter 13 Bankruptcy

A

Reorganization: Payments to creditors are typically reduced to be more manageable.
Creditors cannot harass the debtor. The advantage is that the debtor generally is not required to
relinquish assets.

53
Q

Chapter 7 Bankruptcy

A

The Bankruptcy Code (Chapter 7) permits a debtor to claim either the “federal” exemptions or the exemptions available under state law. There are 33 states which have opted out of Federal
exemptions.

54
Q

Debts not cancelable by bankruptcy

A
  • Student and government loans
  • Wage withholding & FICA obligations/recent income taxes due
  • Child support and alimony
55
Q

Consumer Credit Protection Act—also known as Truth in Lending

A
  • Interest must be reported as annual percentage rate (APR).
  • Credit terms must be disclosed, including fees, points, prepayment penalties, etc.
  • Lost or stolen credit cards have limited liability of $50 per card.
56
Q

Fair Credit Reporting Act

A
  • Consumers may review their files at any time for a nominal fee but are entitled to one free report per year.
  • If consumers are denied credit, they have a right to receive a free copy of their file. Information may be retained up to 7 years.
  • Only interested parties can access the file (creditors, mortgage companies, insurance companies,
    etc.)
57
Q

Duty of Loyalty

A

Under the Duty of Loyalty, the CFP® professional is required to:
- Hold the interests of the client above those of the planner and the firm
- Balance conflicts of interest so as to maintain the client’s best interest above all

58
Q

Duty of Care

A

Under the Duty of Care the CFP® professional is required to act with the skill, prudence and diligence of
a prudent professional in consideration of the client’s goals, risk tolerance, and personal circumstances.

59
Q

Duty to Follow Client Instructions

A

Under the Duty to Follow Client Instructions the CFP® professional is required to comply with the
client’s instructions, objectives, policies, and restrictions presuming they are reasonable and lawful.

60
Q

The Integrity Standard

A

CFP® professional may not:
- Deceive or defraud clients and the public in general
- Make untrue statements of material facts
- Omit a material fact in order to mislead a client or the public in general
- Encourage any business act that would operate as a fraud or deceit upon anyone

61
Q

The Competence Standard

A
  • Provide professional services with competence encompassing relevant knowledge and skill
  • Recognize that professional’s lack of competence in a particular area and, in that light must do one of the following:
    o Obtain the assistance of a competent professional
    o Refer the client to one or more competent professionals
    o Limit or terminate the engagement
62
Q

The Diligence Standard

A
  • Provide services in a professional manner
  • Respond to reasonable client inquiries and requests in a timely fashion
63
Q
A
64
Q

What is a pro forma statement?

A

Projects the expected profitability or return of the next year or long (future)

65
Q

Who regulates Savings and Loan (S&L)/Thrifts?

A

A branch of the FDIC, and Federal Home Bank Board

66
Q

Ownership categories for FDIC insurance

A
  • Individual accounts
  • Joint accounts
  • Revocable trust (in tryst for or payable on death to)
  • IRAs and Keoghs

$250k each

67
Q

Who regulates Trust Companies?

A

State law

68
Q

Can you use AOC and LLC for the same student?

A

No! But they can be used in the same year for different students/different expenses

69
Q

Are 529s considered assets of owner or child?

A

Assets of owner, unless the owner is not the parent, then it can be considered asset of child

CFP (6 decks)

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