Fundamentals Flashcards
(166 cards)
1
Q
Financial Planning Process is…
A
Establish client Gather data - Determine goals & expectations Analyze finanical status Developing Plan Implement Plan Monitor Plan
2
Q
Life Insurance Benchmark
A
10-16 times gross income
3
Q
Health Insurance Benchmark
A
At least $1 million lifetime cap
no caps under affordable care act
4
Q
Disability Insurance Benchmark
A
If paying premiums with after tax dollars, then policy should pay 60-70% of gross income
5
Q
Property Insurance Benchmark
A
Covers both home & auto for FMV
6
Q
Long Term Care Benchmark
A
Inflation protected daily benefit
7
Q
Personal Liability Umbrella Policy (PLUP) Benchmark
A
$1-3 million of liability protection
8
Q
Emergency Fund Benchmark
A
3-6 months of non-discretionary expenses
9
Q
Housing Ratio Benchmark
A
PITI = 28% of gross income
10
Q
Total Debt Ratio Benchmark
A
PITI+All other debt expenses = 36%
11
Q
Good Debt is…
A
When use of the asset far exceeds the term of the debt.
12
Q
Reasonable Debt Example
A
30 year mortgage or 5 year auto loan, etc.
13
Q
Bad Debt Example
A
Carrying credit card debt each month, etc.
14
Q
Good Debt Example
A
15 year mortgage or 3 year auto loan
15
Q
Educational Funding Benchmark for State College
A
$1,000/yr for 18 years
16
Q
Educational Funding Benchmark for Semi-Private University
A
$3,000/yr for 18 years ($15k/yr tuition)
17
Q
Educational Funding Benchmark for Competitive Private University
A
$6,000/yr for 18 years ($25k/yr tuition)
18
Q
Retirement Amount Benchmark
A
At age 62-65, should have 16 times income needed annually saved
19
Q
Savings Rate Benchmark
A
10-12% of income, assuming savings starts at an early age
20
Q
Return on Investment Benchmark
A
8-10%, assuming long-term horizon
21
Q
What are the “big three” all clients should have?
A
- Will
- Durable Power of Attorney for Healthcare
- Advanced Medical Directive
22
Q
Interest Rates have an inverse relationship with…
A
Investment returns & purchasing power
Higher interest rates means lower earnings for businesses and make bonds w/ lower rates less desirable. It also makes the bond market more attractive than the stock market
23
Q
Unemployment is inversely related to…
A
Wage rate
The lower the unemployment, the more businesses have to pay employees to compete with each other
24
Q
The Demand Curve is affected by…
A
Incomes, Tax rates, Savings rates, & Disposable income
25
The Supply Curve is affected by...
Technology, Competition, & anything other than price
26
____________ is where the Supply and Demand Curves meet
Equilibrium
27
The Elastic Demand Curve goes...
horizontally sloping to the right
| The quantity demanded responds greatly to changes in price
28
The Inelastic Demand Curve goes...
vertically sloping to the right
| The quantity demanded responds little to changes in price
29
What direction does inflation move in each phase of the business cycle?
```
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
```
30
What direction do interest rates move in each phase of the business cycle?
```
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
```
31
What direction does GDP move in each phase of the business cycle?
```
Peak = Highest
Recession = Decreasing
Trough = Lowest
Expansion = Increasing
```
32
What direction does Unemployment move in each phase of the business cycle?
```
Peak = Lowest
Recession = Increasing
Trough = Highest
Expansion = Decreasing
```
33
Average GDP Growth?
3%
34
Average Business Life Cycle Duration
60 months
35
What is a Recession?
6 months, or 2 quarters, of declining GDP
36
What is a Depression?
18 months, or 6 quarters, of declining GDP
37
What is Disinflation?
A decline or slowdown in the rate of inflation
38
What is the Producer Price Index?
A measure of price changes in the wholesale and manufacturing sectors
39
Leading, Lagging, or Coincident Indicator: Stock Prices
Leading
40
Leading, Lagging, or Coincident Indicator: Initial Unemployment Claims
Leading
41
Leading, Lagging, or Coincident Indicator: Money Supply (M2)
Leading
42
Leading, Lagging, or Coincident Indicator: New Manufacturing
Leading
43
Leading, Lagging, or Coincident Indicator: New Private Housing Units
Leading
44
Leading, Lagging, or Coincident Indicator: Consumer Sentiment
Leading
45
Leading, Lagging, or Coincident Indicator: Employees on Payroll
Coincident
46
Leading, Lagging, or Coincident Indicator: Personal Income
Coincident
47
Leading, Lagging, or Coincident Indicator: Industrial Production
Coincident
48
Leading, Lagging, or Coincident Indicator: Manufacturing Sales
Coincident
49
Leading, Lagging, or Coincident Indicator: Average Duration of Employment
Lagging
50
Leading, Lagging, or Coincident Indicator: Change in the CPI
Lagging
51
Leading, Lagging, or Coincident Indicator: Change in Labor Cost per Unit
Lagging
52
Leading, Lagging, or Coincident Indicator: Consumer Credit to Income
Lagging
53
Leading, Lagging, or Coincident Indicator: Value of Outstanding Loans
Lagging
54
Leading, Lagging, or Coincident Indicator: Average Prime Rate Charged by Banks
Lagging
55
What are the Four Tools Used by the Fed?
1. Reserve Requirement
2. Discount Rate
3. Open Market Operations
4. Excess Reserves
56
What is the Reserve Requirement?
The required percentage of deposits a bank must maintain in cash
(The higher the reserve requirement, the less money supply, and higher the interest rates)
57
What is the Discount Rate?
The overnight interest rate member banks can borrow from the Fed to meet the reserve requirement
(This is the only interest rate the Fed sets)
58
What are Open Market Operations?
When the Fed buys or sells gov't securities, the money supply is influenced and pressure is placed on interest rates
(If the Fed buys Treasuries, money supply increases, causing interest rates to fall and vice versa)
59
What are Excess Reserves?
The amount of money in excess the reserve requirement a member bank holds at the Fed
60
Effects on Money Supply & Interest Rates: The Fed Increases the Reserve Requirement
Money supply decreases
| Interest rates increase
61
Effects on Money Supply & Interest Rates: The Fed Increases the Discount Rate
Money supply stays the same
| Interest rates increase
62
Effects on Money Supply & Interest Rates: The Fed Sells Treasuries in the Open Market
Money supply decreases
| Interest rates increase
63
Effects on Money Supply & Interest Rates: When Excess Reserves Increase
Money Supply decreases
| Interest rates increase
64
What are the Three Fiscal Tools used by Congress?
1. Taxation
2. Spending
3. Debt Management
65
How is Taxation a Fiscal Tool?
Increases in taxes reduces the money supply, thus raising interest rates
66
How is Spending a Fiscal Tool?
Increased spending results in more money supply, thus lower interest rates
67
How is Debt Management a Fiscal Tool?
If there is a deficit, then congress must borrow more money, decreasing the amount of money available to lend, thus decreasing the money supply and increasing interest rates
68
If a lost or stolen credit card is reported, but used, what is the liability according to the Fair Credit Billing Act?
$50 per card, or the amount charged, whichever is less
69
The credit CARD act limits late fees generally to...
$25
70
The Credit CARD Act requires companies give _____ days notice of a rate increase.
45
71
The Credit CARD act doesn't allow companies to issue cards to anyone under age ____, unless there is a co-signer over age ____.
21, 21
72
New Health Insurance Policies cannot have Lifetime Caps if issued after...
September 2010
73
How has the Affordable Care Act impacted tanning salons?
10% service tax
74
What does the Affordable Care Act done about Medicare Part D's "Donut Hole"?
Individuals will receive $250
75
Until What age can a child stay on their parent's health care policy?
26th birthday, regardless of if parents claim them as a depend, a student, or married.
76
The Affordable Care Act requires employers who provide health insurance to report what on the employees W-2?
Disclose the value of the benefit for that employee
77
Debts that are not discharged in Ch 7 Bankruptcy
Student Loans, 3 years of back taxes, Alimony, Child Support
78
Bankruptcy exempt assets are...
Contributory IRAs up to $1 million, Qualified Plans and converted IRAs are unlimited
79
Ch 11 Bankruptcy is...
relief through reorganization for business or self-employed
80
Ch 13 Bankruptcy is...
Relief through adjusting debts
81
Workers Compensation will pay regardless of who is at fault. True or False?
True. Workers Compensation is an absolute form of liability
82
What is the maximum number of weeks one can receive unemployment payments?
26, and 39 in times of high unemployment
83
What is a Balance Sheet?
A snapshot at "a moment in time" of one's net worth
84
What is the Balance Sheet Formula?
Assets - Liabilities = Net Worth
85
What are the Three Categories Under Assets in a Balance Sheet?
1. Cash & Cash Equivalents (Current Assets)
2. Invested Assets
3. Personal Use Assets
86
What are the Two Categories Under Liabilities in a Balance Sheet?
1. Current Liabilities (Due in < 12 months)
| 2. Long-Term Liabilities
87
Liquidity Ratios Measure...
The ability to meet short-term liabilities
88
Debt Ratios Measure...
How well a person manages their overall debt
89
Performance Ratios Measure...
Financial flexibility & progress toward goals
90
Current Ratio Formula
Current Assets / Current Liabilities = Current Ratio
91
Emergency Fund Ratio Formula
Current Assets / Non-discretionary expenses = Emergency Fund Ratio
92
Name Three reasons to Buy a Home vs Renting?
When you will be there > 3 yrs
When your goal is to build equity
When you have a high marginal tax rate and can benefit from the mortgage interest deduction
93
What does the "2/6" in a 2/6 ARM Mortgage mean?
Interest rate can't increase more than 2% per year, or more than 6% for the entire term
94
What is the Minimum Age to Enter a Reverse Mortgage?
62
95
What is the Maximum Amount that can be deducted from Mortgage Interest?
$1,000,000 for the home
| $100,000 for a home equity loan
96
ROI Formula
(Ending Investments - Beginning Investments - Savings - Gifts Received) / ((Beginning Investments + Ending Investments) /2)
97
What is the Expected Family Contribution?
The amount congress determines a family should pay toward secondary education formulated in the FAFSA form that considers income, family size, assets, etc
98
When are Students Considered Independent?
If any of these:
Over 23
Married
Working on Masters or Doctorate
If they have legal dependents other than spouse
Currently serving or veteran of US armed forces
99
Name the Four Most Important Financial Aid Programs for Education
1. Federal Pell Grant
2. Stafford Loan
3. Parent Loans for Undergraduate Students (PLUS)
4. Federal Perkins Loan
100
Who Qualifies for a Pell Grant?
Students who have not already earned a Bachelors or professional degree and who qualifies for a needs based loan
101
How is the amount of a Pell Grant determined?
The EFC formula
102
What is the Primary Type of Aid Provided by the Dept. of Education?
Stafford Loans
103
When must Stafford Loans Recipients Begin to Pay Back Their Loans?
6 months after either leaving school or falling below part-time status (6 semester hours)
104
What are the Two Types of Stafford Loans?
Subsidized and Unsubsidized
105
Which Type of Stafford Loan is Needs Based?
Subsidized
106
When are Stafford Loans Inappropriate?
When the parents intend to pay the loans
107
What is a PLUS loan?
Parent Loans for Undergraduate Students
108
What is the Basis for a PLUS loan?
The parent's credit score, not needs based
109
Are PLUS Loans Subsidized?
No
110
Who are Perkins Loans for?
Students with exceptionally low EFC amounts, it is needs based
111
Name the Needs Based Financial Aid for Education
Pell Grants
Subsidized Stafford Loans
Federal Perkins Loans
FSEOG
112
What is an FSEOG
Federal Supplemental Education Opportunity Grant, awarded to students with very low EFC
113
What is Federal Work Study?
On or Off campus employment to help pay for educational expenses
114
Income Based Repayment reduces loan payments to what?
15% of discretionary income, also there is 25 year debt forgiveness
115
What Type of Loan is Eligible for IBR?
Stafford Loans, not PLUS loans
116
Name the 5 Tax-Advantaged Plans for Education
1. Qualified state tuition plans (prepaid and 529 plans)
2. Coverdell Educational Savings Accounts
3. Roth IRA
4. Series EE Savings Bonds
5. Uniform Gift to Minor's Act
117
What is Prepaid Tuition?
An asset owned by the parents where they buy college credits today for use in the future at an in-state college
118
What are the Advantages to Prepaid Tuition?
Lock in tuition cost in today's dollars
119
What are the Disadvantages to Prepaid Tuition?
1. The return is equal only to tuition inflation
2. The child may receive a scholarship and not need the credits
3. If parents return the credits, they only get the principle back with no interest
4. State schools may not have the desirable curriculum in the students area of interest
5. Only design to pay tuition, not room and board and other expenses
120
What is the 529 Prorated Contribution?
You can spread out a single contribution to a 529 plan over 5 years. The maximum would be $65k.
121
What are Qualified Educational Expenses for a 529 Distributions?
Earnings are tax free for tuition and fees, books, supplies, equipment, and room and board if enrolled at least half time
122
What is the Penalty for Using 529 Distributions on Non-Educational Expenses?
Earnings must be included in gross income plus a 10% penalty
123
What are the Exceptions to the 529 10% penalty?
Distributions on account of death, disability, and scholarship
124
Who May Contribute to a Coverdell ESA and How Much?
Parents and Grandparents, totaling to $2,000 per year
125
What are the Tax Advantages to a Coverdell ESA?
Distributions are tax free if used for qualified educational expenses
126
What Types of Schools Can You Use an ESA for, but not a 529?
Private elementary or secondary education
127
What Age Must an ESA be Used By?
By the time the beneficiary turns 30, contributions can't exceed 18th birthday
128
How Can You Use a Roth IRA for Education?
There is an exemption to the early withdrawal penalty for qualified educational expenses
129
What Can an UGMA Invest in?
Stocks, mutual funds, and bonds
130
What Can an UTMA Invest in?
Real estate, stocks, mutual funds, and bonds
131
What is the Primary Risk of an UTMA/UGMA?
The child may use the funds for whatever they like
132
What Type of Deduction is the Student Loan Interest Deduction? What is the Limit?
Above the line, $2,500
133
What Programs do the Lifetime Learning Credit Apply?
Undergraduate, graduate, and professional programs
134
What are the Limits to the Lifetime Learning Credit?
20% of up to $10,000 in expenses per family, but can be claimed for an unlimited number of years
135
What Programs do the American Opportunity Tax Credit Apply?
Tuition & fees for four years of post-secondary education for each dependent
136
What are the Limits to the American Opportunity Tax Credit?
100% for the first $2,000 & 25% for the second $2,000 ($2,500 max)
137
To Use the Lifetime Learning Credit, Which Expenses Must Payments Be Made Directly to the School?
tuition & fees, student activity fees, books, supplies, and equipment
138
To Use the American Opportunity Credit, Which Expenses Must Payments Be Made Directly to the School?
tuition & fees, & student activity fees.
| However, books, supplies, and equipment don't have to be paid directly to the school to qualify
139
Can an Individual Claim both the Lifetime Learning & American Opportunity Credits for a Dependent in the Same Year?
No
140
If an Employer Reimburses Your Education Expenses, How much is Not Included in Income?
Up to $5,250
141
Qualified Expenses for ESAs are...
Tuition & Fees, Books & Supplies, Equipment, Room & Board
142
Qualified Expenses for RIRAs are...
Tuition & Fees, Books & Supplies, Equipment, Room & Board if half time or more
143
Qualified Expense for Lifetime Learning Credit are...
Tuition & Fees paid direct, Books & Supplies paid direct, Equipment paid direct, no room and board
144
Qualified Expenses for American Opportunity Credit are...
Tuition & Fees paid direct, Books & Supplies, Equipment, no room & board
145
Can an RIA Use those letters after his name?
No, must spell out Registered Investment Advisor
146
What Defines an Investment Advisor
ABC:
Advice
Business
Compensation
147
An Advisor Must File Form _____ with the SEC to register
ADV
148
An Advisor Must File Form _____ with the SEC to withdraw register
ADV-W
149
What is on an ADV Part I?
Advisor's name, education, business, and disciplinary history of the last 10 years
150
How Often Does an Advisor Have to Update ADV Part I and Schedule I?
Annually, within 90 days of the fiscal year end
151
What Is on an ADV Part II?
Advisor's compensation, fees, education, investment objectives, conflicts of interest, & background of advisory personnel
152
How Often Does an Advisor Have to Update ADV Part II and Company Brochure?
Annually, or promptly when when any information becomes materially inaccurate
153
How Often Does an Advisor Have to Provide an ADV Part II and Company Brochure to Clients?
Annually
154
RIA Registration Exceptions are...
```
TABLE:
Teachers
Accountants
Brokers
Lawyers
Engineers
```
Advice must be solely incidental to their profession
155
RIA Registration Exemptions are...
VIPs are SaFE
Advisor to Venture capital firms
Advisor to Insurance companies
Advisor to Private funds less than $150 million
home State (and doesn't provide advice for national securities)
Foreign advisors (without a place of business in US)
securities not a national Exchange
156
Who are the Five Gatekeepers that Perform Critical Roles for Advisers?
1. Auditors
2. Prime Brokers
3. Custodians
4. Administrators
5. Marketers
157
What is a Mid-Sized Advisor
AUM between $25 and $100 million
158
The Brochure Rule Requires what Four Disclosures?
1. Explanation of advisory services and fees
2. Types of securities
3. Educational background of advisor
4. Participation/Interest in securities transactions
159
When Must a Brochure Be Presented to a Client?
Within 48 hours prior to entering into a contract, or, at time of entering contract with 5 day grace period
160
Series 6 Securities
Mutual Funds, UITs, variable insurance and annuities
161
Series 7 Securities
Anything but commodities and futures
162
Define an Accredited Investor
```
1,2,3,4 test:
$1 million net worth review every
4 years
$200k of income if single or
$300k of income if married
```
163
Name the Seven CFP Principles
1. Integrity
2. Competence
3. Objectivity
4. Confidentiality
5. Fairness
6. Professionalism
7. Diligence
(I Can Obtain CFP Designation)
164
What Four Elements Determine if a Certificant is Engaged in Financial Planning
1. The client's understanding & intent
2. Multiple FP areas are involved
3. Comprehensive data gathering
4. Breadth & depth of recommendations
165
The "Always Bar" List
Felony conviction for financial crimes
Revocation of a financial professional license
Felony conviction for rape or murder
Felony conviction for violent crimes in past 5 yrs
166
The "Presumed Bar" List
Two or more personal bankruptcies
Revocation or suspension of non-financial license
Suspension of financial professional license
Felony conviction for non-violent crime within 5 yrs
Felony conviction for violent crimes more than 5 yrs
