Fundamentals Flashcards
1
Q
What is the Financial Planning Process?
A
- Understanding the Client’s Personal and Financial Circumstances
- Identifying and Selecting Goals
- Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
- Developing the Financial Planning Recommendation(s)
- Presenting the Financial Planning Recommendation(s)
- Implementing the Financial Planning Recommendation(s)
- Monitoring the Plan
Uber Is A Drunk Person’s Immediate Motor Vehicle
2
Q
What is the life insurance benchmark?
A
10-16x gross pay
3
Q
What is the emergency fund benchmark?
A
3-6 months
4
Q
What is the emergency fund formula
A
Current Assets / Monthly Non-Discretionary Cash Flows
5
Q
What is the education funding benchmark?
A
Save $3,000/$6,000/$9,000 per child per year for 18 years (in-state/mid-private/elite-private)
6
Q
What is the disability benchmark?
A
60-70% of gross pay
7
Q
What are the housing ratio benchmarks?
A
28% (housing debt) = PITI/GrossIncome
36% (total debt) = (PITI + Recurring Debt Payments) / GrossIncome
8
Q
What is the homeowners insurance benchmark?
A
<= full replacement value on both dwelling and contents coverage
9
Q
What is the auto insurance benchmark?
A
<= full FMV for comprehensive and collision
10
Q
What is the liability insurance benchmark?
A
$1-3 million
11
Q
What is the long-term care insurance benchmark?
A
benefit period >= 36-60 months
12
Q
What is the benchmark for retirement savings at retirement?
A
16x pre-retirement income
13
Q
What is the benchmark for annual retirement savings rate?
A
10-13%
14
Q
What is the benchmark for expected retirement return and standard deviation?
A
8-10% and 8-14%
15
Q
What is good debt?
A
- Interest rate low compared to expected inflation and investment returns
- Expected payback period is substantially less than the expected economic life of the asset
16
Q
What is reasonable debt?
A
Payback period is longer or the returns on the debt are positive, but less certain
17
Q
What is bad debt?
A
High interest rates or economic life of a purchase is shorter than the associated debt payback period
18
Q
What estate planning documents are needed?
A
- Will
- Durable power of attorney for healthcare
- Advanced medical directive
19
Q
Describe the shape of an elastic demand curve.
A
- Almost horizontal, sloping down and to the right.
* When there’s a small change in price, there’s a large change in quantity demanded.
20
Q
Describe the shape of an inelastic demand curve.
A
- Almost vertical, sloping down and to the right.
- When there’s a small change in price, there’s very little change in quantity demanded.
- Remember the “I” in inelastic to remember the shape of the inelastic demand curve.
21
Q
What is the order of the business life cycle?
A
Expansion
Peak
Contraction/Recession
Trough
22
Q
Describe the expansion phase.
A
Characterized by increasing GDP, inflation and interest rates. Unemployment rate is decreasing.
23
Q
Describe the peak phase.
A
Characterized by GDP being at its highest. Inflation and interest rates are peaking and unemployment rate is at its lowest levels.
24
Q
Describe the contraction/recession phase.
A
Characterized by GDP slowing, inflation and interest rates beginning to decline and unemployment rate beginning to increase.
25
Describe the trough phase.
Characterized by GDP, inflation, and interest rates being at their lowest levels. Unemployment is at its highest.
26
What direction is inflation headed in each phase of the business life cycle?
Expansion: increasing
Peak: Highest
Recession: Decreasing
Trough: Lowest
27
What direction are interest rates headed in each phase of the business life cycle?
Expansion: increasing
Peak: Highest
Recession: Decreasing
Trough: Lowest
28
What direction is GDP headed in each phase of the business life cycle?
Expansion: increasing
Peak: Highest
Recession: Decreasing
Trough: Lowest
29
What direction is Unemployment headed in each phase of the business life cycle?
Expansion: decreasing
Peak: Lowest
Recession: Increasing
Trough: Highest
30
What are cyclical in nature and fluctuate directly with the business cycle?
Consumer durables and capital goods and investments, i.e. we may wait to buy a new car
31
Define recession
Six consecutive months (or two quarters) of declining GDP
32
Define depression
A recession becomes a depression if the recession lasts for 18 months or 6 consecutive quarters (3x as long as a recession)
33
Define deflation
* Opposite of inflation
* Prices are falling
* During periods of deflation, individuals prefer to hold cash because cash becomes more valuable as it can buy more goods and services and prices decrease.
34
Define disinflation
* A decline or slowdown in the rate of inflation.
* e.g. if annual inflation has been running at 4% each year for the past three years, then slows to 3-3.5% would be a slowdown in the rate of inflation.
35
What are the three main goals of the Federal Reserve?
1. Maintain long-term economic growth.
2. Maintain price levels supported by the economy.
3. Maintain full employment.
36
What are the four tools used by the Federal Reserve to influence the money supply and interest rates?
1. Reserve Requirement
2. Discount Rate
3. Open Market Operations
4. Excess Reserves
37
Describe the Federal Reserve's "Reserve Requirement"
* A percentage of deposits a bank must maintain in cash.
* As the reserve requirement increases, there's less cash available to lend, therefore the money supply decreases and interest rates increase.
* As the reserve requirement decreases, there's more cash available to lend, therefore the money supply increases and interest rates decrease.
38
Describe the Federal Reserve's "Discount Rate"
* The overnight rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements.
* As the discount rate increases, short-term interest rates increase as well.
* As the discount rate decreases, short-term interest rates decrease as well.
39
Describe the Federal Reserve's "Open Market Operations"
As the Federal Reserve buys or sells government securities, the money supply is influenced and places pressure on interest rates.
* To increase interest rates, the fed will sell government securities.
* To decrease interest rates, the fed will buy government securities.
40
Describe the Federal Reserve's "Excess Reserves"
* Monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount.
* An increase in the excess reserves rate will cause more banks to hold excess reserves, which takes money out of the economy - this is contractionary.
* A decrease in the excess reserves rate will cause fewer banks to hold excess reserves, which means they will have more money to lend into the economy - this is expansionary.
41
FDIC Insurance
* 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, and (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.
42
List some examples of debts that are not discharged in bankruptcy.
Examples of debts that are not discharged through Chapter 7: (1) Student loans, (2) 3 years of back taxes, (3) alimony, and (4) child support.
43
List some examples of the assets that are exempt from creditors.
* Traditional and Roth IRAs are exempt, up to $1 million (as indexed) from creditors.
* Clearly identified rollover IRAs have an unlimited exemption if not combined with other IRA money or contributions.
44
Definition of Workers Compensation
* An absolute form of liability
* Regardless of fault if injured at work, the employee will collect benefits.
* Not taxable income
45
Characteristics of a Balance Sheet
* A listing of assets, liabilities and net worth.
* A snapshot of account balances at a "moment in time".
* Proper dating is "As of December 31, 20xx."
* Assets - Liabilities = Net Worth
46
Balance sheet presentation: Cash & Cash Equivalents
Cash, money market, CD <= 12 months
47
Balance sheet presentation: Invested Assets
IRA, Brokerage account, CD > 12 months
48
Balance sheet presentation: Personal Use Assets
Car, House, Jewelry, Furniture
49
Balance sheet presentation: Liabilities
Credit Cards, Mortgage, Auto Loan, Student Loan
50
Current Ratio
* A measure of a client's ability to meet short-term obligations.
* Current assets = cash and cash equivalents, marketable securities such as certificates of deposit less than 12 months in maturity, money market, savings, cash and accounts receivable.
* Current liabilities = credit cards, short-term debts due in less than 12 months
* Current ratio = Current Assets / Current Liabilities.
* The higher the ratio, the better.
51
What are non-discretionary expenses?
* Only those expenses that do not go away if you lose your job: mortgage, utilities, food, car loan, property taxes and insurance premiums.
* Do not include: income taxes, payroll taxes and contributions to a retirement savings account.
52
What is an emergency fund?
* Clients need 3-6 months in non-discretionary expenses in an emergency fund.
* If two or more sources of income, then 3 months.
* If one source of income, then 6 months.
53
What is the benchmark for consumer debt ratios?
20% of NET income
54
What is the benchmark for the housing debt ratio?
<= 28% of GROSS income
55
What is the benchmark for the housing and all other debt ratio?
<= 36% of GROSS income
56
How do you calculate the Housing Debt ratio?
* Monthly Housing Costs (PITI) / Monthly Gross Income
* Where P = Principal, I = Interest, T = Taxes (Property), and I = Homeowners Insurance
* Do not subtract taxes or savings from gross income when calculating these ratios as they require gross income.
57
How do you calculate the Housing and All Other Debt Ratio?
* [Monthly Housing Costs (PITI) + All Other Recurring Debt Payments] / Monthly Gross Income
* All other recurring debt includes: Auto, Student Loans, Boat, Credit Card, and any other type of monthly debt.
58
What is the Savings Ratio?
* [Annual Savings = Employee + Employer Contributions] / Annual Gross Income
* A benchmark savings ratio target is 10-12% of gross income if the client starts saving before age 32.
* If a client waits to begin saving at 45 or 50, the rate may be 20-25% of gross income.
* It's important to include employer contributions to 401(k), profit sharing plans, etc. as part of the savings ratio calculation.
59
Characteristics of a Federal Pell Grant
* Strictly "Need" based and dependent on the EFC amount
* The EFC determines a student's eligibility and how much is awarded
* Only students that have not earned a bachelors or professional degree qualify
60
Characteristics of a Stafford Loan
* The primary type of financial aid provided by the U.S. Department of Education.
* Student loans
* Repayment begins after a six month grace period of leaving school or falling below part-time status (6 semester hours)
* There are two types of a Stafford Loan (subsidized versus unsubsidized)
* Inappropriate if the parents intend to repay the loan
61
Characteristics of a Subsidized Stafford Loan
* Subsidized = interest paid for by the federal government while the student is in school.
* Not available to graduate students.
* "Need" based
62
Characteristics of an Unsubsidized Stafford Loan
* Interest begins to accrue when the funds are disbursed
* not need based
* Available to graduate students
63
Characteristics of the PLUS loan
* A loan for parents to pay for their children's education
* Not need based
* Depends on the parents' credit score
* Not subsidized
* Appropriate for parents who can afford to maek a loan payment, but may not have saved anything for education
* TIP: Wealthy parents are a "PLUS"???
64
Characteristics of the Federal Perkins Loan Program
* For students with exceptionally low EFC amounts.
* "Need" based
* This program was allowed to expire in September 2017, but it could possibly still appear on the exam.
65
Characteristics of Prepaid Tuition
* considered an asset of the parent for financial aid purposes
* can be used to pay for an in state college credit at today's cost
* Basically purchasing college credits today and using them when your child goes to college
66
Advantages of Prepaid Tuition
1. Lock in tuition cost at today's dollars.
67
Disadvantages of Prepaid Tuition
1. Only earn a return equal to tuition inflation.
2. The child may receive a scholarship and not use the tuition credits.
3. Parents may return the tuition credits, but they only receive principal back, typically without interest.
4. The state schools may have less than desirable curriculum in the student's area of interest.
68
Characteristics of a Savings Plan or 529 Savings Plan
* considered an asset of the parent for financial aid purposes
* Typically for parents or grandparents but anyone can contribute to a savings plan that invests in a diversified portfolio of stocks and bonds based upon your child's age
* Any appreciation in the asset value is tax-free if used for qualified education expenses
* Contributions are recognized as being made proratably over a five year period.
* An individual can contribute up to $75,000 (5 x $15,000) in one year, without an gift tax consequences as it's 5x the annual gift tax exclusion amount.
* A couple that elects gift splitting could contribute $150,000 (5 x 2 x $15,000) in one year.
69
Advantages of a Savings Plan or 529 Savings Plan
1. Possible state income tax deduction for contributions if the clients' state has a state income tax and the client lives in the state in which they opened the 529 plan.
2. There is no AGI phase out for who can participate so regardless of income level, anyone can take advantage of 529 Savings Plans.
3. The account owner controls the assets, typically a parent or grandparent.
4. The account owner can change the beneficiary at any time.
5. The contributor can remove assets from their gross estate.
6 Beginning in 2018, up to $10,000 of annual distributions may be taken from a 529 Plan to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
70
Disadvantages of a 529 Savings Plan
* There is a 10% penalty on the earnings and and the earnings are including in gross income if not used for qualified education expenses.
* Exceptions include: distributions on account of death, disability of the beneficiary or scholarship.
71
Characteristics of a Coverdell Education Savings Account (ESA)
* considered an asset of the parent for financial aid purposes
* contributions are limited to $2,000 per year, per beneficiary (a parent and grandparent can contribute to a Coverdell ESA for the same child but contributions cannot exceed this limit.)
* There is an income phaseout for contributions.
* Earnings tax-free if used for qualified education expenses
* Earnings tax-deferred if not used for qualified education expenses (10% penalty and earnings included in gross income)
* Can be used for both private elementary or secondary education.
* Account owner may change the beneficiary at any time.
* Funds must be used or distributed by age 30 to the beneficiary.
* Account owner cannot make contributions beyond the beneficiary's 18th birthday.
72
Characteristics of a Series EE Savings Bond
* Purchased for face value
* Parents must own the bonds and parents must be 24 years old or older when purchased
* May be rolled into a 529 Plan or Coverdell ESA
* No federal income tax on interest if the bond is used to pay for qualified education expenses (subject to AGI limits)
* Bond must be redeemed in same year as education expenses are incurred
73
Uniform Gift to Minor's Act/Uniform Transfers to Minors Act (UGMA/UTMA)
* Assets are considered an asset of the child when determining financial aid
* Taxation of unearned income (interest, dividends and capital gains) may be subject to the kiddie tax
* If the child is under 19 or a full-time dependent student under 24, then the unearned income may be taxed using the trust and estates brackets
* Otherwise, taxed at the child's rate
* Primary risk is that a child can use assets for something other than education
* UTMA may include: real estate as an investment, stocks, mutual funds or bonds
* UGMA only includes: stocks, mutual funds, and bonds, but not real estate.
74
Deductibility of Student Loan Interest
* above the line (before AGI), limited to $2,500
* loan must have been used for: tuition, room, board, supplies, or other necessary expenses.
* education student loan interest is deductible for the life of the loan
75
Lifetime Learning Credit
* Available for tuition and fees related to undergraduate, graduate, or professional programs.
* tax credit: 20% of up to $10,000 in qualified expenses per year
* maximum per family is $2,000 per year
* can be claimed for an unlimited number of years
76
American Opportunity Tax Credit
* applies to tuition and fees for the first four years of post-secondary education
* tax credit: 100% of first $2,000 in qualified expenses; 25% of second $2,000
* maximum tax credit per student is $2,500 per year
* can apply to multiple students on one family tax return
77
What are the coordination rules for using the American Opportunity Tax Credit and Lifetime Learning Credit in the same year?
* An individual may not claim both for the same child in the same year.
* An individual may not use an AOTC or LLC for the same expense paid by a qualified tuition program.
* An individual may use the AOTC or LLC in the same year as a distribution from a qualified tuition plan, just not for the same expenses.
78
Employer Education Assistance
* An employer may pay for or reimburse an employee for education expenses.
* Any benefit or reimbursement is not included in income up to $5,250.
79
What is the Code of Ethics?
A CFP(r) professional must:
1. Act with honesty, integrity, competence, and diligence.
2. Act in the 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(r) certification.
This is not specifically defined, remains aspirational and leads to more detailed rules and obligations through the planning process.
80
What are the duties owed to clients? [UPDATE]
1. Fiduciary Duty
2. Integrity
3. Competence
4. Diligence
5. Disclose and Manage Conflicts of Interest
6. Sound and Objective Professional Judgment
7. Professionalism
8. Comply with the Law
9. Confidentiality and Privacy
10. Provide Information to a Client
11. Duties when communicating with a client
12. Duties when representing compensation method
13. Duties when recommending, engaging, and working with additional persons
14. Duties when selection, using, and recommending technology
15. Refrain from borrowing or lending money and commingling financial assets
81
Fiduciary Duty
* Three duties: Duty of Loyalty, Duty of Care, Duty to Follow Client Instructions
* Any recommendations regarding financial assets must be made as a fiduciary.
* Client Needs > Financial Planner Interests
* All compensation and business models
82
Integrity [UPDATE]
* Key Words: Honesty, Upstanding, Candor
* Allows for innocent mistakes and differences of opinion.
* Do not commit fraud, deceive or violate the spirit of the rules
83
Competence [UPDATE]
* Key Words: Relevantly Apply Knowledge
* A CFP(r) professional does not have to master all areas of planning.
* Gain competence, obtain assistance, limit the engagement or refer if competence is lacking.
84
Diligence [UPDATE]
* Key Words: Timely, Thorough
| * Timely is not instant. Timely allows for the normal course of doing business on the part of the CPF(r) professional.
85
Disclose and Manage Conflicts of Interest [UPDATE]
* Key Words: Active Consent, Disclosure, Manage, Material Conflict, Ambiguity
* Consent does not need to be in writing
* Larger potential for harm, greater the need for disclosure
* Ambiguity on the side of the client
* Assume financial conflicts are material
86
Sound and Objective Professional Judgment [UPDATE]
* Key Words: Exercise judgment, not subordinated
* Do not accept or solicit gifts that could influence judgment
* Fruit basket OK; Ferrari no
87
Professionalism [UPDATE]
* Key Words: Dignity, Courtesy and Respect
| * Applies to Clients, Potential Clients, and other Financial Professionals
88
Comply with the Law [UPDATE]
* Key Words: Laws, Rules, Regulations, Standards
* Avoid intentionally or recklessly violating laws, rules, regulations, or standards.
* Recklessly can apply to making poor referrals.
89
Confidentiality and Privacy [UPDATE]
* Key Words: Consent, Ordinary Business, Legal and Enforcement Purposes, Policies
* Client consent does not need to be in writing
* No absolute confidentiality
* "Ordinary Business" requires consent
* "Legal and Enforcement Purposes" does not require consent
* Must have policies and process to protect Confidentiality, deliver in writing at or before engagement and every 12 months if they change
* Carve out on policy delivery for Regulation S-P; B/D, Federal Covered RIAs
* The compliance officer where an account was held in the *past* does not have the authority to compel a CFP(R) professional to provide confidential information.
90
Provide Information to a Client [UPDATE]
* Key Words: Financial Advice, Financial Planning
* Financial Advice requires seven elements (Description, Pay, Compensation, Bankruptcies/Regulatory Events, Conflicts of Interest, Economic Benefit of Referrals, Other Material Information)
* Financial Planning all of the above *and* Scope of Engagement, Limitations and Responsibilities.
* Monitoring is assumed unless excluded from the scope of engagement.
91
Communicating with a Client [UPDATE]
* Key Words: Reasonable, Expected to Understand, Avoid Complexity
* Ensure Client Understanding
* Consider multiple forms of communication
92
Duties when Representing Compensation [UPDATE]
* Key Words: Fee-Only, Fee-Based, Sales Related Compensation, Soft Dollars, Non-Monetary Benefits, Related Party
* Fee-Only = direct fees charged to clients or as a % of financial assets
* $0.01 of Sales Related Compensation eliminates the ability to use "Fee-Only"
* 12b-1 Fees are specifically stated as Sales Related Compensation
* Control and compensation from a related party earning Sales Related Compensation eliminates the ability to use "Fee-Only" with a few carve outs
* Fee-Based = Fees & Sales Related Compensation
* Soft Dollars (research or speaking services supplied by an investment company or B/D) are not sales related compensation
93
Recommending, Engaging or Working with Additional Persons [UPDATE]
* Key Words: Reasonable Basis, Reputation, Experience, Qualifications, Disclosure, Reasonable Care
* This standard requires referring on the basis of reputation, experience and qualifications.
* Provide disclosure if paid a referral fee or given a substantial economic benefit.
* Fruit Basket = No. $1,000 Check = Yes.
94
What must a CFP(r) professional do when selecting, using, and recommending Technology?
* Key Words: Reasonable Care and Judgment, Level of Understanding
* Exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tool, or other technology while providing Professional Services to a Client.
* Have a reasonable level of understanding of the assumptions and outcomes of the technology employed.
* Must have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes.
95
Refrain from Borrowing or Lending Money and Commingling [UPDATE]
* Key Words: Commingle, Client Assets, Borrow, Lend
* Client lending/borrowing generally prohibited
* Exception family members, businesses who lend/borrow
* CFP(r) professional or their employer cannot commingle with client assets
96
What shall a written "Agreement" between a client and CFP(r) Professional specify? [UPDATE]
* the parties to the Agreement
* the date of the Agreement and its duration
* how and on what terms each party can terminate the Agreement
* the services to be provided as part of the Agreement
* fees and compensation
97
Definition of a "fiduciary"
A certificant shall at all times place the interest of the client ahead of their own. When the client provides financial planning or material elements of the financial planning process, the certificant owes to the client the duty of care of a "fiduciary" as defined by the CFP Board: one who acts in utmost good faith, in a manner they reasonably believe to be in the best interest of the client.
Practicing with a duty of care, loyalty, and following client instructions should lead to fewer infractions and liability than other business models.
98
Duty of Loyalty [Fiduciary Duty]
1. Place the interests of the Client above the interests of the CFP(r) professional and their firm.
2. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client's informed consent, and properly manage the conflict.
3. Act without regard to the financial or other interests of the CFP(r) professional, their firm, or any individual or entity other than the Client, which means that a CFP(r) professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client's interests above their own.
99
Duty of Care [Fiduciary Duty]
A CFP(r) professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client's goals, risk tolerance, objectives, and financial and personal circumstances.
Having false information on an application violates this duty, as does using trial and error to determine the course of action.
100
Duty to Follow Client Instructions [Fiduciary Duty]
A CFP(r) professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.
101
Duties Owed to Clients: Integrity
A CFP(r) professional must perform Professional Services with integrity. Integrity demands honesty and candor, which may not be subordinated to personal gain or advantage. Allowance may be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of principle.
A CFP(r) professional may not, directly or indirectly, in the conduct of Professional Services:
i. Employ any device, scheme, or artifice to defraud
ii. Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading
iii. Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
102
Competence [UPDATE]
```
A CFP(r) professional must provide Professional Services with competence, which means with relevant knowledge and skill to apply that knowledge. When the CFP® professional is not sufficiently competent in a particular area to provide the Professional Services required under the Engagement, the CFP® professional must gain competence, obtain the assistance of a
competent professional, limit or terminate the Engagement, and/or refer the Client to a competent professional. The CFP® professional shall describe to the Client any requested Professional Services that the CFP® professional will not be providing.
```
103
Duties Owed to Clients: Diligence
A CFP® professional must provide Professional Services, including responding to reasonable Client inquiries, in a timely and thorough manner.
104
Disclose Conflicts [UPDATE]
When providing Financial Advice, a CFP® professional must make full disclosure of all Material Conflicts of Interest with the CFP® professional’s Client that could
affect the professional relationship. This obligation requires the CFP® professional to provide the Client with sufficiently specific facts so that a reasonable Client would be able to understand the CFP® professional’s Material Conflicts of Interest and the business practices that give rise to the conflicts, and give informed consent to such conflicts or reject them. A sincere belief by a
CFP® professional with a Material Conflict of Interest that he or she is acting in the best interests of the Client is insufficient to excuse failure to make full disclosure.
i. A CFP® professional must make full disclosure and obtain the consent of the Client before providing any Financial Advice regarding which the CFP® professional has a Material Conflict of Interest.
ii. In determining whether the disclosure about a Material Conflict of Interest provided to the Client was sufficient to infer that a Client has consented to a Material Conflict of Interest, CFP Board will evaluate whether a reasonable Client receiving the disclosure would have understood the conflict and how it could affect the advice the Client will receive from the
CFP® professional. The greater the potential harm the conflict presents to the Client, and the more significantly a business practice that gives rise to the conflict departs from commonly accepted practices among CFP® professionals, the less likely it is that CFP Board will infer informed consent absent clear evidence of informed consent. Ambiguity in the disclosure provided to the Client will be interpreted in favor of the Client.
iii. Evidence of oral disclosure of a conflict will be given such weight as CFP Board in its judgment deems appropriate. Written consent to a conflict is not required.
105
Manage Conflicts [UPDATE]
A CFP® professional must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability to act in the Client’s best interests.
106
A material conflict is [UPDATE]
one that could impact advice given by the CFP® professional or cause potential harm
107
Sound and Objective Professional Judgment [UPDATE]
A CFP® professional must exercise professional judgment on behalf of the Client that is not subordinated to the interest of the CFP® professional or others. A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional’s objectivity.
108
Duties Owed to a Client: Professionalism
A CFP® professional must treat Clients, prospective Clients, fellow professionals, and others with dignity,
courtesy, and respect.
109
Comply With the Law [UPDATE]
a. A CFP® professional must comply with the laws, rules, and regulations governing Professional Services.
b. A CFP® professional may not intentionally or recklessly participate or assist in another person’s violation of these Standards or the laws, rules, or regulations governing Professional Services.
110
Duties When Communicating With a Client [UPDATE]
A CFP® professional must provide a Client with accurate information, in accordance with the Engagement, and in response to reasonable Client requests, in a manner and format that a Client reasonably may be expected to understand.
111
What is Financial Planning?
Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.
Relevant elements of personal and financial circumstances vary from Client to Client, and may include the Client’s need for or desire to: develop goals, manage assets and liabilities, manage cash flow, identify and manage risks, identify and manage the financial effect of health considerations, provide for educational needs, achieve financial security, preserve or increase wealth, identify tax considerations, prepare for retirement, pursue philanthropic interests, and address estate and legacy matters.
112
1. Understanding the Client’s Personal and Financial Circumstances [UPDATE]
* Key words: Obtaining Qualitative and Quantitative Information, Analyzing Information, Addressing Incomplete Information, Defining Scope of Engagement
* Both Quantitative and Qualitative information is equally important
* Restrict scope of engagement if necessary information is not provided or available
* Examples of Qualitative information include medical conditions
* A new scope of engagement is not required when a client changes their risk aversion
113
2. Identifying and Selecting Goals [UPDATE]
* Key words: Identify Goals, Effects on other Goals, Prioritize Goals
* Goal selection and prioritization is ongoing through the planning process
* Scarcity of resources, impact one another
* A client's attitude, values, expectations and time horizon are all necessary to determine financial goals, needs, and priorities. Income, however, comes in as part of the analysis phase.
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3. Analyzing the Client’s Current Course of Action and
| Potential Alternative Course(s) of Action [UPDATE]
* Key words: Current Course of Action, Advantages & Disadvantages, Potential Course of Action
* Objectively analyze the good and the bad of current and proposed actions
* Products and strategies are not favored or recommended by CFP Board, only process. Keep personal bias in check on the exam.
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4. Developing the Financial Planning Recommendation(s) [UPDATE]
* Key words: Assumptions, Maximize Potential to Meet Goals, Basis for Making Recommendation, Timing, Priority, Independent or in Concert
* Select answers that maximize potential to meet goals (consider cost, liquidity, risk)
* Transactions stand as independent recommendations; Financial Planning most often requires goals to work together
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5. Presenting the Financial Planning Recommendation(s) [UPDATE]
* Key words: Information, Developing
* Present recommendations and discuss with the client before acting on them.
* Process > Product
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6. Implementing the Financial Planning Recommendation(s) [UPDATE]
* Key words: Responsibilities, Identify, Analyze, Advantages, Disadvantages
* Different business models put different levels of responsibility on clients and the planner
* Consider stand alone goals (buying P&C coverage) and those that have to be implemented together (estate planning)
* Process > Product
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7. Monitoring Progress and Updating [UPDATE]
* Key words: Monitoring Responsibility, Progress, Collaborate, Update
* Must establish monitoring duties, but not necessarily monitor (if excluded from the scope).
* CFP Board does not state how frequently monitoring or progress updates must take place (states appropriate intervals)
* A CFP® professional must specifically state they are not monitoring, otherwise monitoring is assumed.
* The engagement must be monitored for a period of time for any events (e.g. inheritance) that will possibly change the scope and breadth of the engagement.
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Felony [UPDATE]
A felony offense, or for jurisdictions that do not differentiate between a felony and a misdemeanor, an offense punishable by a sentence of at least one-year imprisonment or a fine of at least $1,000.
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Relevant Misdemeanor [UPDATE]
A criminal offense, that is not a Felony, for conduct involving fraud, theft, misrepresentation, other dishonest conduct, crimes of moral turpitude, violence, or a second (or more) alcohol and/or drug-related offense.
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Regulatory Investigation [UPDATE]
An investigation initiated by a federal, state, local, or foreign governmental agency, self-regulatory organization, or other regulatory authority. A Regulatory Investigation does not include preliminary or routine regulatory inquiries or requests for information, deficiency letters, “blue sheet” requests or other trading
questionnaires, or examinations.
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Regulatory Action [UPDATE]
An action initiated by a federal, state, local, or foreign governmental agency, self- regulatory organization, or other regulatory authority.
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Civil Action [UPDATE]
A lawsuit or abitration
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Finding [UPDATE]
A finding includes an adverse final action and a consent decree in which the finding is neither admitted nor denied, but does not include a deficiency letter, examination report, memorandum of understanding, or similar informal resolution of a matter.
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Minor Rule Violation [UPDATE]
A violation of a self-regulatory organization rule designated as a minor rule violation under a plan approved by the U.S. Securities and Exchange Commission. A rule violation may be designated as “minor” under a plan if the sanction imposed consists of
a fine of $2,500 or less, and if the sanctioned person does not contest the fine.
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What are the rules to notify the Board for a change to contact information? [UPDATE]
within 45 days: e-mail address, telephone number(s) and physical address
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What are the rules for notifying the CFP Board in the case of being charged, convicted or involved with adverse conduct?
A certificant shall notify the CFP Board in writing of any charge or conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves the use of alcohol or drugs, or of any professional suspension or bar within thirty (30) calendar days after the date on which the certificant is notified of the charge, conviction, suspension or bar. A CFP® professional should report *both* the initial charge or investigation as well as its outcome.
30 days includes weekend and holidays, and a policy of over-disclosure is preferential to one of less disclosure.
Testable exceptions to reporting include claims of arbitration compensation for $5,000 or less and violations settled for $15,000 or less. Even rebuttable actions should be reported to CFP Board. Reporting does not necessarily lead to discipline.
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Examples of conduct that will ALWAYS bar an individual from being certified [UPDATE]
- Felony conviction for theft, embezzlement or other financially based crimes.
- Felony conviction for tax fraud or other tax-related crimes.
- Revocation of a financial professional (registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the revocation is administrative in nature.
o Example of administrative revocation: the result of the individual determining not to renew the license by not paying the required fees.
- Felony conviction for any degree of murder or rape.
- Felony conviction for any other violent crime within the last five years.
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Examples of conduct that is PRESUMED to be unacceptable [UPDATE]
Two or more personal or business bankruptcies.
o Note: CFP Board will no longer investigate, and the Disciplinary and Ethics Commission will no longer adjudicate, single bankruptcy-only cases. Instead, ALL bankruptcies will be disclosed on the CFP® professional’s public profile displayed on the CFP Board’s website for 10 years and their names will be included once in a press release issued periodically by the Board.
- Revocation or suspension of a nonfinancial professional (real estate, attorney) license, unless the revocation is administrative in nature.
- Suspension of a financial professional (registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature.
- Felony conviction for nonviolent crimes (including perjury) within the last five years.
- Felony conviction for violent crimes other than murder or rape that occurred more than five years ago.
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Examples of matters that may RARELY delay or deny certification [UPDATE]
* Customer complaints
* Arbitrations and other civil proceedings
* Felony convictions for nonviolent crimes that occurred more than five years ago
* Misdemeanor convictions
* Employer reviews and terminations
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What are the exceptions to Registration with the SEC?
* Any broker/dealer whose advisory services are solely incidental to the conduct of business.
* Lawyers, accountants, teachers and engineers whose advice is solely incidental to their profession.
* Banks and bank holding companies that are not investment compoanies.
* Publisher of a bonafide newspaper, magazine or periodical of regular publication.
* Advisers whose advice and services are related strictly to securities guaranteed by the United States government.
* Such person not within the intent of the law as the SEC may designate by rules, regulations or order.
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What are some exemptions from Registration?
* Advisers whose clients reside in their state of business and who don't provide advice, services, analyses or reports regarding nationally listed securities.
* Advisers whose only clients are insurance companies.
* Advisers solely to venture capital funds.
* Advisers solely to private funds less than $150 million.
* Foreign advisers without a place of business in the United States.
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Characteristics of the Brochure Rule
Requires written disclosure to every client of the following:
* Advisory services that are provided and the fees pertaining to those services
* Types of securities that are part of investments
* Education background of advisor
* Participation/interest in securities transactions
* This information must be provided to the client at or before the time of entering into a contract
* Compliance with the brochure rule is accomplished by providing client with a separate written narrative comprised of information in Part 2A and B (outlines fees)
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Leading economic indicators
Anticipate changes in the economy; forecast economic expansions and contractions
e.g. initial unemployment claims, stock prices, money supply (M2), new manufacturing orders, new private housing units, consumer sentiment
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Coïncident economic indicators
Change along with changes in the business cycle, e.g. employees on payroll, personal income, industrial production, manufacturing sales
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Lagging economic indicators
Summarize or confirm past performance, e.g. average duration of unemployment, change in the CPI, change in labor cost per unit, consumer credit to income, value of outstanding loans, average prime rate charged by banks
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CFP Board's definition of Client
* Any person, including a natural person, business organization, or legal entity, to whom the CFP(r) professional provides or agrees to provide Professional Services pursuant to an Engagement.
Exam tip: It is important to clearly identify who the client is in any given situation, to know whose interest the CFP(r) professional serves.
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What constitutes a conflict of interest?
* When a CFP(r) professional's interests (including the interests of their firm) are adverse to the CFP(r) professional's duties to a Client or
* When a CFP(r) professional has duties to one Client that are adverse to another client.
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What written documentation must be provided to the Client in a Financial Planning Engagement?
* Privacy Policy
* Services and Products
* How the Client Pays
* How you, your Firm, and Related Parties are Compensated
* Public Discipline and Bankruptcy
* Referral Compensation
* Terms of Engagement (Implementing, Monitoring and Updating is Required Unless Explicitly Excluded)
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What is Financial Advice?
A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to:
1. The development or implementation of a financial plan;
2. The value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets;
3. Investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters
4. The selection and retention of other persons to provide financial or Professional Services to the Client; or
5. The exercise of discretionary authority over the Financial Assets of a Client
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What written documentation must be provided to the Client in a Financial Advice Engagement?
* Privacy Policy
| * Most disclosures can be provided orally in a Financial Advice Engagement
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Requirements of Written Disclosure
The written disclosure may consist of multiple written documents. Written disclosures used by a certificant or certificant's employer that are used in compliance with state or federal laws, or the rules or requirements of any applicable self-regulatory organization, such as a Form ADV or other disclosure documents, shall satisfy some of the requirements of this Rule.
A certificant may use a current copy of SEC Form ADV Part 2 to satisfy the compensation and/or conflict of interest disclosure requirement.
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What must a CFP(r) professional do on a recurring basis to retain the right to use the CFP(r) marks?
A certificant shall meet all CFP Board requirements, including continuing education requirements, to retain the right to use CFP(r) marks.
Continuing education requirement for CFP(r) Certificants are 30 hours every 2 years, of which 2 hours must be CFP Board ethics.
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Which of the Practice Standards for the Financial Planning Process are required for a CFP(r) professional to complete?
All 7 Practice Standards for the Financial Planning Process are required when engaging in Financial Planning. Steps 6 and 7, Implementing and Monitoring can be excluded from the scope of engagement if specifically addressed.
Implementation responsibilities only need to be addressed/applied if the CFP(R) professional is subject to practice standards.
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What do the CFP Board Code of Ethics and Standards of Conduct establish?
CFP Board's Code of Ethics and Standards of Conduct reflect the commitment that all CFP(r) professionals make to high standards of competency and ethics. CFP Board's Code and Standards benefit and protect the public, provide standards for delivering financial planning and advance financial planning as a distinct and valuable profession. Compliance with the Code and Standards is a requirement of CFP(r) certification that is critical to the integrity of the CFP(r) marks. Violations of the Code and Standards may subject a CFP(r) professional to discipline.
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Prohibition on Circumvention
A CFP(r) professional may not do indirectly, or through or by another person or entity, any act or thing that the Code and Standards prohibit the CFP(r) professional from doing directly.
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Absolute liability
A situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances
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Res ipsa loquitor
The thing that speaks for itself and no need to prove negligence
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Estoppel
If a right has been waived, the company will be stopped from denying a claim
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Waiver provision
The company representatives cannot change the contract
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Parol evidence rule
Once the contract has been placed in written form, all previous understandings of a verbal (or other) contract will not be allowed to contradict the written contract
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Rescission
No agreement can be reached, usually carried out by a court of law
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Reformation
Both parties agree on the error and are willing to work together to rectify it
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Two fairly common defenses used against charges of negligence have been
(1) contributory negligence and (2) assumption of risk.
Today, more and more we are seeing cases presented on a comparative negligence basis. This allows one to collect even if one party did in some way contribute to the accident.
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Lotto winnings income stream
equivalent to a fixed annuity; will not increase for inflation
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Invest a sum at the end of each year that will remain constant in purchasing power
Increase the payment each year to keep pace with inflation
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How to calculate how much needed to live off of a specific income indefinitely, given an interest rate?
Desired income $ / interest rate
| e.g. $20,000 / 0.04 = $500,000
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A bull market
Stocks are increasing in prices, probably in an expansion phase of the business cycle, inflation increasing and interest rates increasing
The Chair of the Federal Reserve may anticipate issues with inflation and they might raise the Federal Reserve rate to alleviate this circumstance. They could also raise required reserves.
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Who issues Treasury bills?
The Treasury Department (not the Federal Reserve)
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What does Section 206 of the Investment Advisers Act of 1940 prohibit?
Fraud or deceit
Under certain circumstances, it allows (a) performance fees, (b) fulcrum fees (which are (a)), and (c) use of the term investment counsel.
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Which industries are least affected by recessions with regard to production and employment?
Consumer non-durable goods and service areas - we would still buy groceries in a recession
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Are the organized stock exchanges, such as the New York Stock Exchange, primarily regulated by the Federal Government?
Yes - they are regulated by the Securities Exchange Commission, which is a US Governmental agency
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Duties owed to firms include
* Complying with Lawful Objectives of CFP(R) Professional's Firm
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What duties does selling a financial asset require of the CFP(R) Professional?
Duties of Care and Loyalty. Selling shares will require an analysis of risk and financial goals, likely creating a situation where the CFP(R) Professional is required to follow practice standards.
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Can the CFP Board revoke a certificant's right to use the marks if they don't respond to the Board's inquiries?
yes
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Describe ethics in planning
It can be used for (a) establishing standards by which conduct can be measured, (b) balancing the power of knowledge of the professional with the rights of the client, and (d) providing a practical guideline for practice standards. It doesn't force a uniform method of conducting business on professionals, leaving much latitude for practicing the profession of financial planning.
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Inelastic demand
* An increase in the price would lead to an increase in the total amount spent on purchases of the product
* Price increases raise revenues
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Elastic demand
An increase in the price would lead to a decrease in the total amount spent on purchases of the product
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Perfectly elastic
An increase in the price would have no effect on the total amount spent on purchases of the product
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Supply curve shift "up and to the left"
Occurs when some firms leave the industry, resulting in a decrease of a good or service being supplied.
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When must a CFP(R) Professional follow the practice standards?
(1) whenever Financial Planning; or
(2) Financial Advice that requires integration of relevant elements of the Client’s personal and/or financial circumstances in order to act in the Client’s best interests (“Financial Advice that Requires Financial Planning”); or
(3) The Client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning.
