Fundamentals Flashcards
1
Q
Billy Smith, age 55, has been a member of the union for 30 years, and as a result, has been excluded from his employer’s retirement plan. Billy has been offered a management position with his firm, which will make him eligible to participate in the company’s 401(k) plan. Billy’s objective is to retire at age 65 with $2,000 in monthly retirement income, exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union retirement plan will provide him with $1,000 monthly. (There are NO matching contributions from Billy’s employer to the 401(k) plan and his income is adequate to have the required level of contributions fall within the deferral limits of the 401(k) plan. Contributions and payments, as appropriate, are made at the beginning of each month.) If the return in the company’s 401(k) plan is 10%, what monthly amount will Billy have to contribute to that plan for 10 years to meet his objective? $556 $566 $576 $747
A
Solution: The correct answer is A. This question is intended to test several time-value-of-money calculations, and is NOT intended to imply a level retirement income or savings approach. Set calculator on “Begin” mode. N = 30 × 12 = 360; i = 10 / 12 = .833; PV = ?; PMT = 1000; FV = 0. Solve for PV of annuity due ($114,900). Then use the PVAD figure of 114900 as a FV, where N = 10 × 12 = 120; i = 10 / 12 = .833; PMT = ?; FV = 114900; Answer = $556.
2
Q
Which of the following are exceptions under the definition of “investment advisor”? I. Banks that are NOT investment companies. II. Accountants or lawyers whose investment advice is “solely incidental” to the practice of their profession. III. Persons whose advice relates only to securities issued or guaranteed by the U.S. government. IV. Publishers of financial publications that have regular and general circulation. I and III only. II and IV only. I, II and IV only. I, II, III and IV.
A
Solution: The correct answer is D. Exceptions do not come under the jurisdiction of the Investment Advisor’s Act and need not register as investment advisors.
3
Q
Which of the following comes under an exemption from registration status of the Investment Advisers Act of 1940? A. Banks and bank holding companies that are not investment companies. B. Lawyers, accountants and teachers whose advice is solely incidental to the practice of their profession. C. Advisers whose advice and services is related to strictly to securities which are obligations of the U.S. government. D. Advisors whose only clients are insurance companies.
A
Solution: The correct answer is D. The parties in Option “D” are exemptions, but must abide by Section 206 of the Act (the anti-fraud provision.) All of the other answers are exceptions; that is, they need not register at all, and are not governed by the Act.
4
Q
Which of the following industries are typically more affected by recession with regard to production and employment? I. Capital goods. II. Consumer durable goods. III. Consumer non-durable goods. IV. Services. I and II only. I, II and IV only. I, II and III only. II, III and IV only.
A
Solution: The correct answer is A. Long-term capital intensive durable goods and capital investments are most affected when recession occurs. The impact is felt in terms of employment in these areas. Non-durables, consumer, and service areas are less impacted by these events. In other words, we may wait to buy a new car, but we will still buy groceries.
5
Q
The provision that all credit reports are required to contain accurate, relevant, and current information is a part of: The Truth in Lending Act. The Consumer Credit Protection Act. The Fair Credit Reporting Act. The Fair Credit Billing Act.
A
Solution: The correct answer is C. The Fair Credit Reporting Act (FCRA) also allows individuals to challenge information deemed to be incorrect on their credit report and provides for changing that information if the creditor does not respond with a specific time period.
6
Q
Which of the following statements about the selected industry relative to its regulatory body and the relationship between the two are true? I. The insurance industry is primarily regulated by each of the 50 states. II. The majority of banks are subject to federal regulation by the Federal Reserve System and the Federal Deposit Insurance Corporation. III. Pension plan funds are primarily subject to federal regulation. IV. The organized stock exchanges, such as the New York Stock Exchange, are primarily regulated by the federal government. I, II and III only. I and III only. II and IV only. I, II, III and IV.
A
Solution: The correct answer is D. Option “III” - Pension funds are governed by PBGC (also known as the Pension Benefit Guarantee Corporation) and ERISA (also known as the Employees Retirement Income Security Act) rules as to reporting and requirements on the federal level. Option “IV” - Organized stock exchanges are regulated by the U.S. Government agency, the Securities Exchange Commission (SEC).
7
Q
Conduct that is PRESUMED to bar an individual from becoming a CFP
A
- Two or more business bankruptcies (ALL bankruptcies will be disclosed on the CFP’s website for 10 years) - Revocation or suspension of a NON-professional license (real estate, attorney) unless it’s administrative in nature (you forgot to pay your renewal fees) - Felony conviction for non-violent crimes (including perjury) within the last 5 years - Felony conviction for violent crimes other than murder or rape that occurred MORE THAN 5 YEARS AGO
8
Q
Bob Blazek comes to you, his financial planner and a CFP® certificant, with a question about a recent agreement he made. His brother Bill asked to borrow $10,000 to start a new business. What advice do you give Bob to help make this a successful transaction? I. Make a formal arrangement specifying the interest rate and repayment schedule. II. State in writing that this is a loan, NOT a gift, and have Bill sign the document. III. Explain to Bob his options in case of default. IV. Make sure Bob approves of the business venture prior to making the loan. I and IV only. II and III only. II and IV only. I, II and III only.
A
Solution: The correct answer is D. All choices are good advice, except for Option “IV.” If Bob does not approve of the business venture, he need not loan Bill the money. Based on the facts, he has already decided to loan the money by coming to you for information on how to accomplish it.
9
Q
Once the contract is placed in written form, all previous and prior understandings of a verbal contract (or any other nature) will not be allowed to contradict the written contract. This will be known as:
A
Parol evidence rule
10
Q
Amber applied for CFP certification and we denied. Her prior conduct falls under the “presumed list” and she wants to appeal. Which of the following is true regarding the review process? a. She must call the professional review staff within 15 days and tell them that she plans to submit the review process b. A fee will be charged c. A final decision whether to deny or grant the petition will be made within 120 days of application d. The disciplinary and ethics commission’s decision regarding a petition for consideration is final and may never be appealed
A
B. A fee will be charged.
11
Q
Which of the following is not an element of the CFP Board requirement of Fiduciary Duty? a. Duty of diligence b. Duty of loyalty c. Duty of care d. Duty to follow client instructions
A
A. Duty of diligence
12
Q
A CFP Professional may share client and account details in the course of ordinary business with which of the following except: a. any affiliated or partner firms owned by the CFP professional’s employer b. any person or businesses the client has provided oral or written consent c. As necessary to provide information between attorney’s accountants and auditors d. To a person acting as a representative capacity to the client such as a POA
A
A. any affiliated or partner firms owned by the CFP professional’s employer
13
Q
A young couple (both age 30) comes to the financial planner with the desire for assistance in improving their family’s financial position. They have two healthy children, ages 3 and 6. The husband is a foreman for a manufacturer of auto parts. His current salary is $30,000 per year. The wife is a marketing professor for a state university. Her current salary is $40,000 per year. The couple recently purchased a riverfront home for $100,000 using their entire savings of $20,000 as a down payment. In addition to an $80,000 mortgage, the couple’s only debt is an automobile loan having a balance of $12,000. Both husband and wife have very good family health insurance from their employers. The wife has employer-paid life insurance equal to two times her annual salary. The couple wants to start an investment program as soon as possible. To correct the weakness in their financial planning before beginning the investment program, the client should: I. Establish an emergency funds with stock mutual funds. II. Start a college savings fund for their children. III. Purchase disability insurance for the wife and the husband. IV. Prepare wills for the wife and the husband. V. Secure credit life insurance for the auto loan. V only. I and II only. I and III only. III and IV only.
A
Solution: The correct answer is D. Option “I” is incorrect because an emergency fund must be liquid. Option “II” would be part of investing and the question asks for corrections, not investments. Option “V” is incorrect as the auto loan is small and is their only debt. The wife has insurance already; therefore, this is not a priority yet.
14
Q
David has won the Illinois state lottery. He must decide whether to receive annual payments of $250,000 at the beginning of each year for the next 20 years, or a lump sum payout. What lump sum amount does David need to receive to equal the $250,000 payments for the next 20 years, if he can earn an 8% return on his investments, assuming inflation is 3%? $2,454,537 $2,650,900 $2,875,900 $3,307,511
A
Solution: The correct answer is B. This is a present value of an annuity due problem. So, N = 20, I = 8, PV = ?, PMT = 250,000, FV = 0. Put your calculator in BEGIN mode and solve for PV. Inflation is not necessary in this calculation, lotto winnings income streams will not increase for inflation, they are the equivalent to a fixed annuity.
15
Q
Which of the following can the Federal Reserve do to reduce the money supply? I. Purchase Treasury securities. II. Decrease the reserve requirements for banks. III. Raise the discount rate. I only. II only. III only. I and III only.
A
Solution: The correct answer is C. Only increasing the discount rate will reduce the money supply. Purchasing Treasury securities and decreasing the reserve requirements for banks will increase the money supply.
16
Q
Which of the following are included among the tools available to the Federal Reserve (the Fed) to accomplish its responsibilities? I. Open market operations. II. Deficit spending. III. Discount rate change. IV. Treasury bill issuance. I and III only. I, II and III only. I, III and IV only. I, II, III and IV.
A
Solution: The correct answer is A. Choice “IV” - Issuing Treasury bills is the domain of the Treasury Department, not the Federal Reserve. Choice “II” - Deficit spending falls under fiscal policy which is governed by the executive and legislative branches of government, not the Federal Reserve.
17
Q
Federal authorities govern the insurance industry in the following instances and manner: I. The federal government NEVER influences insurance regulations. II. That is left to the individual states. III. Through the Internal Revenue Codes. IV. Through the Securities Exchange Commission. V. Through the Employees Retirement Income Securities Act. I only. II, III and IV only, III and IV only II and IV only.
A
Solution: The correct answer is B. Federal authorities govern the insurance industry in the following instances and manner: through the Internal Revenue Codes, through Securities Exchange Commission, and through the Employees Retirement Income Securities Act.
18
Q
Cathy and John Gonnerman would like to retire in twelve years. At that time, they would like to have accumulated $350,000 in today’s dollars. To achieve this goal, they plan to invest a sum at the end of each year that will remain constant in purchasing power. They anticipate average inflation at 6% and have an after tax investment earning capacity of 9%. What payment is required at the end of the first year for them to reach their goal? $34,806.25 $26,394.63 $27,978.31 $50,104.88 $45,563.97
A
Solution: The correct answer is B. The payments increasing each year will keep pace with inflation at the end of 12 years. 1) Solve for PMT with inflation adjusted return: N=12 i=[(1.09/1.06)-1] × 100=2.83 PMT=24,900 × 1.06=26,394 FV=350,000 PMT = 24,900 (If needed) Further information to verify the above calculation: $350,000 today, inflated at 6%, is equal to 704,269 in 12 years PV = 350,000 N = 12 I = 6 solve for FV= $704,269 2) Solve for the serial payment amount: N=12 I = (1.09/1.06) - 1 × 100 FV = 350,000 note: the inflation is being accounted for in the PMT solve forPMT $24,900.59 ***Since the first payment is not being made until the end of the year, you have to multiply by (1 + inflation rate) because you have to “make up” for the first year of inflation 24,900.59 × 1.06 = 26,394.63
19
Q
Which of the following is/are true regarding registering as an investment adviser? I .Exceptions are not governed by the Investment Advisers Act of 1940 at all. II. Exemptions are governed by Section 206 of the Investment Advisers Act of 1940. III. Exceptions include advisers whose only clients are insurance companies. IV. Exemptions include banks and bank holding companies. I only. I and II only. II and III only. II and IV only.
A
Solution: The correct answer is B. Exceptions are not governed by the Act. Exemptions need not register, but are governed by the “anti-fraud” provision (Section 206) of the Act.
20
Q
As a rule of thumb, it is best if consumer debt does not exceed:
A
20% of net income.
21
Q
The husband of one of your clients had his wallet stolen. He had five credit cards in his wallet when this occurred. He reported the cards as missing the next morning, but the following transactions had already occurred: (Discover Card - $350) (MasterCard - $100) (VISA - $425) (Sears - $25) (Marshall Fields - $685) What is the client’s liability for the fraudulent transactions on these cards? $50 $225 $250 $1,235
A
Solution: The correct answer is B. The maximum on any card that the client would have to pay would be $50. But remember the thief only charged $25 on the Sears Card. Therefore, the total is 4 cards times $50 plus $25, which equals $225.
22
Q
As a direct result of a prolonged bull market and rising economy, the Chair of the Federal Reserve sees the possibility of problems looming on the horizon. Which of the following are among the issues the Chair may be anticipating, and what are the related actions might the Chair take to alleviate these circumstances? I. Stagnation; raise the Federal Reserve rate. II. Inflation; raise the Federal Reserve rate. III. Deflation; raise the required reserve. IV. Recession; raise the opening bid at T-bill auctions. V. Irrational exuberance; print less money. I only. II only. II and IV only. III and V only.
A
Solution: The correct answer is B. The situation described presents a strong possibility of inflation. One way to control inflation is by raising interest rates. Raising required reserve is another, but it is incorrectly paired with deflation. The other choices make no sense.
23
Q
Conduct that will ALWAYS bar an individual from becoming a CFP
A
Felony conviction of: - theft - embezzlement - other financial crimes - tax fraud - other tax related crimes - murder / rape - violent crime WITHIN THE LAST 5 YEARS - Revocation or suspension of a FINANCIAL professional license (registered securities rep, broker/dealer, insurance, accountant, investment advisor, financial planner) UNLESS it’s administrative in nature (you forgot to pay your renewal fees)
24
Q
Financial Advice VS Financial Planning
A
Am I Providing Financial ADVICE to a Client? NO = Fiduciary duty does NOT apply, CFP must still abide by the Code of Ethics YES = Only fiduciary duty applies *Confidentiality & Privacy docs MUST BE IN WRITING, all other documents can be oral. Does the Financial Advice Require Financial PLANNING? NO = Fiduciary duty applies, CFP not required to apply the practice standards for the FP process ( YES, but the client doesn’t agree to engage = same as NO. YES = Apply the practice standards for the FP process **Terms of engagement * Conflicts of interest can be oral, ALL OTHER DOCUMENTS MUST BE IN WRITING. Both must disclose: services, products, comp., disciplinary history, bankruptcy, conflicts of interest, confidentiality and privacy, related parties, websites (FINRA, CFP website, etc.)
25
Mrs. Hoffman is an 80-year old widow whose liquid assets are on deposit at a small FDIC-insured bank. She has the following on deposit: - $75,000 in various Certificates of Deposit - $50,000 in a Money Market Mutual Fund - $200,000 in an IRA Rollover - $25,000 Passbook Savings (Joint with son) - $25,000 Checking Account (Joint with daughter) How much is currently insured by the FDIC? $100,000 $125,000 $250,000 $375,000
Solution: The correct answer is B. The $75,000 CDs are insured under Mrs. Hoffman (Single). The $50,000 Money Market Mutual Fund is not insured by the FDIC. It may be insured under the SIPC but that is not what the question is asking. The $200,000 could be insured but we do not know what the IRA is invested in as it must be cash to receive FDIC coverage. The Passbook Savings is FDIC insured jointly with her son ($12,500 for each Mrs. Hoffmann and her son) for a total of $25,000 coverage. The Checking account is FDIC insured jointly with her daughter ($12,500 for each Mrs. Hoffmann and her daughter) for a total of $25,000 coverage. In Summary: $75,000 in various Certificates of Deposit – Covered by FDIC $50,000 in a Money Market Mutual Fund – Not Covered $200,000 in an IRA Rollover – We don’t know if it would be covered. $25,000 Passbook Savings (Joint with son) – Covered $25,000 Checking Account (Joint with daughter) Covered TOTAL FDIC COVERAGE: 125,000 The question asked "How much is currently insured by FDIC", NOT what Mrs. Hoffman was covered for. IF the question had asked "How much is Mrs. Hoffman insured for under the FDIC?" the answer would be: $75,000 + $12,500 + $12,500 = $100,000, due to the joint accounts with her children.
26
A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following EXCEPT the: Diversification of the client's assets. Size of the client's net cash flow. Client's liquidity position. Client's use of debt.
Solution: The correct answer is B. Assets and liabilities show up on a balance sheet, while cash flows are demonstrated on a statement of earnings also known as a personal cash flow statement (statement of income and expenses).
27
Your client wants to receive payments of $2,500 from her investments at the beginning of each month during her retirement to supplement her pension plan benefits. Your client estimates she will need to receive this monthly payment for 35 years. If an 8.5% annual return is earned on investments, compounded monthly, what amount does your client need to have at the time of her retirement to fund her needs? $334,734 $337,106 $6,488,916 $6,534,879
Solution: The correct answer is B. You are solving for the PV of a future cashflow. BEGIN mode N=35 × 12 = 420 i = 8.5/12 = .7083 PV = ? PMT = 2,500 FV = 0 Solve for PV = 337,105.5360
28
All of the following economic activities represent governmental fiscal policy EXCEPT: A. The government increases purchases of goods and services. B. The government cuts taxes. C. The government cuts the Federal Funds Rate. D. The government uses higher taxes to dampen consumption and private investment.
Solution: The correct answer is C. The Federal Reserve sets the discount rate, upon which the Federal Funds Rate is based. The Fed will lower the discount rate when it wants to increase the money supply. Choices "A" and "B" represent expansionary fiscal policy. Choice "D" represents restrictive fiscal policy.
29
Exceptions to Registration with the SEC
Teachers, Accountants, Brokers, Lawyers & Engineers TABLEs are incidental. MUST KNOW EXCEPTIONS FROM EXEMPTIONS
30
Exemptions from Registration with the SEC
Venture capital, Insurance companies, Private funds less than $150m, home State, Foreign advisors, and securities not on a national Exchange. VIPs are SaFE from exemptions MUST KNOW EXEMPTIONS FROM EXCEPTIONS
31
Who is an accredited investor?
- $1m net worth EXCLUSIVE of their personal residence, reassessed every 4 years - $200,000 income on average if SINGLE - $300,000 income on average if MARRIED Tip: You must pass the 1,2,3,4 test
32
Three Panel: Risk Benchmarks
Life Insurance: 10-16x gross pay Health Insurance: Disability: 60-70% of gross pay Property: LTC: 36-60 months w/inflation protection PLUP: $1-3m
33
Three Panel: Short Term Savings & Investment Benchmarks
EM Fund: 3-6 months (current assets/monthly NON-discretionary cash flows Consumer Debt: No more than 20% Housing: No more than 28% (PITI/monthly gross income) Consumer Debt & Housing: No more than 36% (PITI + recurring debt payments)/monthly gross income
34
Three Panel: Long Term Savings & Investments
Education Funding: $3k/year for public, $6k/year for semi-private, $9k/year for private for 18 years Retirement: 10-12% savings rate, goal is 16x pre-retirement income (age 62-65), assumptions of 8-10% returns and standard deviation of 8-14% Estate: BIG 3 = Will, Durable POA for healthcare, advanced medical directive
35
What does a demand curve look like?
A quarter pipe. You drop in from the top left down to the bottom right. (opposite of a supply curve) Price is on the Y axis (vertical), quantity is on the X axis (horizontal)
36
What does a supply curve look like?
A quarter pipe. You drop in from the top right down to the bottom left. (opposite of a demand curve) Price is on the Y axis (vertical), quantity is on the X axis (horizontal)
37
What makes a demand curve move to the left? To the right?
To the left: Anything that causes discretionary income to DECREASE. If people spend less, the demand curve moves DOWN & LEFT. To the right: Anything that causes discretionary income to INCREASE. If people spend more, the demand curve moves UP & RIGHT.
38
What makes a supply curve move to the right? To the left?
To the right: Anything that causes production to IMPROVE will shift the curve DOWN & RIGHT. To the left: Anything that causes an increase in production costs or supply to decrease will shift the curve UP & LEFT.
39
What does an elastic demand curve look like?
Almost horizontal, sloping down and to the right. - Examples of products with elastic demand curves: Airline tickets, movie tickets, alcohol, luxury goods.
40
What does an inelastic demand curve look like?
Almost vertical, sloping down and to the right. Remember the "I" of inelastic is basically the same shape of the curve. - Examples of products with inelastic demand curves: milk, gasoline (quantity demanded changes very little to changes in price)
41
What is the business life cycle?
Expansion, Peak, Recession/Contraction, Trough
42
What direction do Inflation, Interest Rates, Unemployment & GDP go with the business cycle?
Inflation, interest rates & GDP all move exactly with the business cycle (Expansion, Peak, Recession/Contraction, Trough). Ex: When the business cycle is in recession/contraction, inflation, interest rates & GDP are decreasing. Unemployment is the only one that moves exactly opposite of the business cycle. Ex: When the business cycle is in trough, unemployment is highest
43
What are cyclical in nature and fluctuate directly with the business cycle?
Consumer durables & capital goods
44
What is a recession?
Six consecutive months (2 quarters) of declining GDP
45
What is a depression?
18 consecutive months (6 quarters) of declining GDP
46
Describe Monetary Policy
Monetary policy is the policy and means by which the FEDERAL RESERVE controls the money supply and influences interest rates. Tools: 1. Reserve Requirement 2. Discount Rate 3. Open Market Operations 4. Excess reserves When the Fed buys securities = Increase in the money supply & decreased interest rates When the Fed sells securities = decrease in the money supply & increased interest rates
47
Describe Fiscal Policy
Fiscal policy is the policy and means by which CONGRESS controls spending and taxation, which influences the money supply and interest rates. Tools: 1. Taxation 2. Spending 3. Debt Management
48
Fair Credit Billing Act
A consumer is only responsible for UP to $50 of fraudulent credit card charges, or whatever was charged on the card if less than $50.
49
FDIC Insurance
Depositor has a total of $250,000 of insurance per type of account ownership: Four Types of Account Ownership 1) Individual accounts 2) JT Accounts (each person is deemed to own 50%) 3) Trust accounts (per owner, per beneficiary) 4) Self Directed retirement accounts - IRAs are only covered if they are invested in bank deposits such as CDs \*\*Stocks, bonds and mutual funds ARE NOT COVERED Accounts at different banks are insured separately.
50
Debts not discharged in bankruptcy
- Student & government loans - 3 years of back taxes - Alimony & child support - Monies owed due to malicious acts, drunk driving, criminal fines & penalties, or embezzlement - Debts related to fraud
51
Assets that are exempt from creditors
- homestead - life insurance - qualified plans - contributory traditional & Roth IRAs up to $1,362,800 ---- IRAs inherited by a non-spousal beneficiary will have no bankruptcy protection (unless a trust is named) \*Qualified plans along with converted IRAs have an UNLIMITED exemption
52
Hannah currently has $915,000 saved. She will retire in 10 years and wants to take $80,000 income for 25 years at the beginning of each year. She also wishes to have $1,000,000 35 years from now to leave to her heirs. What is the internal rate of return needed to accomplish this? 5.99% 4.96% 3.13% 4.75%
Solution: The correct answer is B. Income needs to begin at the beginning of year 10, make end of year 9 the last year of inactivity. The 1,000,000 is entered separately as it is not part of the retirement income stream. 10BII and 10BII+ (zeros were truncated to speed up calculation) 915 +/-CF 0 CF 9 [OS] Nj [OS] means Orange Shift 80 Cf 25 [OS] Nj 1000 CF [OS] IRR/YR
53
Ross is employed as a loan officer at a local bank. Ross recently sat down and visited with his financial planner Julie, a CFP® professional. Ross was in need of cash and borrowed $9,500 from Julie. Based on Julie’s duties to her clients’ according to the Code of Ethics and Standards of Conduct: A - Julie is not in violation of her duties to clients because Ross is in the business of lending money. B - Julie is in violation of her duties to clients because a CFP® certificant must never lend money to a client. C - Julie is not in violation of her duties because she loaned Ross less than $10,000. D - Julie has violated her duties to her clients by making a loan to Ross.
Solution: The correct answer is D. A CFP® professional may not, directly or indirectly, borrow money from or lend money to a Client unless: i. The Client is a member of the CFP® professional’s Family; or ii. The lender is a business organization or legal entity in the business of lending money. Ross is not a bank (making A incorrect). B is incorrect Julie can lend in some circumstances and C is incorrect.
54
Today, Walter is submitting his Initial Application for CFP® certification with the CFP Board of Standards. Four years earlier, Walter signed a Letter of Acceptance, Waiver and Consent with FINRA, as part of FINRA arbitration hearing. As part of the arbitration settlement, Walter consented to a 30-day suspension, a fine of $100,000 and 20 hours of continuing education. Which action is most appropriate for Walter to take when completing his Initial Application for CFP® Certification? a. Walter cannot disclose the FINRA arbitration because if he reports the arbitration to the CFP Board, he would be violating duties owed to clients (9 - confidentiality) by disclosing confidential client information. b. Walter should disclose the FINRA arbitration to the CFP Board. c. Walter may disclose the FINRA arbitration, but is not required to disclose the arbitration, because the matter was settled more than five years prior to Walter applying for initial certification as a CFP® Certificant. The Candidate Fitness Standards look back period is up to five years. d. CFP Board Practice Standards require Walter is to disclose any and all arbitration, civil or criminal suits.
Solution: The correct answer is B. According to Anonymous Case History #16726 by not reporting the FINRA arbitration settlement, the candidate for CFP® certification violated their Obligations to Clients (2 b– Integrity) A CFP Professional may not professionally engage in conduct to defraud, make any untrue statement, omission, mislead or engage in fraud or deceit. Answer A is incorrect, obligations to CFP Board require disclosure and reporting. The infraction is greater than $2,500 and not considered “Minor” (Duties owed to CFP Board 1 g.) C is incorrect fitness standard look-back elements apply to criminal events not financial events. D is incorrect the practice standards do not govern confidentiality and disclosure, those elements are controlled by Duties to CFP Board and Duties to Clients.
55
Bill is a CFP® professional and is working with his clients, Sally and Harry. Bill arranged and attended a meeting between Sally, Harry and Bill’s brother, who is an attorney. Bill’s brother presented an investment opportunity to Sally and Harry. Sally and Harry decided to invest $250,000 as part of a loan secured by a promissory note. Although the investment was offered by Bill’s brother, the clients were led to believe Bill and his firm were involved with the investment. Bill’s brother signed the promissory note. As a result, Bill violated the Code of Ethics, and his usage of the marks were suspended for two years. The most appropriate action for Bill to take would have been? a. Bill should have structured the investment as an equity investment, rather than a loan, because the Code of Ethics forbids borrowing from a client. b. Bill has an inherent conflict of interest because his brother offered the investment. The Code of Ethics do not permit Bill to have material conflicts of interest. c. Bill should have disclosed in writing that Bill and his firm were not involved in the investment with minimal industry jargon, clearly representing a material conflict. d. Bill was obligated to keep his client’s information confidential and violated that confidentiality by permitting his brother to offer an investment to the client.
Solution: The correct answer is C. According to Anonymous Case History #15982 by not disclosing in writing to the clients that both the CFP® professional and his firm were not involved in the investment, the planner violated rules regarding disclosure, failing to exercise reasonable and prudent professional judgment and failing to provide services in compliance with laws and regulations. The planner’s action runs afoul of the October, 2019 rule update in multiple areas. Duties to clients including violating: Integrity, disclosure of a material conflict of interest, not disclosing and economic benefit of a referral or related party. While the new Code and Standards allow for oral disclosure of material conflicts of interest, it is better to put them in writing the more complicated they are. A is not the best answer, the loan itself was not problematic, the investment and atmosphere around the investment. B is incorrect Bill can have conflicts, he needs to better manage and disclose them. D is incorrect if the client’s gave consent to share information with Bill’s brother.
56
Sorel Parks, CFP®, met with Dorian and Griffin, Dorian's father. During the meeting, Sorel entered into an oral agreement with Dorian to manage Griffin's financial affairs. Sorel did not complete a client profile of Griffin. Sorel offered to review and make recommendations on Griffin's then-current living trust. Sorel prepared a Last Will, Revocable Trust and Durable Power of Attorney for management of Property and Personal Affairs, and charged Griffin $400 per hour for preparing the documents. Griffin had not requested such documents. Griffin asked Sorel to provide him with all the documents pertaining to his investments. As of the hearing date with the Disciplinary and Ethics Commission, Sorel had not provided the requested documents to Griffin. The Commission issued an Order to Revoke Permanently Sorel's right to use the CFP®, CERTIFIED FINANCIAL PLANNER™ and certification marks. The Commission ordered Sorel to verify that he was not using the marks by submitting copies of letterhead and business cards within 30 days of the Order. To comply with the Code of Ethics, before providing any services to Griffin, Sorel was required to take all of the following steps, Except: A. Review implementation responsibilities with Griffin. B. Understanding The Client’s Personal and Financial Circumstances by Obtaining Qualitative and Quantitative Information C. Provide information to a client outlined in Duties to a Client including but not limited to How the client pays for products, services and additional incurred costs including surrender charges and sales loads. How the CFP® professional and their firm are compensated for providing products and services. D. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action prior to making any financial planning recommendations. E. Sorel must do all of the above.
Solution: The correct answer is A. Implementation responsibilities are done after the client agrees to one of the courses of action the CFP® professional has presented. Duties owed to clients (10) outlines information that must be provided to a client when a CFP® professional is providing financial advice or engaging in financial planning. This information must be provided prior to the process beginning. B is the first step of the active financial planning process and comes after item C. D is a step in the planning process that comes after Information is provided.
57
Mitt, is a broker for a large national broker dealer firm. In addition to all of his appropriate security licenses, Mitt is also a CFP® professional. His security licenses require him to ensure investments are suitable for his clients. Mitt executes security orders for his clients on a daily basis. Mitt is aware of the standard of care requirements of the CFP Board of Standards Code of Ethics and he is concerned about meeting his ethical requirements. How would you describe Mitt’s duty of care responsibilities for his clients? a. Mitt is only required to meet the security license duty of care, which requires investments to be suitable for a client. b. Mitt is required to provide a suitability standard and to put his client’s interest ahead of his own. c. Mitt is required to provide a process oriented fiduciary duty of care. d. Mitt is required to provide a suitability and fiduciary duty of care.
Solution: The correct answer D. Mitt owes a Fiduciary Duty to his Client’s (Duties to clients 1a. b and c). Mitt also must comply with the law (Duties to clients 8). A CFP® professional must comply with laws, rules and regulations governing professional services. As such Mitt must meet both a suitability and fiduciary duty of care.
58
Which of the following is not included in the ethical principles guiding a CFP® certificant? Diligence Experience Competence Integrity
Solution: The correct answer is B. A, C and D are duties owed to clients.
59
Students are considered dependents if:
- Over age 23 - Married - Working on Masters or Doctorate
60
Financial Aid Programs
Federal Pell Grant (NEED BASED) Stafford Loans - Subsidized (NEED BASED) (no interest until graduation, leaving school, or below 1/2 time status) - Unsubsidized (interest when loan starts) PLUS Loan
61
Financial Aid Programs
Federal Pell Grant (NEED BASED) Stafford Loans - Subsidized (NEED BASED) (no interest until graduation, leaving school, or below 1/2 time status) - Unsubsidized (interest when loan starts) PLUS Loans - Parent loans for undergrad students (parents take the loan out) - Graduate loans (grad student takes the loan out)
62
Dividend Options for Whole Life Policies
1. Cash
2. Accumulate Interest
3. Reduce Premiums
4. Paid-up additions
5. One-year term
CRAP-O
63
Life Insurance Nonforfeiture Options
1. Cash surrender value (Insured receives cash value when terminating their policy.)
2. Reduced paid-up insurance (insured receives the cash value in the form of a paid-up policy with a smaller face amount)
3. Extended term insurance (insured receives cash value in the form of a paid-up term policy for a specified duration with the same face amount as the original policy)
64
Which of the following would constitute a material conflict of interest?
a. The client specifically asks about it.
b. It is reasonably expected to be permanent.
c. It could cause harm or impact potential advice.
d. It has the potential to cost the client more money.
Solution: The correct answer is C.
65
What would likely rise to the standard of a material conflict of interest, and need to be disclosed by a CFP® professional?
a. That the CFP® professional recommended his personal accountant who gives the CFP® professional discounted accounting services.
b. The CFP® professional received an undisclosed fee for a referral to a municipal bond broker.
c. A client who is an attorney brought him a $50 fruit basket as a thank you for the referral.
d. The CFP® professional gave the name of his lawyer to one of his clients who was wishing to divorce his wife, whom was also a high revenue client of the CFP® professional
Solution: The correct answer is D.
Referring one client to another is rife with potential conflicts of interest. Especially if both clients provide active revenue for the CFP® professional. A is not the best answer, a discounted accounting service is a conflict of interest but not likely material. B is incorrect a fee paid by a broker is a conflict of interest, but not immediately material as the CFP® professional is a fiduciary. C is not material.
66
Ralph, a CFP® professional and independent registered investment adviser, has been working with his new client Jack over the last few months. He has completed all required disclosures and provided all information required for a financial planning engagement. Jack is 32, married, and has 3 children. Ralph discussed Jack’s insurance coverage following a thorough review of Jack’s policies and recommended Jack purchase a disability policy, additional term life insurance through his employer and a personal liability umbrella policy. Ralph also performed a retirement needs analysis and developed an investment plan he believes will help Jack achieve his goals. While presenting the retirement and investment plan, Jack mentioned that he was rejected for the life insurance for medical reasons that he does not wish to discuss with Ralph. To comply with the Practice Standards of the Code of Ethics and Professional Conduct Ralph must:
a. Gather appropriate information from Jack’s spouse to determine if Jack’s condition may affect the retirement and investment plan.
b. Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review.
c. Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review and retirement and investment analyses.
d. Inform Jack in writing that his medical condition could affect Ralph’s conclusions and recommendations.
Solution: The correct answer B.
B is the best answer. Ralph should encourage the client to share the cause of the rejection as a terminal issue would drastically change planning. Ralph is then required (Under element six of Financial Planning and the Application of Practice Standards for The Financial Planning Process) to not enter into an engagement, terminate the engagement, limit the scope of engagement or limit services provided to the client.
67
Which of the following is necessary for a certificant to disclose to a client if providing financial planning?
a. That you own 50% of a corporation.
b. Your secondary education.
c. The IRS has a lien on your personal property.
d. An active FINRA license suspension.
Solution: The correct answer is D.
D is the best answer. A CFP® professional must disclose significant information to a client prior or when engaging in a financial planning relationship. This includes compensation information, how a client pays, disclosing conflicts of interest and Existence of any public discipline and locations of any Self Regulatory Organization (SRO) or government websites where the CFP® professional is a control person. A license suspension is an example of public discipline.
68
Which of the following statement is true regarding the CFP Board’s Code of Ethics and Standards of Conduct?
a. The standards apply to all CFP® professionals at all times, regardless of the insurance or securities licenses or registrations held.
b. The standards are waived when CFP® professionals are limited to proprietary products.
c. The standards apply to all CFP® professionals unless they hold another license or other registration.
d. The standards apply only to CFP® professionals who provide financial planning or material elements of financial planning.
Solution: The correct answer is A.
A CFP® professional must follow the code of ethics when providing professional services.
69
What should a CFP® Professional disclose to a financial planning client at the first meeting?
a. The CFP® Professional's areas of expertise
b. The CFP® Professional’s CFP Board identification number
c. The CFP® Professional’s involvement in community activities
d. 10 years of employment history of the CFP® Professional
Solution: The correct answer is A.
The planner should disclose areas of expertise to help define the scope of any engagement. The planner’s expertise (or lack of expertise) could reasonably be expected to materially affect the client’s decision to engage the certificant.
B is incorrect because the ID number is not information that must be disclosed.
C and D are incorrect because your community activities and employment history are not required disclosures.
70
Which statement best fits the CFP Board Code of Ethics for CFP Board professionals and registrants?
a. CFP Board Code of Ethics are a means to avoid disciplinary action.
b. CFP Board Code of Ethics state a CFP® Professional must follow the practice standards if they are performing financial planning, but not when simply recommending or transacting financial assets.
c. CFP Board Code of Ethics are a guide to the personal financial planning process.
d. The code of ethics is not specifically defined, remains aspirational and leads to more detailed rules and obligations through the planning process.
Solution: The correct answer is D.
The Code and Standards are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, they are aspirational in character and provide a source of guidance for certificants and registrants.
71
Morgan, a prospective client, recently approached Mike, a CFP® professional with significant estate planning needs. Mike does not feel like he can adequately fulfill all of Morgan’s needs so he refers Morgan to a colleague who specializes in estate planning. What principle did Mike most clearly demonstrate?
a. Objectivity
b. Fairness
c. Professionalism
d. Competence
Solution: The correct answer is D.
A competent financial planner focuses on maintaining and applying adequate skills and knowledge when providing services to clients. Competence also includes the planner’s ability to recognize his or her limitations. Answer A is incorrect because objectivity is about providing professional services objectively and Mike did not perform any services. Answer B is incorrect because although Mike is being fair to Morgan, he is better demonstrating competence, and the question asks what principle did Mike MOST clearly demonstrate. Answer C is incorrect because much like answer B, competence is most clearly demonstrated over professionalism.
72
You receive a phone call from an individual you have NOT spoken with previously. The caller is excited, just having heard that a new mutual fund is positioned to deliver large gains in the coming year. The caller wishes to purchase shares of the fund through you. According to the Code of Ethics and standards of practice, which of the following would be acceptable actions for a CFP® professional?
a. Gather sufficient information about the client to establish a brokerage account and execute the transaction after the client signs a letter acknowledging the limited nature of the engagement.
b. Understanding The Client’s Personal and Financial Circumstances as well as Identifying and Selecting Goals before analyzing and making recommendations.
c. Gather sufficient information about the client to establish a brokerage account and execute the transaction only after providing written information about your compensation, potential conflicts of interest, contact information and any other material information about you and your firm.
d. Inform the potential client that although you are willing to execute the transaction, you are certain you could improve their risk portfolio and overall financial plan if they would engage you to undertake a comprehensive financial planning review.
Solution: The correct answer is B.
Selling a financial asset requires a CFP® professional to act with a Duty of Care and Loyalty. Selling the shares will require an analysis or risk and financial goals, likely creating a situation where the CFP® professional is required to follow practice standards. The first practice standard is to understand client circumstances and selecting financial goals.
73
When should a financial planning client immediately contact their CFP® Professional?
When the client has an additional child.
If there is a change in the client’s marital status.
If there is a change in the client’s tax rate.
If there is a change in the client’s employer.
Solution: The correct answer is B.
This is a difficult question to choose one correct answer. The best answer is B, as a change in marital status likely results in a major impact to current and future financial planning.The engagement will need to be updated to reflect who the client is (additional client if married or removal of a client in the case of divorce)
A is incorrect because while the client should contact their CFP® professional regarding a new child, the additional child will not change the scope of the engagement.
C is incorrect because a change in tax rates is likely expected, unless it’s related to a significant change in income.
D is incorrect because simply changing jobs is immaterial, unless it accompanies a significant change in insurance benefits and/or income.
74
A small business owner wants to create a business succession plan, but the CFP® professional does not have any experience with succession planning for small businesses. However, his colleague has extensive experience. What should the CFP® professional do?
Turn down the engagement
Disclose to the Client the use of a third party and prepare the plan, with the help of his colleague as a resource
Explain to the business owner that it’s outside the scope of his expertise
Do the necessary research and figure out how to prepare a succession plan
Solution: The correct answer is B.
The duty of competence requires the planner to either refer the client to an expert or bring an expert into the engagement. Preparing the plan with the help of an expert is acceptable under the Code and Standards.
A is incorrect because the Code of Ethics and Standards of Conduct simply require the planner to either refer the client to an expert or bring an expert into the engagement.
C is incorrect because the planner can still accept the engagement, but most bring an expert into the engagement.
D is incorrect because the principle of competence requires the planner to refer the client to an expert or bring an expert into the engagement.
75
In engagements where financial planning services are to be provided, which of the following is not required to be provided to a client?
Disclosure of reasonable and customary fees paid for custodial services.
Any arrangement by which someone who is not the Client will compensate or provide some other material economic benefit to the CFP® professional, the CFP® Professional’s Firm, or a Related Party for the recommendation or Engagement.
How the client pays for products, services and additional incurred costs including surrender charges and sales loads.
Existence of any bankruptcy, public discipline and locations of any Self Regulatory Organization (SRO) or government websites where the CFP® professional is a control person.
Solution: The correct answer is A.
Duties owed to clients require disclosing referral benefits, how products will be paid for and existence of any bankruptcies. Reasonable and customary fees for custodial services are not sales-based compensation (12.b.ii) and are not required to be specifically disclosed.
76
For a CFP® certificant working with a client in just a single core subject area, could the engagement rise to the level of financial planning or otherwise require the CFP® professional to apply practice standards?
No, financial planning requires a comprehensive plan integrating at least three of the core subject areas.
No, financial planning requires a client engagement involving all six core subject areas.
Yes, if the Client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning.
Yes, working in any core subject area automatically elevates a client engagement to that of financial planning.
Solution: The co
Solution: The correct answer is C.
.3.a of the Practice Standards states that if a client has a reasonable to believe the CFP® professional will provide planning, the CFP® professional must follow the practice standards.
77
Ronald, a CFP® professional, has been invested in real estate rental properties for the past 15 years. Unfortunately, many of his properties have declined in value significantly and he has been unable to rent the properties. Four years ago, Ronald was forced into personal bankruptcy, due to his real estate investments. What is a likely action of the CFP Board, as a result of Ronald’s personal bankruptcy filing?
Include Ronald’s name in a news release with other CFP® professionals that have filed bankruptcy within the past 7 years.
The CFP Board reviews bankruptcies prior to certification, through the Candidate Fitness Standards. Therefore, there will be no further action by the CFP Board since Ronald is already certified.
CFP Board disciplinary actions will consider if the bankruptcy was a result of Roland’s inability to manage his personal finances.
Immediate Suspension of the CFP® marks for one year and one day.
Solution: The correct answer C.
CFP Board will consider the bankruptcy. Roland can provide a rebuttal along with his disclosure showing the bankruptcy does not demonstrate an inability to manage responsibly the CFP® professional’s or the business’s financial affairs. A and D are incorrect CFP Board does not make immediate bankruptcy related decisions. B is incorrect active CFP® certificants must report control bankruptcies and may be subject to discipline.
78
Becca, age 24, applied for CFP® Certification. The Disciplinary and Ethics Commission denied her application because she had been convicted of assault and battery and served nine months in the county jail at the age of 18, while she was a member of a street gang. She has served her time, graduated from college and has decided to appeal the decision of the Disciplinary and Ethics Commission. All of the following are true regarding the review process EXCEPT:
She must submit a written petition for consideration to Professional Review staff and sign a form agreeing to CFP Board's jurisdiction.
Staff will review the request to ensure the transgression falls within the "presumed unacceptable" list.
Her prior conduct falls under the "presumed unacceptable" category and therefore, she may appeal the denial of certification.
The Disciplinary and Ethics Commission's decision regarding a petition for consideration is final.
Solution: The correct answer is D.
Reason: The DEC's decision regarding a petition for consideration may be appealed to the Appeals Committee of the Board of Directors, in accordance with Article 11 of the Disciplinary Rules and Procedures. All the other statements are true.
79
A CFP® professional's client, Jim, was previously married and had 2 children. He set up an irrevocable trust for those two children, naming his brother Harry as the trustee. Jim remarries a woman named Laura who has no children. Laura comes into the CFP® professional’s office saying that Jim is concerned about losing money in the trust due to the recent drop in the market, so he wants to change some things. What should the professional do?
Provide her with the trading forms that will require Jim’s signatures, allowing her to make the changes requested.
Tell her that because she is not the trustee, she is not authorized to make any charges.
Tell her that he will contact Harry, the trustee, and let him handle it.
Contact Jim to discuss the meeting with Laura.
Solution: The correct answer is D.
The CFP® Professional owes a duty to the client, who is Jim. The Code of Ethics require the CFP® Professional to discuss Jim's concerns with Jim, not Laura. In addition, the conversation with Jim needs to address that Jim does not have control over the trust assets, the trustee does.
A is incorrect because Jim is the client and the planner owes the duty of a fiduciary and confidentiality to Jim since Laura is not the client.
B while true, the CFP® Professional should first tell Laura that Jim is the client and Jim should discuss his concerns, because the CFP® professional may only speak to the client about the trust.
C is incorrect because the CFP® professional must talk to the client about the trust, not Laura or Harry, unless Harry instructs the CFP® professional differently.
80
What document must be disclosed in writing whether providing Financial Advice or providing Financial Planning?
The date and duration of the plan.
The Privacy Policy.
The names of each party involved.
The terms of terminating the agreement.
Solution: The correct answer is B.
According to the Standards of Conduct, the Privacy Policy is required to be in writing.
A, C and D are incorrect because these items may be disclosed in writing or orally for Financial Advice according to the Standards of Conduct.
81
Harry and Deidre Salinger are both age 59 and plan to work to age 65. They have been filling their “bucket list” with all of the things they plan to do in retirement and are really looking forward to getting started on it, but are also concerned about outliving their money. They have saved diligently in their company’s 401(k) plan In addition to the 401(k)s, the Salingers each have variable universal life insurance policies with $50,000 of cash value. They maintain their checking and savings accounts at the bank where Deidre works, and have a total of $35,000 in those two accounts.
The Salingers have asked you to guide them regarding their asset allocation in the 401(k) plans and whether they can afford to retire at 65 and do the things on their bucket list. Which of the following is the most important piece of additional information that you will need to gather to assist them with these issues?
Investment risk tolerance
Summary of current income and expenses
Copy of their tax return
Whether either of their employers offers continuation of health insurance benefits for retirees
Solution: The correct answer is A.
In order to determine the appropriate asset allocation, you must have an understanding of the client’s risk tolerance. Risk tolerance is also necessary to make assumptions regarding investment return, which will affect the analysis of whether they can afford to retire at age 65 and live the kind of lifestyle they desire. Answers B and C are other items of information you will need to gather to complete the financial plan, but in terms of the question being asked, A is the most important piece of additional information. D would be least important because if they retire at age 65 as planned they will be eligible for Medicare.
82
A client complained about a CFP® professional because he took too long to do something and the client lost 10% of his investment in a stock. Who does the CFP® professional have to report this complaint to?
CFP Board
FINRA
His manager
The Securities and Exchange Commission
Solution: The correct answer is C.
The manager should be notified and the firm will take appropriate steps to resolve the issue with the client, typically either through arbitration or negotiations.
A is incorrect because the CFP Board must be notified when a CFP® Professional is charged, convicted or named in criminal, civil or regulatory action including the suspension of a professional license.
B is incorrect because FINRA must be notified if there is a violation of securities law.
D is incorrect because the SEC must be notified if there is a violation of securities law.
83
Which of the following is not a Conflict of Interest that must be disclosed?
The offering of proprietary products and Material limitations on the universe of products.
The CFP® professional’s public disciplinary history.
The receipt of additional compensation when the Client increases the amount of assets under management.
Receipt of third-party payments for recommending products.
Solution: The correct answer is B.
Public disciplinary history must be disclosed to a Client when providing Financial Advice, but it is not an example of a Conflict of Interest.
84
Which of the following would most likely require a CFP® professional to follow practice standards for the financial planning process with their clients?
Activity related solely to the sale of a specific category of products
Investment advisory services as defined by applicable state or federal regulations
Completing an application and opening a brokerage account
Acting as an instructor in a financial planning continuing education class
Solution: The correct answer is B.
Investment advisory services are procedural and require a discussion of goals, risk and optimization.
85
Your client has asked you to assist her in examining possible funding methods for her daughter who is planning on attending graduate school for her MBA. Which of the following can you advise your client is/are available to assist in covering expenses?
I. Perkins Loan
II. Supplemental Education Opportunity Grant
III. Supplemental Loan for Students (Stafford Unsubsidized)
IV. Parent PLUS Loan
V. Lifetime Learning Credit
I and II only.
III and IV only.
III only.
II, III and V only.
Solution: The correct answer is C.
No grants are available to graduate students, only loans. Lifetime Learning Credit is a credit for tax purposes, not financial assistance direct for education. Parent PLUS Loans are loans for parents to pay for undergraduate course work. Graduate parent loans are available for graduate school, but is not an answer choice. Perkins loan program ended September 2017.
86
Which of the following statements is true regarding a Coverdell Education Savings Account?
a. An individual can be the beneficiary of only one Coverdell ESA, and the total contribution to the account in any year can't exceed $2,000.
b. There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.
c. The Coverdell ESA must be established in the names of the parents, who must be at least 24 years old at the time the account is created.
d. There may be multiple contributors to a Coverdell ESA, however the total contribution per contributor cannot exceed $2,000 in any year.
Solution: The correct answer is B.
Answer A is incorrect because an individual can be the beneficiary of multiple accounts. Answer C is incorrect because it describes the education requirements for Series EE bonds, not Coverdell. Answer D is incorrect because the $2,000 limit is per beneficiary, not per contributor or per account.
87
Sidney, who is not a CFP® certificant, asks Alison, who is a CFP® certificant and licensed insurance broker, to execute a $1 million term life policy to Sidney’s client, Sally. For this specific transaction, what is Alison’s standard of care duty as a CFP® professional?
Meet her state insurance suitability duty requirements.
Follow the prudent investor rule.
Act as a fiduciary.
Alison should decline to provide the policy since Sally is not her client.
Solution: The correct answer is C.
CFP® professionals are required to hold a fiduciary duty when they recommend financial assets (life insurance) or engage in financial planning. Alison will recommend a specific term policy, making her a fiduciary. B is incorrect the prudent investor rule does not apply in this circumstance.
88
A CFP® certificant is required to operate under the fiduciary standard of care when:
a. The CFP® certificant charges the client an asset management, flat, hourly or retainer fee for his or her work.
b. An engagement is comprehensive in nature and requires the integration of two or more core financial planning elements.
c. At all times, when providing financial advice to a client, a CFP® professional must adhere to a fiduciary duty and act in the best interest of their client.
d. At all times, when providing any kind of advice (financial or otherwise) to a client.
Solution: The correct answer is C.
Duties owed to clients 1. At all times, when providing financial advice to a client, a CFP® professional must adhere to a fiduciary duty and act in the best interest of their client.
89
An increase in the price of product A causes a decrease in the demand for product B. What are the two products?
Complement products.
Substitute products.
Unrelated products.
Demand-elastic products.
Solution: The correct answer is A.
By definition, products are complements if an increase in the price of good A causes a decrease in the demand for its complementary good B. For example: If I increase the price of hot dogs, what happens to the demand of hot dogs? The demand will fall as the price rises. What else will fall as the price rises? How about hot dog buns? Hot dogs and hot dog buns are complements. As the price of hot dogs increase, demand for hot dog buns will fall since less people will buy hot dogs.
90
If the demand for a product is inelastic, it means that:
An increase in the price would lead to an increase in the total amount spent on purchases of the product.
An increase in the price would lead to a decrease in the total amount spent on purchases of the product.
An increase in the price would have no effect on the total amount spent on purchases of the product.
The demand and supply are in equilibrium.
Solution: The correct answer is A.
Choice "B" is the description of a product whose demand is elastic. Choice "C" describes the demand of a product that is perfectly elastic. Choice "D" is a description of the equilibrium point in supply and demand.
For example:
If demand is 100 units and the price is $5, then total spent on the product is 100 × $5 = $500.
If price is increased to $7 and demand is still 100 units (inelastic = qty. demanded does not change when price changes), then total spent is 100 × $7 = $700.
91
Sally, a CFP® professional, was discussing the prior year’s investment results with her long standing client Deidra as part of their semi-annual meeting to review the status and progress of a comprehensive financial plan Sally had developed for Deidra a number of years ago. The initial plan included a risk tolerance assessment of moderately aggressive for Deidra and over the years, her reactions to market ups and downs had supported this assessment in Sally’s opinion. As a result, well diversified equity investments comprised about 70-75% of Deidra’s portfolio, on average. It had not been a good year in the market. The S&P 500 had declined slightly more than 30%, as the economic recovery faltered and concerns about the European debt crisis mounted. Deidra’s portfolio lost 35% of its value over the last 12 months. Deidra became very concerned as she began to recognize the extent of the losses, and was bordering on becoming hysterical. As they talked, Sally discovered that Deidra had become pregnant, was getting married next month and had planned to use some of her investments to help support the family while she stayed home for the first six months of the child’s life. According to the Code of Ethics and Standards of Conduct, Sally must take the following actions EXCEPT:
a. Establish with Deidra whether her new husband will be added to their Financial Planning engagement.
b. Sally must communicate to Deidra when she (Sally) will update financial planning recommendations
c. Sally and Deidra must discuss the temporary change in income, and how to plan for it.
d. Sally must modify the scope of the engagement based on Deidra’s risk aversion.
e. Sally must do all of the above
Solution: The correct answer D.
A CFP® professional would need to re-establish the financial planning engagement to add the new husband as a client. B and C are conversation that will need to be had as part of Monitoring and Updating. However a new scope of engagement is not required when a client changes their risk aversion.
92
Jonathon got divorced in 2017 and subsequently had severe financial problems. Two years later he filed a chapter seven bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer three years following his bankruptcy. During his first year on the job, he received a large number of customer complaints, his insurance license was suspended for one month and he was discharged by his employer. During his unemployment, he completed all of the requirements for the CFP® certification. In August, four years following his bankruptcy, he made his application to the CFP Board. Which of the following is correct under the Board’s revised policy regarding bankruptcy?
A. Jonathan's behavior falls on the presumed unacceptable list and he will be denied the right to use the marks unless he files a successful consideration request with the CFP Board.
B. Jonathan's behavior falls on the always bar list and he will be denied the right to use the marks.
C. Jonathan's behavior will prevent him from applying for the CFP® certification for the five year period following his actions
D. Jonathan's bankruptcy will be disclosed on the CFP® professional’s public profile displayed on the CFP Board’s website for 10 years. He will need to request a consideration from the Disciplinary and Ethics Commission for the suspension, but the bankruptcy will not be a factor in their decision.
Solution: The correct answer A.
This answer was correct under the pre-October 2019 practice standards and remains correct under 2012 fitness standards. One complexity to the question rationale is that if Jonathan were to successfully petition the discipline and ethics committee, he would be required to report the bankruptcy to clients when providing professional services. An expanded rationale is below:
A is correct under the revised Candidate Fitness Standards effective July 2012. Although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of his insurance license. B is not correct because revocation of a financial professional license is required to move to the always bar list. C is incorrect because there is no five year expiration period on the suspension of the insurance license D is not correct because although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of the insurance license.
93
Jonathan got divorced in 20XX and subsequently had severe financial problems. Two years later, he filed for chapter seven bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer. Five years following the bankruptcy, he completed all of the requirements for the CFP® certification. In August of that year, he made his application to CFP Board. Which of the following is correct under the Board’s revised policy regarding bankruptcy?
A. Jonathan's bankruptcy falls on the presumed unacceptable list because it is within five years preceding his application. He will be denied the right to use the marks unless he files a successful consideration request with the CFP Board.
B. Jonathan's bankruptcy falls on the always bar list because it is within five years preceding his application. He will be denied the right to use the marks.
C. Jonathan's bankruptcy is no longer a concern of the CFP Board as long as he discloses it in writing to all potential clients for the five-year period following the bankruptcy.
D. Jonathan's bankruptcy must be disclosed to CFP Board, but will not likely prevent him from becoming a CFP® professional. It must be disclosed to clients when Jonathan is providing financial advice or financial planning.
Solution: The correct answer D.
D is correct under the revised Candidate Fitness Standards effective July 2012, and as stated in the CFP Board Code and Standards E.3.l. His name will also be included in a press release disclosing the bankruptcy. A is incorrect because that was the prior requirement before the standards were revised. B is incorrect because two or more bankruptcies are on the presumptive bar list. C is incorrect because the Board must still be informed and will take the proactive measures listed in Item D to ensure proper disclosure. Jonathan should also make written disclosure of this event, but that alone is not sufficient.
94
For many years, Samuel has been employed as a financial advisor at a leading brokerage firm where he conducts suitability reviews and makes investment recommendations for his clients. He recently obtained his CFP® certification and has just signed an agreement with Thomas, a new client, for a comprehensive financial plan. According to the Code of Ethics and Standards of Conduct, all of the following represent requirements for Samuel in his engagement with Thomas EXCEPT:
Samuel must address if he has implementation responsibilities.
Samuel must act as a fiduciary in his relationship with Thomas.
Samuel must disclose to Thomas the existence of any bankruptcy where Samuel was a control person.
Samuel must provide Thomas with information regarding how Thomas pays for products, services and additional incurred costs including surrender charges and sales loads.
Solution: The correct answer is A.
A is the best answer. Implementation is a required step, and only needs to be addressed in the beginning if it is specifically excluded from the engagement. B, C and D are required of any CFP® professional selling a financial asset or providing professional advice.
95
Sidney, a CFP® professional, has been working with his new client Rachel over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. After gathering and analyzing Rachel’s financial information, Sidney developed and presented a comprehensive financial plan. Rachel agreed with most of his recommendations, but wants her uncle, a local attorney, to implement the estate planning components of the plan, rather than an attorney that Sidney normally works with and trusts to do a thorough job. Sidney does not know Rachel’s uncle and is unfamiliar with his qualifications. According to the Practice Standards of the Code of Ethics, Sidney could take all of the following actions EXCEPT:
a. Contact Rachel’s uncle and coordinate the delivery of any information needed to implement the estate planning component of the plan.
b. Inform Rachel that if she used her uncle for estate planning he would need to restrict the scope of the engagement to exclude responsibility for the estate planning implementation.
c. Inform Rachel that if she used her uncle for estate planning, Sidney is required to have the documents reviewed by a qualified estate planning attorney to ensure they are legal and accurate or Sidney may need to terminate the engagement.
d. Inform Rachel of the name, contact information and the expertise and credentials of his attorney, and ask her to consider using his services rather than her uncle because Sidney believed his expertise would be valuable to Rachel.
Solution: The correct answer C.
A CFP® professional is not required to have the documents reviewed, but it would be in the best interest of the client (Duties to Client 8 – Complying with the Law). A CFP® professional may not intentionally or recklessly participate or assist in violation of these standards or the laws, rules and regulations governing professional services. Sidney may be acting recklessly if he does not push for Rachel to have documents reviewed by a qualified estate planning attorney.
A is a correct statement as Sidney does need to follow the clients instructions and wishes. B is a correct statement, Sidney should comply with Rachel and provide the information requested, but does not need to be part of the implementation. D is a correct statement as Sidney should explain that a credentialed attorney in the area of planning she needs would be in her best interest, but will follow the client's wishes.
96
Ralph, a CFP® professional, was the financial advisor for Sue and her husband Bob, who had recently passed away. Bob’s assets included an IRA with Sue as the named beneficiary. Ralph advised Sue that she could disclaim her interest as beneficiary of the IRA, which would allow its value to pass to her two children. However, Ralph did not notify the custodian issuer of the IRA that Sue had disclaimed her interest in the IRA. Ralph acknowledged during his hearing with the Disciplinary and Ethics Commission that he could have annuitized the existing annuity in the IRA, which would have been less costly for Sue than purchasing a new annuity for each of her children. The Commission determined that annuitizing the existing annuity would have avoided early withdrawal penalties and the effects on taxable income on Sue’s children, and issued a Public Letter of Admonition to Ralph. The Commission ordered Ralph to complete, in addition to the 30 hours of continuing education for renewal, 12 hours of continuing education, including four hours each in estate planning, investments and estate distributions. Ralph violated all of the following provisions of his obligations to clients EXCEPT?
A. Failed to act with competence.
B. Failed to act as a fiduciary, demonstrating a lack of care, loyalty and following client instructions.
C. Failed to act with professionalism by not treating the client with dignity and respect.
D. Failed to act within the scope of tax regulations by intentionally or recklessly participating or assisting in violation of these standards or the laws, rules and regulations governing professional services.
Solution: The correct answer is C.
(Anonymous Case History 19334) Ralph did not violate this rule because there was no information provided to indicate that Ralph treated the client without dignity or respect. A is incorrect Ralph acted incompetently. B is incorrect Ralph did not act with a duty of loyalty or care, creating a more expensive and complicated situation for the client and not maximizing their legacy. D is incorrect the CFP® professional acted recklessly.
97
Janice, age 42, recently graduated from college and began working for a soda bottling company as a marketing specialist. She worked as a staff accountant at a small accounting firm for 19 years before going back to school to get her Marketing degree. She earns $60,000 per year at her new job, and she feels as though she can use $1,500 of her income per month towards repayment of debt. Her debt includes a $110,000 student loan with an interest rate of 5% and a bank loan of $15,000 at 4%. She has a portfolio of stocks valued at approximately $500,000, with a cost basis of $400,000, and a 401(k) plan balance from her old job in the amount of $75,000. She is in the 32% income tax bracket. Assuming she would like to pay off her student loans as soon as possible, what is the best option for a CFP® professional to suggest to Janice?
A. Use the $1,500 per month toward the bank loan until it is paid off, then apply the $1,500 towards the student loans until they are paid off, at which time add any excess earnings to the investment portfolio.
B. Use the $1,500 per month toward the bank loan until it is paid off, then apply the $1,500 towards the student loans until they are paid off, at which time contribute any excess earnings to the 401(k) plan with the new employer.
C. Use the $1,500 per month toward the student loans until they are paid off, then apply the $1,500 towards the bank loan until it is paid off, at which time contribute any excess earnings to the 401(k) plan with the new employer.
D. Sell a portion of the investment portfolio to pay off the student loans and bank loans, then contribute to the 401(k) plan with her new employer.
Solution: The correct answer is D.
The best option would be to sell the stock and pay off the debt. One of her main goals is to pay off the student loans and selling the stock and paying off debt and taxes would clear her from debt and allow her to utilize her free cash flow to enhance savings.
98
What is not covered under Medicare part B?
Dental care, dentures
Cosmetic surgery
Hearing aids
Eye exams
99
Cara has entered into a comprehensive planning engagement with Stan, a CFP® professional and registered representative. The letter of engagement that Cara signed indicates that Stan will monitor his investment recommendations on an annual basis, every June. In June of the current year, Cara received the update from Stan’s annual review. In September of the current year, the mutual funds that Stan recommended experienced a 20% decline in value due to a market selloff. What additional responsibilities does Stan owe to Cara as a result of the poor investment performance?
A. Stan must revise the asset allocation within 30 days.
B. Stan must update the letter of engagement to include more frequent monitoring of the investment portfolio.
C. Stan must return a portion of his fee since Cara’s portfolio lost money.
D. Stan has no additional responsibilities with respect to the engagement.
Solution: The correct answer is D.
Since the monitoring standards were established and agreed upon in the letter of engagement, and Stan has satisfied those responsibilities, he is under no further obligation to Cara. He could work with Cara to update the letter of engagement to include more frequent monitoring, but does not owe that duty.
100
Jordan was meeting with Cecelia, a CFP® professional, to review her financial statements. These statements are developed to reflect Jordan’s:
A. Income and balance sheet.
B. Cash flows and income.
C. Assets and cash flows.
D. Cash flows and balance sheet.
Solution: The correct answer is D.
The financial statements are designed to reflect income and expenses (cash flow statement), as well as assets and liabilities (balance sheet).
A is incorrect. Financial statements also reflect expenses.
B is incorrect. Financial statements also reflect assets and liabilities.
C is incorrect. Financial statements also reflect liabilities.
101
Jake contacted Robert, a CFP® professional who provides investment services and has worked with Jake in the past. He requested that Robert purchase 2,500 shares of DEF stock for Jake. The call came in at 1:32PM. Immediately following the call, Robert became seriously ill and was out of work for the next week. Upon his return, Robert executed Jake’s purchase order, however, the stock had appreciated 11% during the week Robert was out. Which of the following statements is correct?
A. violated the CFP Board’s Code of Ethics Duty of Diligence.
B. Robert did not maintain the CFP Board’s Financial Planning Practice Standards by executing Jake’s purchase of DEF stock.
C. Robert violated the CFP Board Code of Ethics Duty of Professionalism.
D. Robert did not violate any CFP Board ethical guidelines.
Solution: The correct answer is A.
Robert’s illness is not an issue, but his execution of a trade (DEF stock) at a higher price may not have been the goal of his client. Robert should have contacted the client and confirmed the trade was still appropriate. Diligence requires services provided in a reasonable and prompt manner.
102
Indranil is age 58 and has recently inherited $2,000,000 from his father. He has given two weeks’ notice to his employer and would like to retire permanently. He has never previously mentioned his father’s wealth, or a desire to retire, to his CFP® professional in any of their financial planning meetings over the years. What is the most appropriate next step for the CFP®professional?
A. Evaluate the client's retirement assets and cash flow needs.
B. Utilize Monte Carlo software to help establish an appropriate withdraw rate for the client.
C. Encourage the client to recant their retirement until additional analysis has been completed.
D. Revisit duties to be performed by the CFP® professional now that the client has retired.
Solution: The correct answer is A.
A, B and C are important in the retirement planning process. However, revisiting the cashflow needs should be the starting point. The CFP® professional does not need to revisit the duties to perform since they have a comprehensive planning relationship already.
103
Paul Simmons has passed the CFP® exam but not yet satisfied his experience requirements to become a CFP® professional. Paul recently had his series 6 license suspended by FINRA for five years. The cause of suspension relates to an unsuitable annuity sale to a client. Which of the following statements is correct regarding the ability of Paul to achieve his CFP®certification?
A. Paul will be able to receive the CFP® certification upon satisfying his experience requirement.
B. Paul will be barred from receiving his CFP® certification because of his suspension.
C. Paul will be barred from receiving his CFP® certification unless he petitions CFP Board’s Disciplinary and Ethics Commission.
D. Paul will automatically receive the CFP® certification at the time his FINRA suspension is lifted.
Solution: The correct answer is C.
Paul must petition the Disciplinary and Ethics Commission and be granted the ability to move forward with acquiring the marks.
A is incorrect. Paul must overcome the presumptive bar he is facing for having a SUSPENSION of a professional designation.
B Is incorrect. Paul is not deemed unacceptable but is instead presumptively barred.
D is incorrect. Paul remains presumptively barred until petitioning the DEC.
104
For purposes of the Free Application for Federal Student Aid (FAFSA), which of the following is/are considered includible assets?
I. Cash.
II. Life insurance.
III. Investment real estate.
IV. Annuities.
A. I and III only.
B. III and IV only.
C. I only.
D. I, II, III, and IV.
Solution: The correct answer is A.
Under the Free Application for Federal Student Aid:
Assets include:
Money in cash, savings, and checking accounts
Businesses
Investment farms
Real estate (other than a personal residence)
Other investments
Assets do not include:
A personal residence
Life insurance
Retirement plans (401(k) plans, pension funds, annuities, IRAs, Keogh plans, etc.)
105
Which of the following individuals or entities is/are responsible for ensuring that CFP® professionals are adhering to CFP Board’s Code of Ethics and Standards of Professional Conduct?
I. The CFP® professional.
II. The CFP® professional’s employer.
III. The CFP® professional’s clients.
A. I only.
B. I and II.
C. I and III.
D. I, II, and III.
Solution: The correct answer is A.
The CFP® professional is responsible for adhering to CFP Board’s Code of Ethics Standards of Professional Conduct. However, the employer is not responsible for ensuring the CFP®professional adheres to CFP Board’s Code and Standards. CFP Board certifies individuals, not firms.
106
Gwyneth currently earns a salary of $30,000 per year with ABC Company. She has the opportunity to attend a full-time training program for two years, if she is willing to quit her job and forgo her current salary. If she chooses to attend the training program, she will earn a salary of $40,000 per year after graduation, for the next 18 years. The cost of the training program is $9,000 annually. Gwyneth is currently earning a 6% rate of return on her investments, and inflation is 3%. Gwyneth will be unable to earn any income while she completes the training. What is the net present value to Gwyneth if she chooses to attend the training program?
A. $26,354.
B. $57,739.
C. $116,890.
D. $461,645.
Solution: The correct answer is B.
This problem requires utilizing an uneven cash flow function on a financial calculator.
Time Period 0 (-9,000 and - 30,000) outflow - Gwyneth is not working and will forsake the $30,000 she could have earned as well as pay training costs of $9,000. The total cash outflow is $39,000.
Time Period 1 (-9,000 and - 30,000) outflow - Gwyneth is not working and will forsake the $30,000 she could have earned as well as pay training costs of $9,000. The total cash outflow is $39,000.
Time Period 2-19 - $10,000 inflow (18 years – Gwyneth will give up a salary of $30,000, but instead will earn $40,000 for 18 years. Therefore, her net increase in income is $10,000 per year if she attends the training program)
I/YR - (1+.06)/(1.03) – 1 = 2.9126 [utilizes an inflation adjusted rate of return]
NPV - $57,739.
A is incorrect. It does not factor inflation (using 6 as the interest rate rather than 2.9126) and solves for 26354
C is incorrect. It does not include the opportunity cost of attending the training program and uses 9,000 instead of 39,000 as initial outflows.
D is incorrect. It incorrectly utilizes 40,000 as the cash flow into Gwyneth; however 40,000 does not take into consideration wages Gwyneth would have earned (30,000)
