511 TB Flashcards
(19 cards)
Identify the disclosure requirement that may be delivered either verbally or in writing when Financial Advice is delivered or within a Financial Planning engagement.
A. Privacy Policy
B. Terms of Engagement
C. Payment Arrangement
D. Material Conflicts of Interest
D) The answer is Material Conflicts of interest. Disclosure of Material Conflicts of interest can be delivered verbally or in writing in situations where either Financial Advice or Financial Planning are occurring.
According to the Practice Standards, all of the following are approved methods of documentation except
A. CRM software
B. voice memos
C. handwritten notes
D. emails
B) The answer is voice memos. The Practice Standards include CRM software, handwritten notes, and emails as approved methods of documentation.
In the data-gathering process, quantitative data may include all of the following except
A. Section 401(k) statements
B. Insurance policies
C. Income tax returns
D. Personal goals and objectives
D) The answer is personal goals and objectives. Quantitative data includes information such as assets and liabilities, cash inflows and outflows, insurance data, employee benefits, income tax returns, retirement statements, wills, trusts, business information, and investment data. Personal goals and objectives are considered qualitative data.
Identify information that may be acquired during the client data-gathering process.
I. A partnership agreement
II. Realistic investment return assumptions
III. Copies of disability income insurance policies
IV. Section 401(k) statements
A. I and IV
B. II and III
C. I, III, and IV
D. I, II, III, and IV
D) The answer is I, II, III, and IV. All of this information may be necessary. A partnership agreement will give details that may help the financial planner with estate planning. The interest rate assumptions used for various needs analyses (e.g., insurance and retirement) must be realistic so that projections are accurate. Copies of disability policies will verify the definition of disability and the amount of benefit the client will receive if the client meets this definition. Section 401(k) statements provide asset allocation information that will help the planner when preparing the client’s retirement plan.
If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner must do which of these?
I. Restrict the scope of the engagement.
II. Terminate the engagement.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
C) The answer is either I or II. According to the Code and Standards, “If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner shall either restrict the scope of the engagement to those matters for which sufficient information is available; or terminate the engagement.”
Choose the goal-related action(s) that occur in Step 2 of the Practice Standards.
I. Identifying Potential Goals
II. Selecting and Prioritizing Goals
III. Collaboration to establish personal and economic assumptions
IV. Discussion of unrealistic goals
A. I only
B. I and II
C. II, III, and IV
D. I, II, III, and IV
D) The answer is I, II, III, and IV. All of these actions occur in Step 2 of the Practice Standards.
Identify the CORRECT statements regarding financial strengths and weaknesses.
I. Inadequate retirement savings is considered a financial weakness.
II. Very general financial goals are considered a financial strength.
III. Determining financial strengths and weaknesses is an objective process.
IV. The lack of a valid will is considered a financial weakness if a will is necessary to protect the interest of heirs.
A. I only
B. I and IV
C. III and IV
D. I, II, III, and IV
B) The answer is I and IV. Inadequate retirement savings is a financial weakness. Vague or unarticulated goals also represent a financial weakness. Determining financial strengths and weaknesses is a subjective process. The absence of a valid will is considered a financial weakness, especially when such an instrument would protect the interest of heirs.
Mateo, a CFP® professional, created a financial plan for his client, Emma, a single mother, who asked him to provide recommendations regarding her retirement. During that meeting, Mateo asked Emma if she would like a life insurance analysis. Emma declined, saying she was currently only interested in investing for her retirement. In the letter of engagement, signed by both parties, Mateo noted this. After discussing Emma’s retirement goals, needs, and priorities, and gathering her retirement information, Mateo set another appointment with Emma in which he would present a financial plan for her. Several weeks later, Mateo met with Emma to discuss her financial plan. In it, he provided two recommendations: (1) that Emma purchase an annuity to save for her retirement, and (2) that she purchase a life insurance policy so her young children would be financially secure in the event of her death. Neither recommendation was discussed in the plan. Emma advised Mateo that she does not like annuities as an investment and restated that she’s not interested in life insurance. How were Mateo’s recommendations in the plan inconsistent with the Practice Standards, Step 4: Developing the Financial Planning Recommendations?
I. He failed to adequately define the scope of his engagement with Emma.
II. He did not offer alternatives to the annuity for Emma’s retirement investment.
III. He did not stay within the scope of the engagement by recommending life insurance for Emma.
IV. In the plan, he failed to explain how the recommendation is designed to maximize the potential of Emma meeting her retirement goals.
A. I and III
B. I, II, and III
C. II, III, and IV
D. I, II, III, and IV
C) The answer is II, III, and IV. By providing a life insurance recommendation, Mateo has failed to stay within the scope of the engagement which, according to the letter of engagement, was for retirement planning only. This letter effectively defined the scope. Under the Practice Standards, Mateo should have provided alternatives to the annuity recommendation. He should have also explained in the plan how his recommendation was designed to maximize the potential to meet Emma’s goals, the anticipated material effects of the recommendation on Emma’s financial and personal circumstances, and how the recommendation integrates relevant elements of her personal and financial circumstances.
Sophia, a CFP® professional, is meeting with Eric and Emily to review the two recommendations included in their financial plan. The first recommendation discussed by Sophia was for Eric and Emily to “purchase term life insurance because it is inexpensive.” When asked why she was suggesting they purchase term life insurance, Sophia responded, “Because you both need it.” Sophia then moved on to talk about her second recommendation that the couple deposit an additional $500 per month in Eric’s 401(k) plan. She showed Eric and Emily a report assuming a 10% interest rate illustrating the retirement income they would receive if they deposited the additional funds. The couple told Sophia that they would do this because they wanted the security of a guaranteed monthly income during retirement. Which of Sophia’s actions did not align with the Practice Standards, Step 5: Presenting the Financial Planning Recommendations?
I. Sophia’s recommendation to “purchase term life insurance” was not clear enough.
II. Sophia did not provide Eric and Emily with pertinent facts to make an informed decision.
III. Sophia’s response regarding the reason she was recommending term insurance was adequate.
IV. Sophia should have advised the couple that the income assumed a 10% interest rate and was not guaranteed.
A. II and III
B. III and IV
C. I, II, and IV
D. I, II, III, and IV
C) The answer is I, II, and IV. Sophia’s recommendation that the couple purchase term life insurance was not specific and clear. She did not give enough details for Eric and Emily to make an informed decision. The response, “Because you both need it” did not provide a specific, actionable response to the couple’s question regarding the term life insurance. Additionally, no alternatives were given to the recommendations Sophia proposed.
Analyze this scenario. Bari, a CFP® professional, is providing Financial Advice to her client, Jamal. After considering Jamal’s goals, family medical history, tax situation, and financial resources, she develops a financial plan that includes a recommendation for Jamal to purchase disability income insurance. Which statement regarding implementation responsibilities is CORRECT?
I. Bari is not responsible for implementing this planning recommendation because it only involves the purchase of a single product.
II. Bari must explain to Jamal the responsibilities she has in implementing the recommendations and the responsibilities that Jamal and any third party may have with respect to implementation.
III. If Bari and Jamal have not excluded implementation responsibilities from the Engagement, Bari must recommend one or more disability insurance policies to Jamal and help him select a policy that will meet his needs.
IV. If Bari and Jamal have not excluded implementation responsibilities from the Engagement, Bari must identify and analyze policies designed to implement the recommendations and must consider advantages and disadvantages of the disability product relative to reasonably available alternatives.
A. I and II
B. II and III
C. II, III, and IV
D. I, II, III, and IV
C) The answer is II, III, and IV. Bari is responsible for implementing the recommendations unless implementation is specifically excluded from the scope of the engagement.
Which of the following statements is CORRECT regarding financial planning?
I. The financial planner is responsible for implementing the client’s Financial Planning recommendation(s) unless specifically excluded from the Scope of Engagement.
II. The practitioner must communicate to the client any limitations on the scope of the engagement.
III. Recommendations must be written and prepared in a clear, understandable manner.
IV. Unrealistic goals must be discussed.
A. I only
B. I, II, and III
C. II, III, and IV
D. I, II, III, and IV
D) The answer is I, II, III, and IV.
Kevin and Gina, ages 45 and 43, respectively, have engaged Mei, a CFP® professional, to help them develop their financial plan. All of the following should be considered when developing Kevin and Gina’s financial plan except
A. their current position in the life cycle.
B. their values, goals, and objectives.
C. their ability to provide referrals.
D. their financial position.
C) The answer is their ability to provide referrals. The ability to provide referrals should not be a consideration when working with clients to formulate a financial plan. When working with Kevin and Gina, Mei should consider
their financial situation;
their internal data and life cycle positioning; and
their values, goals, and objectives.
A person in the conservation or protection phase of the financial life cycle is likely to have which of the following goals?
A. Long-term goals, such as investing for retirement
B. Short-term goals, such as saving for a down payment on a home
C. Long-term goals, such as education planning and preservation of capital
D. Short-term goals, such as protection and maintenance of current lifestyle
A) The answer is long-term goals, such as investing for retirement. In the accumulation phase of the financial life cycle, individuals have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. In the conservation or protection phase, individuals’ financial goals are likely to change to longer-term goals, such as investing to provide for future retirement income. Finally, in the distribution or gifting phase, estate planning and capital preservation become most important.
Which of the following uses of the CFP® certification marks is CORRECT?
I. John Doe, C.F.P.
II. John Doe, a CFP
III. John Doe, CERTIFIED FINANCIAL PLANNERTM
IV. John Doe, CFP®
A. IV only
B. I and III
C. II and IV
D. III and IV
D) The answer is III and IV. Whenever a CFP® certificant uses the initials after his name (e.g., on a business card), the initials must be followed by the ® symbol. If the words CERTIFIED FINANCIAL PLANNER are used, they must be followed by a TM because the words are subject to trademark law. The initials should not include periods.
As a member of a team of financial advisors, a financial planner’s responsibilities for a client typically includes which of the following?
I. Helping the client identify financial goals
II. Preparing tax returns for a small-business owner client
III. Analyzing the client’s current financial status
IV. Monitoring whether the client is complying with a plan after implementation
A. I and III
B. III and IV
C. I, III, and IV
D. I, II, III, and IV
C) The answer is I, III, and IV. Unless a financial planner is also a tax professional with an IRS preparer tax identification number (PTIN), the planner should not engage in unauthorized tax preparation.
How clients perceive risk can directly affect their risk tolerance. Which of the following correctly describes risk perception?
A. It is the degree to which a client’s financial resources can mitigate risk.
B. It is the ability to comprehend and act upon information regarding financial risks.
C. It is the subjective judgment clients make when they are asked to describe and evaluate the risk of financial decisions.
D. It is the tradeoff that clients are willing to make between potential risks and rewards, with some probability of negative outcomes.
C) Risk perception is the subjective judgment clients make when they are asked to describe and evaluate the risk of financial decisions. Risk capacity is the degree to which a client’s financial resources can mitigate risk. The ability to comprehend and act upon information regarding financial risks is known as financial literacy. Risk tolerance is the trade-off that clients are willing to make between potential risks and rewards, with some probability of negative outcomes.
Which of the following statements regarding psychological profiling is CORRECT?
I. Many financial planners conduct fact-finding interviews in which they acquire information regarding how their clients process information, make decisions, and behave socially.
II. Closed-ended questions—those that require the clients to answer in their own words—should be used to gain a reliable psychological profile.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A) The answer is I only. Statement II is incorrect. Open-ended questions should be used to gain a reliable psychological profile.
Which of the following statements regarding attitudes and values is CORRECT?
I. Values reflect a person’s opinions and wants.
II. Beliefs are a type of attitude because they reveal a person’s understanding of some aspect of their life.
III. A client’s context can be affected by their cultural influences, religious preferences, and individual family circumstances.
IV. A planner should recognize their own attitudes, values, biases, and behaviors and be certain that they do not impact recommendations made to clients.
A. IV only
B. III and IV
C. I, II, and III
D. II, III, and IV
D) The answer is II, III, and IV. Attitudes, not values, reflect a person’s opinions, values, and wants. Values are attitudes and beliefs for which a person feels strongly; they represent what a person believes to be right. The other statements are correct.
