General Financial Principles, Conduct & Regulation Flashcards
(79 cards)
1
Q
Section 529 plans
A
- gift of present interest
- can take advantage of the annual gift tax exclusion
- opportunity to front-load 529 plans and put in 5 years worth of annual gift tax exclusions at 1x (can accelerate how we fund these plans)
- contributions removed from the contributors gross estate (but still maintain control over theese accounts) - gives them flexiblity
- can change beneficiary
- gift split
- fund expenses (qualified education expenses) up to $10k
2
Q
Coverdell Education Savings Accounts (CESAs)
A
- gift of present interest
- max contribution per year per student of $2k
- contributions are removed from contributor’s gross estate
- funds have to be used by that bene’s attainment of age 30
3
Q
Custodial Accounts (UTMA/UGMA)
A
- anything put in there for the benefit of the bene, ends up being an irrevocable gift
- once the student reaches the age of majority (18 in some, age 21 in others), the funds belong to them (so if they don’t want to go to school, nothing the contributor can do about it)
- subj to kiddie tax rules
4
Q
Kiddie tax rules
A
The unearned income in custodial accounts are taxed at, first 0% for the first $1,350, and then for the next $1,350 in 2025, the students/young persons presumed low income tax rate of 10%. Anything in excess of $2,700 is going to be taxed at parent’s marginal tax rate
5
Q
Series EE savings bonds
A
- interest earned is not subj to income tax when used for qualified education expenses
- owned by parents (age 24 or older when purchased)
6
Q
American Opportunity Tax Credit (AOTC)
A
- 1st 4 years undergrad
- at least half-time
- per student
- no felony drug
7
Q
Key areas of focus on the statement of financial position
A
- Assets (FMV) and Liabilities (Principal)
- Statement date
- Net worth (A-L)
- Footnotes
- Property titling/account ownership
- Stage in the life cycle
8
Q
Key areas of focus on Financial Statement
A
- As of date
- Type of assets (cash, invested, personal use)
- Understand how multiple transcations impact these statements
9
Q
How do multiple transcations impact a Financial Statement?
A
Cash paid to reduce debt may have no effect on net worth, while appreciation of stocks could increase net worth
10
Q
Dividend reinvestment on Financial Statement
A
Shown as both an inflow and outflow
11
Q
Difference between statment of financial position and statement of cash flow items
A
Cash flow items, such as salary and car payments, are not listed on the statement of financial position
12
Q
Items on Statement of Financial Position (Assets)
A
- Cash - Money Market
- Invested Assets - Portfolio, Annuity, Retirement Accounts, Defined Benefit Plan
- Personal Use Assets - Primary residence, vacation home, personal property/furniture, auto
13
Q
Items of Statement of Financial Position (Liabilities)
A
- Current - bank credit card balance, auto note balance
- Long-Term - mortgage primary residence/vacation home
14
Q
Items on Statement of Cash Flows
A
- Inflows - Annual
- Outflows - Annual
- Fixed Outflows - Annual
- Variable Outflows - Annual
15
Q
Items on Statement of Cash Flows (Inflows - Annual)
A
- Schedule C net income
- Salary
- Dividends/Interest
16
Q
Items on Statement of Cash Flows (Outflows - Annual)
A
- IRA contributions
- Dividends/Interest
17
Q
Items on Statement of Cash Flows (Fixed Outflows - Annual)
A
- Morgage payment (principal & interest)
- Property taxes
- Homeowners insurance
- Utilities
- Cell phone
- Auto payment (principal & interest)
- Auto insurance
- Gas/oil/maintenance
- Credit card payments
18
Q
Items on Statement of Cash Flows (Variable Outflows - Annual)
A
- Taxes
- Food
- Medical/dental
- Clothing/personal care
- Child care
- Entertainment/vacation
- Other (discretionary)
19
Q
Financial Plan Weaknesses to look for
A
- Inadequate savings (particularly for retirement)
- Inappropriate investments
- Uncovere catastrophic risks (life/health/disability/property/liability/umbrella/long-term care)
- Inadequate net-worth
- Inadequate emergency fund
- No will or invalid will
- Lack of defined financial goals
- Poor spending habits - improper use of cash flow
- Lack of investment knowledge
20
Q
Life Cycle Phases
A
- Asset Accumulation (work force to age 45)
- Conservation/Protection (age 45 to 60/retirement?)
- Distribution/Gifting
21
Q
Calculate Monthly Mortgage Payment
A
Set payments per year to 12
PV = loan amount
n = number of total payments (x 12 months)
i = interest rate
Solve for PMT
22
Q
College Funding - Higher income (wealthier)
A
- Parent loan
- Plus loan
- Unsubsidized Stafford student loan
23
Q
College Funding - Lower income (need-based)
A
- Pell grants
- Subsidized Stafford student loans
- Federal Supplemental Eduational Opportunity Grant
24
Q
CFP Board Practice Standards for the Financial Planning Process
A
Utterly Impossible Acronyms Do Produce Impeccable Mememory
- U - Understanding the Client’s Personal and Fin Circumstances
- I - Identifying & Selecting Goals
- A - Analyzing the Client’s Current Course of Action & Potential Alt Course(s) of Action
- D - Developing the Fin Planning Rec(s)
- P - Presenting the Fin Planning Rec(s)
- I - Implementing the Fin Planning Rec(s)
- M - Monitring Progress and Upating
25
Present Value (PV)
The single amount is the PV lump-sum amount
26
Future Value (FV)
The value to which the PV grows over a given perid at an assumed or actual ROR
27
28
Annuity due
Payments made at the **beginning** of each period (i.e. lease payments)
29
Ordinary annuity
Payments made at the **end** of each period (i.e. mortgage payments)
30
7 steps to financial planning process
Uber is a drunk persons immediate motor vehicle
U - understanding personal/financial circumstances
I - identifying/selecting goals
A - analyzying current and potential alt course(s) of action
D - developing recs
P - presenting recs
I - implementing recs
M - monitoring progess and updating
31
Lifetime Learning Credit (LLC)
* no time frame t be used
* felony drug OK
* per family
32
Cognitive Error
Anchoring and adjustment
you make irrational decisions based on information that shuld have no influence on the decisions at hand
33
Cognitive Error
Outcome bias
You tend to take course of action based on the outcome of prior events, ignoring current conditions
34
Cognitive Error
Framing bias
You process and respond to information based on the manner in which it's presented
35
Cognitive Error
Recency bias
You give recent information more importance because you remember it most distinctly
36
Emotional Bias
Loss Aversion
You fear losses much more than you value gains, and you prefer avoiding losses to acquire the same amount in gains
37
Emotional Bias
Overconfidence
You believe that you contrl random events merely by acquiring more knowledge and consider your abilities to be much better than they are
38
Emotional Bias
Self-control Bias
You lack self-discipline and favor immediate gratification over long-term goals
39
Emotional Bias
Status quo bias
You are comfortable with an existing situation, which leads to an unwillingness to make changes, even though the changes are beneficial
40
Emotional Bias
Endowment Bias
You think an asset you own is worth more than it is because it is yours
41
Emotional Bias
Regret Aversion Bias
You do nothing out of excess fear that your decisions or actions could be wrong
42
Emotional Bias
Affinity Bias
You make decisions based on how you believe the outcomes will represent your interests and values
43
Leading Indicators
* housing starts
* new claims for unemployment
* direction of stock market and int rates
* changs in investor sentiment
* durable goods orders
44
Lagging Indicators
average duration of employment
45
Fiscal policy economists believe...
that the economy can be controlled through the use of **government spending** and **income tax adjustments**
46
Economists that believe that economic activity is controlled through the use of money supply...
inc/dec money supply
inc/dec inflation rate
47
The anticipation of inflation suggests that the investor should
anticipate higher interest rates
ex: if int rates increase to fight inflation, and increase in interest rates causes bond prices to fall
48
Inflation adjust return calculation
**1+inflation rate, INPUT
1+ROR, DOWNSHIF, % CHG =**
ex: if 7% ROR and 2% inflation rate
1.02, INPUT
1.07, DOWNSHIFT, % CHG = 4.90%
make sure IAR is lower than the different between the ROR and inflation rate
49
Prepaid tuition plan
Requires the child attend a public college/uni within the state that established the plan
50
To follow an expansionary (easy) monetary policy, the Fed will
lower the discount rate
* which will increase the money supply
* banks will be able to borrow funds at lower rates
51
To institute a restrictire (tight) monetary policy, the Fed will
raise the discount rate
* which will curb inflation
* contract money supply
52
To determine whether items should be included in the statement of financial positions, the A/L should have the following characteristics
1. fixed and determinable amount
2. receipt or payment is not contingent on the occurence of a particular event
3. receipt or paymeny does not require future performance of service
53
Downward sloping demand curve means
consumers demand more at lower prices
54
Emergency fund ratio
cash/cash equivalents / **monthly** nondiscretionary expenses = # of months
3-6 months of fixed and variable monthly expenses
55
Reverse mortgage
the lender makes monthly payments to the homeowner based on the FMV of the home (ex: 65 y/o homeowner with substantial home equity)
56
FDIC coverage
FDIC insures seperate legal categories of accounts of a legal institution
Each category of ownership (individual, jt or retirement account) in the same institution is subject to a seperate limit of $250k
Individual IRA up to $250k
Individual accounts aggregated up to $250k
Joint account up to $250k (of half interest)
57
Emergency fund should be
approx 3 months of fixed and variable expenses
excluding:
* income taxes
* FICA
* savings/investments
58
Personal and financial circumstances within the life cycle are influenced by
* financial status
* attitudes, values, beliefs
* martial status
59
Chapter 7 Bankruptcy
debts canceled entirely
"type of bankruptcy in which a person is **freed** from most debts in exchange for **giving creditors assets that legally be seized**"
60
Chapter 13 Bankruptcy
reorganization
A plan is created for the debtor to repay outstanding debts **within a specified time frame**
(usually amount owed reduced so payments more manageable)
61
Consumer Credit Protection Act (Trust Lending Act)
this act requires lenders, before extending credit, to **disclose**:
* both the dollar amount of finance charges
* the APR
* other loan terms and conditions
The act also limits consumer liability for a lost or stolen credit card to the amount charged or a maximum of $50 per card, whichever is less.
The requirements of this act are often encountered when a consumer enters into a mortgage agreement with a lender and closes on a personal residence.
62
Disclosure of confidential
2 broad exceptions
* can be made for ordinary business purposes
* to comply with fed, state or local law
can be disclosed in a civil investigation but **subpoena required**
63
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act)
Under the 2005 Bankruptcy Act, people who have the ability to pay their debts **must file under Chapter 13 **(reorganization) rather than having their debts canceled entirely under Chapter 7.
64
Investment Advisers Act of 1940
* registered as an IA because she is **"in the business **of providing advice regarding securities for a fee"
* required Form ADC Part 2A to clients
65
The individual registers with **FINRA**
through a **broker dealer** on **Form U-4**
66
Investment advisers register with the **SEC**
using **Form ADV**
67
Forms of discipline for misconduct
* **private** censure
* public letter of admonition
* revocation of right to use marks
* suspension (max 5 years)
68
In bankruptcy, planners should rely on
**state laws **to supersede federal laws in regards to property retention
69
Fiduciary duty must be upheld when
Financial **Advice** or Financial **Planning** are occurring
70
Standards of Conduct
* Diligence
* Professionalism
* Competence
71
When reviewing, the Discipline and Ethics Commission (DEC) may
* accept
* reject, or
* modify
**cannot deny**
72
Securities Exchange Act of 1934
price manipulation
includes schemes such as:
* wash sales
* pools
* circulation of manipulative info
* false/misleading statements about securities
73
Compensation arrangements based on **earnings** of clients portfolio
* performance
* incentive
74
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
advisers with assets under management of **more than $100 million** must register as investment advisers with the SEC unless an exemption applies.
75
Securities Investor Protection Act of 1970
established the Securities Investor Protection Corporation (SIPC)
The SIPC was created by the Securities Investor Protection Act of 1970 to insure investors against losses arising from the failure of any brokerage firm
76
76
Once an individual files for banruptcy, what items are exempt from creditors
* accrued pension benefits
* homestead (may be exempt, usuallt cap/ceiling on the value of the home that may be proteted)
77
Fair Credit Reporting Act
* If denied credit, he/she has right to recieve a copy of the credit report by the CB for free
* However, he/she may review his or her report at any time for a nominal charge
* If errors, the CB must correct them and submit the corrected report to any recipient of the report in the last 6 months.
* If consumer and CB do not agree on the facts in report, he/she has the right to include their own version of the facts in the report
78
CFP Board's Fitness Standards apply to
Candidates for the CFP exam and Professionals Eligible for Reinstatement
