Austin Fundamentals of Financial Planning Deck

Question 1

FAFSA Asset Rules

Answer 1

Assets on Fafsa Application Include:
1. Cash; Savings; checking accounts
2. Businesses
3. Investment Farms/ Investment Real Estate
4. Investmets (securities; bonds; etc)
5. UTMA Accounts

Excluded From Assets on Fafsa:
1. Personal Residence
2. Life Insurance
3. Retirement Plans

529 Plans:
1. Asset of the parent if set up by the parent
2. Asset of the grandparent if set up by grandparent
3. Distributions from the 529 are NOT counted as student income if owned by the parent or student

Question 2

Disciplinary Actions of the CFP Board (ADD MORE)

Answer 2

Disciplinary Action is handled by the Disciplinary and Ethics Commission

CFP Board DOES NOT:
1. Impose monetary fines
2. Does not enforce its rules through the CFPs Employer
3. Does not enforce rules through public trial

Question 3

Common Planning Benchmarks

Answer 3

1. Life Insurance: 10-16 TIMES gross pay
2. Disability: 60-70% of gross pay
3. Home and Auto: Greater than FMV of stuff
4. LTC: 36-60 months
5. Emergency Fund: 3-6 months (of non-discretionary)
6. Housing/ Debt: 28% and 36% Gross
7. Savings Rate: 10-13%
8. Retirement Savings: 16 TIMES gross pay

Question 4

Business Life Cycle:

Answer 4

Expansion
1. Increasing: GDP, inflation and interest rates.
2. Decreasing: unemployment rate
Peak
1. Highest: GDP; Inflation; interest rates are peaking and the
2. Lowest: unemployment rate
Contraction/Recession
1. Increasing: Unemployment Rate
2. Decreasing: GDP; Inflation; interest
Trough
1. Highest: Unemployment
2. Lowest: GDP; inflation; interest rates being

Question 5

Economic Definitions

Answer 5

1. Recession: 2 consecutive quarters (6 months) of declinging GDP
2. Depression: Recession becomes a depression if the recession last for 6 consecutive quarters (18 months)
3. Deflation: Opposite of inflation (cash is INCREASING in value)
4. Disinflation: a SLOWDOWN in the rate of inflation (not deflation)

Question 6

Federal Reserve: 3 Goals

Answer 6

1. Maintain long-term economic growth
2. Maintain Price levels supported by the economy
3. Maintain full employment

Question 7

Federal Reserve: 4 Tools to influence Money Supply

Answer 7

1. Reserve Requirement: Percentage of of deposits a bank must maintain in cash
**2. Discount Rate: **Overnight interest rate at which member banks can borrow from the Federal Reserve to meet reserve requirements
3. Open Market Operations: When the Federal Reserve Buys or Sells government securities
4. Excess Reserves: money that a bank holds at the Federal Reserve or Central Bank in excess of the reserve requirement

Question 8

FDIC Insurance

Answer 8

Each depositor has a total of $250,000 of insurance per type of account ownership.

Four types of ownership:
1. Individual accounts.
2. Joint accounts.
3. Trust accounts.
4. Self-directed retirement accounts.

Accounts at separate banks each receive $250,000 of insurance.

Each person is deemed to own 50% of joint accounts.

Question 9

Balance Sheet

Answer 9

Characteristics:
1. Listing of Assets; Liabilities; Net Worth
2. Snapshot “at a moment in time” “As of 20xx”
3. Assets - Liabilities = Net Worth

Organiztion:
* Organized from Short to Long Term

Question 10

Federal Pell Grant

Answer 10

1. Strictly Need based and dependent on the EFC amount
2. EFC determines a student’s eligibility and how much is awarded
3. ONLY for undergraduate degree

Question 11

Stafford Loan

Answer 11

1. Student Loan/ financial aid provided by the U.S Dept. of Education
2. Repayment begins 6 months after graduation
3. not ideal if parents plan to pay back the loan

Unsubsidized Stafford Loans (What I have):
1. NOT needs based
2. Interest begins accruing when the funds are disbursed (accumulates while in school)

Subsidized Stafford Loans:
1. NEEDS BASED
2. Interest is paid for by the federal gov while in school

Question 12

PLUS Loan (Parental Loan)

Answer 12

1. The PLUS loan is NOT need based, but depends on the parents credit score.
2. PLUS loans are not subsidized.
3. PLUS loans are appropriate for parents who can afford to make a loan payment, but may not have saved anything for education.

TIP: Wealthy parents are a “PLUS.”

Question 13

Perkins Loan

Answer 13

Perkins Loan Program is for VERY POOR students

Need Based for students with very low EFC

Expired in 2017

Question 14

529 Plan

Answer 14

1. Typically for parents or grandparents that wish to contribute to a savings/ investing plan for kid’s savings (can be used for secondary; elementary; private education)
2. After tax contributions ONLY, but any appreciation is TAX FREE if used for qualified education expenses
3. ASSET OF THE PARENT (or owner of the account)
4. 5 year Front Load: 5x annual gift exclusion can be made in a single year ($80,000 Single; $160,000 MFJ)
5. NEVER a phaseout based on income
6. managed by the grantor
7. Can pay UP TO $10,000 per year for tuition at primary schools (anything under highschool) and UNLIMITED amount for qualified expenses at secondary schools (Highschool)

Penalties:
1. 10% penalty on earnings and the earnings are included in gross income (taxed at income) if not used for education expenses

Question 15

Series EE savings Bonds

Answer 15

1. Purchased at face value
2. Parents must own the bonds and Parent must be at least 24 years old
3. NO FEDERAL income tax on interest if used to py for qualified education expenses
4. Must be redeemed in the same year as the education exp
5. Can be rolled into a 529 plan OR Coverdell

Question 16

Uniform Transfers to Minors Act (UTMA Account)

Answer 16

1. Assets are an asset of the child for FASFA (CAN be rolled into a 529 plan AS LONG AS UTMA and 529 are same bene)
2. Taxation of unearned income (interest, dividends and capital gains) may be subject to the kiddie tax.
3. If the child is 19 or older then unearned income is taxed at child’s rate.
4. The primary risk is that a child can use assets for something other than education.
   An UTMA: CAN include real estate
   An UGMA: CANT have real estate

Question 17

American Opportunity Tax Credit (AOTC)

Answer 17

1. Tax Credit for tuition and fees for the FIRST 4 YEARS of undergrad college
2. Limit can ONLY be used for the first 4 years of degree
3. CANNOT be used for the same child in same year as lifetime learning credit
4. CANNOT be used on the same expense that is reduced by lifetime learning credit
5. CAN be used in the same year as a 529 withdrawal BUT not on the same expense

Formula:
1. 100% of FIRST $2,000 in expenses
2. 25% of second $2,000 in expenses
Max Credit: $2500 (if you have $4,000 in expenses)

Question 18

Lifetime Learning Credit (LLC)

Answer 18

1. Lifetime Learning Credit is available for tuition and fees related to undergraduate/ graduate/ professional program
2. Can be claimed for an UNLIMITED number of years

Credit Formula:
1. 20% of up to $10,000 in expenses per year
2. $2,000 is maximum credit limit per year PER FAMILY

Question 19

Fiduciary Duty (3 Sub-Duties)

Answer 19

Duty of Loyalty:
1. Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm
2. Avoid COIs or Disclose them and obtain consent
3. Act without regard to the CFP

Duty of Care:
1. Must act with care, skill, and diligence in light of the clients goals, risk tolerance, objectives

Duty to Follow Client Instructions:
1. CFP must comply with all terms of the engagement and all reasonable and lawful directions of the client

Question 20

4 Duties Owed to Clients (FDIP)

Answer 20

Fiduciary Duty:
* Consist of 3 Duties: Care, Loyalty, Follow Client Direction
Diligence:
* Must provide provide professional services including responding to client request in a TIMELY MANNER
Integrity:
* Honesty and Candor
* Never act in a deceitful manner or attempt to scheme or defraud or mislead
Professionalism:
* CFP must treat clients and prospects with dignity, courtessy, and respect

Question 21

Privacy Policy

Answer 21

Must be WRITTEN in:
1. Financial Planning Arrangement
2. Financial Advice Arrangement

*Remember: Financial Planning arrangement has a HUGE list of things required to be written BUT ONLY privacy policy must be written for BOTH Financial Planning and FInancial Advice

Question 22

What must a CFP do on a recurring basis

Answer 22

1. A certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use the CFP® marks.
2. Continuing education requirement for CFP® Certificants are 30 hours every two years, of which, 2-hours must be CFP Board ethics.

Question 23

When must a CFP notify the CFP Board when charged or convicted

Answer 23

General Rule: Must Notify the CFP board IN WRITING within 30 days of incident

Exceptions:
1. Misdemeanor traffic offenses UNLESS it involves the use of drugs or alcohol

Question 24

EXCEPTIONS to SEC Registration

Answer 24

1. Broker/ Dealer hose advisory services are solely incidental to the conduct of business.
2. Lawyers, accountants, teachers and engineers whose advice is solely incidental to their profession.
3. Banks and bank holding companies that are not investment companies.
4. Publisher of a bonafide newspaper, magazine or periodical of regular circulation.
5. Advisers whose advice and services are related strictly to securities guaranteed by the United States government.

Question 25

EXEMPTIONS from SEC Registration

Answer 25

1. Advisers whose client’s reside in their state of business and who don’t provide advice, services, analyses or reports regarding nationally listed securities. 2. Advisers whose only clients are insurance companies. 3. Advisers solely to venture capital funds. 4. Advisers solely to private funds less than $150 million. 5. Foreign advisers without a place of business in the United States.

Question 26

Securities Act of 1933 and 1934

Answer 26

**Securities Act of 1933** * Regulates the issuance of new securities (the primary market) * Requires that new issues are accompanied with a prospectus before purchase **Securities Act of 1934:** * Regulates the secondary market and trading of securities * CREATED THE SEC! To enforce compliance with security regulations and laws

Question 27

Investmentment Company Act of 1940

Answer 27

* Authorized the SEC to regulate Investment Companies * 3 types: Open Ended; Closed Ended; Unit Investment Trusts

Question 28

Investment Advisors Act of 1940

Answer 28

Requires investment advisors to register with the SEC or the State depending on asset size *Less than 100 mil = State * 100 -110 mil = Choice * Over 100 Mill = SEC

Question 29

Securities Investors Protection Act of 1970 (SIPC)

Answer 29

* Protects investors for losses resulting from broker firm failures * Accounts of member firms are covered for clients regardless of client citizenship * Does not protect investors from incompetence or poor investment decisions * Losses are LIMITED to 500k/ 250k in cash per account

Question 30

Treasury Securities

Answer 30

1. Treasury Bills: less than 1 year 2. Treasury Notes: 1- 10 years 3. Treasury Bonds: Greater than 10 years Exempt from STATE and Local Taxes

Question 31

What is the Efficient Market Hypothesis (EMH)

Answer 31

1. **Weak Form:**Historical information does not help investors get above average returns (rejects Technical Analysis) 2. **Semi-Strong Form:** Historical and Public information will not help achieve above avg returns (rejects tech and fundamental) 3. **Strong Form:** Historical; Public; and Private information will not give above avg returns (rejects tech; fund; and insider info)

Question 32

Standard Deviation Definition and Characteristics (distribution)

Answer 32

Standard deviation is a measure of risk and variability of returns (High = more risk; Low = Less Risk) Measures of the range of returns around an average Can be used to determine TOTAL risk of an UNDIVERSIFIED portfolio Bell Curve/ Distribution Levels 1. 1st: 68% Probability (34% on either side) 2. 2nd: 95% Probability (47.5% on either side) 3. 3rd: 99% Probability (49.5% on either side)

Question 33

Bond Duration

Answer 33

**Duration is a measure of how much a bond price will change when interest rates move; Interest rate sensitivity** 1. Average Weighted to time horizon 2. Zero Coupon Bonds ALWAYS have the highest duration 3. Inverse relationship with Interest Rates of the FED **Relationships:** 1. Direct Relationship: Years to maturity 2. Inverse Relationship: Coupon; yield; interest rates

Question 34

Private Placements and Rules

Answer 34

**Private Placement:** Sale of a stock or bond to pre-selected people rather than publicly on the open market **Private Placement Requirements:** 1. Can ONLY be sold to 35 NON-ACCREDITED investors 2. Unlimited number of Accredited Investors **Accredited Investor Definition:** 1. Has a net worth OVER $1 million, either individually or together with a spouse (excluding the value of a primary residence) 2. Earned income of more than $200,000 (or $300,000 MFJ) in each of the last two years

Question 35

Workers Compensation

Answer 35

1. Workers' compensation is a federally and state mandated program which provides benefits for Workers suffering injury or illness on the job 2. if the injured worker accepts workers compensation benefits, the employer is protected from employee lawsuit

Question 36

FDIC Protection Limits

Answer 36

`Stolen Card` 1. Maximum on any missing credit card that client would have to pay is $50 2. If a thief only charges $25, the holder is liable for the whole amount `FDIC Insurance Coverage` 1. FDIC insurance covers up to $250k per account 2. Only Cash; Normal Money Market; and CDs are covered by the insurance 3. Money Market Mutual Funds ARE NOT covered by FDIC 4. IRA/ Retirement Accounts CAN be covered, but ONLY if invested in cash/ CD/ MM (not mf) 5. Joint accounts have split coverage