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FP511 General Financial Planning Principles, Professional Conduct, and Regulation > Module 1 > Flashcards

Flashcards in Module 1 Deck (39)
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1

Name the three approved methods of documentation between a planner and client

CRM Software
Handwritten Notes
Emails

2

Name the 7 steps of the financial planning process

(U)nderstand a clients personal and financial circumstances
(I)dentify & select goals
(A)nalyze the client's current course of action & potential alternatives courses
(D)evelop the financial planning recommendations
(P)resent the financial planning recommendations
(I)mplement the financial planning recommendations
(M)onitor progress and update

3

Describe quantitative data vs qualitative data

Qualitative - Subjective information like a client’s health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action.

Quantitative - Objective information like the client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, and capacity for risk.

4

If unable to obtain information necessary to fulfill the scope of engagement....

......then the CFP® professional must either limit the scope of engagement to those services the CFP® professional is able to provide or terminate the engagement.

5

Identify the CORRECT statements regarding financial strengths and weaknesses.
I. Inadequate retirement savings is considered a financial weakness.
II. Very general financial goals are considered a financial strength.
III. Determining financial strengths and weaknesses is an objective process.
IV. The lack of a valid will is considered a financial weakness if a will is necessary to protect the interest of heirs.

I & IV

6

Which of the following statements is CORRECT regarding financial planning?
I. The financial planner is responsible for implementing the client’s Financial Planning recommendation(s) unless specifically excluded from the Scope of Engagement.
II. The practitioner must communicate to the client any limitations on the scope of the engagement.
III. Recommendations must be written and prepared in a clear, understandable manner.
IV. Unrealistic goals must be discussed

I, II, III, & IV are all correct

7

Define Integration Factors in the context of determining if financial advice also requires financial planning.

Integration factors are variables that weigh in determining whether Financial Advice requires Financial Planning. Integration factors include:

- The number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect
- The portion and amount of the client’s financial assets that the Financial Advice may affect.
-„ The length of time that the client’s personal and financial circumstances may be affected by the Financial Advice.
-„ The effect on the client’s overall exposure to risk if the client implements the Financial Advice.
„- The barriers to modifying the actions taken to implement the Financial Advice.

8

Define Integration Factors in the context of determining if financial advice also requires financial planning.

Integration factors are variables that weigh in determining whether Financial Advice requires Financial Planning. Integration factors include:

- The number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect
- The portion and amount of the client’s financial assets that the Financial Advice may affect.
-„ The length of time that the client’s personal and financial circumstances may be affected by the Financial Advice.
-„ The effect on the client’s overall exposure to risk if the client implements the Financial Advice.
„- The barriers to modifying the actions taken to implement the Financial Advice.

9

All of the following are integration factors necessary to act in the client’s best interest within a financial planning engagement except:
A. the portion and amount of the client’s financial assets that the Financial Advice may affect.
B. the number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect.
C. the client’s overall risk tolerance.
D. the effect on the client’s overall exposure to risk if the client implements the Financial Advice

C. the client’s overall risk tolerance (this is not one of the 5 integration factors)

10

All of the following are integration factors necessary to act in the client’s best interest within a financial planning engagement except:
A. the portion and amount of the client’s financial assets that the Financial Advice may affect.
B. the number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect.
C. the client’s overall risk tolerance.
D. the effect on the client’s overall exposure to risk if the client implements the Financial Advice

C. the client’s overall risk tolerance (this is not one of the 5 integration factors)

11

The CFP Board’s Code of Ethics comprises six principles that apply at all times to individuals holding the CFP® marks. Name all six.

1. Act with honesty, integrity, competence, and diligence.
2. Act in the client’s best interests.
3. Exercise due care.
4. Avoid or disclose and manage conflicts of interest.
5. Maintain the confidentiality and protect the privacy of client information.
6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.

12

Select the principles that are included in the Code of Ethics.
I. Act in the client’s best interests.
II. Maintain the confidentiality and protect the privacy of client information.
III. Exercise due process.
IV. Avoid all conflicts of interest.

I & II

13

Select the principles that are included in the Code of Ethics.
I. Act in the client’s best interests.
II. Maintain the confidentiality and protect the privacy of client information.
III. Exercise due process.
IV. Avoid all conflicts of interest.

I & II

14

Name the 6 subsections of The Standards of Conduct (Standards) (a section of the Code and Standards that articulates professional duties that CFP® professionals must uphold)

1. Duties Owed to Clients
2. Financial Planning and Application of the Practice Standards for the Financial Planning Process
3. Practice Standards for the Financial Planning Process
4. Duties Owed to Firms and Subordinates
5. Duties Owed to CFP Board
6. Prohibition on Circumvention

15

The Code and Standards state, “At all times when providing Financial Advice to a client, a CFP® professional must act as a fiduciary, and, therefore, act in the best interests of the client.” To uphold the fiduciary standard, the CFP® professional is required to fulfill the following three duties:

(1) Duty of Loyalty. Involves placing the client’s interests ahead of the CFP® professional, the CFP® professional’s firm, or any other entity. Includes avoiding, fully disclosing, obtaining consent, or managing material conflicts of interest.
(2) Duty of Care. The CFP® professional must engage the client with care, skill, prudence, and diligence. Fulfillment of this duty requires consideration of the client’s goals, risk tolerance, objectives, and circumstances
„(3) Duty to Follow Client Instructions. CFP® professionals are obligated to adhere to the terms of the engagement and must follow “reasonable and lawful” client instructions.

16

STUDY NOTE:

Duties Owed to Clients This section identifies 15 duties that financial planners owe to clients.

Fiduciary Duty (A.1)
Integrity (A.2)
Competence (A.3)
Diligence (A.4)
Disclose and Manage Conflicts of Interest (A.5)
Sound and Objective Professional Judgment (A.6)
Professionalism (A.7)
Comply With the Law (A.8)
Confidentiality and Privacy (A.9)
Provide Information to a Client (A.10)
Duties When Communicating With a Client (A.11)
Duties When Representing Compensation Method (A.12)
Duties When Recommending, Engaging, and Working With Additional Persons (A. 13)
Duties When Selecting, Using, and Recommending Technology (A.14)
Refrain From Borrowing or Lending Money and Commingling Financial Assets (A.15)

17

Disclose and Manage Conflicts of Interest (Standard A.5)

A CFP® professional must do the following three things:

1. Avoid or fully disclose material conflicts of interest by providing sufficiently specific facts.
2. Obtain informed consent.
3. Manage the conflict of interest.

18

Confidentiality and Privacy (Standard A.9)

CFP® professionals are required to uphold client confidentiality and privacy. There are two exceptions:

1. Information used for ordinary business purposes (e.g., personal information necessary for an estate planning attorney to draft a will)
2. Information transferred for legal and compliance purposes (e.g., subpoenas)

19

Duties When Representing Compensation Method (Standard A.12)

This standard establishes criteria for determining the appropriate compensation method to disclose to clients. CFP® professionals may only represent their compensation in one of the following ways:

Fee-only, fee-based, and sales-related compensation.

Defined as follows: „

– Fee only—only planning fees (no sales-related compensation)
– Fee based—planning fees + sales-related compensation
„ Sales-related compensation = This is defined separately in Standard A.12 and includes commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, referral or solicitor fees, or similar consideration

20

Refrain From Borrowing or Lending Money and Commingling Financial Assets (Standard A.15)

CFP® professionals must refrain from borrowing or lending money. Commingling of financial assets is prohibited. Borrowing / lending is only allowed in the following two cases:

(1) If the client is a family member
(2) If the lender is an organization or entity in the business of lending money.

Note: This standard explicitly prohibits indirect borrowing.

21

Duties Owed to Firms and Subordinates

Name the three:

(1) Use reasonable care when supervising.
(2) Comply with lawful objectives of the CFP® professional’s firm.
(3) Provide notice of any public discipline enacted by CFP Board.

22

Duties Owed to CFP Board

Name the five:

(1) Avoid any adverse conduct.
(2) Report incidents involving adverse conduct to CFP Board within 30 days.
(3) Provide a narrative statement to CFP Board on reportable matters.
(4) Cooperation with CFP Board throughout investigations and disciplinary proceedings.
„(5) Compliance with the Terms and Conditions of Certification and License (Terms).

23

Define "Prohibition on Circumvention"

CFP® certificants are prohibited from using a third party to conduct business that violates the Code and Standards.

24

Regarding the use of technology, a CFP® professional must do which of the following?
I. Have a reasonable basis for believing the technology produces reliable, objective, and appropriate outcomes.
II. Exercise reasonable care and judgment when selecting, using, or recommending technology.
III. Have a reasonable level of understanding of technology’s assumptions and outcomes.
IV. Become a technology expert.

I, II, & III

25

Financial planners can gain valuable insight into their clients’ objectives and concerns by identifying their financial life cycle phase. Personal and financial circumstances within the life cycle are influenced by the following 5 things:

(1) Age
(2)„ Marital status and dependents
(3) Financial status (Level of income and net worth will affect goals)
(4)„ Special needs (disabled dependents, nontraditional relationships, children from previous marriages, etc.)
(5)„ Attitudes, values, beliefs, biases, and behavioral characteristics.

The CFP Board refers the items just described as Contextual Variables.

26

Name the 3 phases of a client's financial life cycle

(1) asset accumulation phase
(2) conservation or protection phase
(3) distribution or gifting phase

27

Define the asset accumulation phase

A client is usually in this phase until approximately age 45 or later if the client’s children are not yet independent.

The beginning of this phase is characterized by the following: „
-Limited excess funds for investing
-High degree of debt to net worth
-Low net worth
-Lack of concern for risks

As the person moves through the asset accumulation phase, there is:
-increased cash available for investments
-reduced use of debt as a percentage of total assets
-increased net worth

28

Define the conservation or protection phase

A client is usually in this phase from approximately age 45–60 or immediately preceding the client’s planned retirement date. This may last throughout the client’s working life or, in some cases, until death.

This phase is characterized by the following:
-Increases to cash flow, assets, and net worth
-Decreases in proportionate use of debt

People generally become more risk averse as more assets are acquired. Thus, they:
-are more concerned about losing what they have acquired than acquiring more
-and become aware of and are concerned with many risks they ignored at the beginning of the asset accumulation phase, including an increased awareness of life’s risks (e.g., untimely death, unemployment, or disability)

29

Define the distribution or gifting phase

A client is usually in this phase from approximately age 60, or the planned retirement date, until the date of death.

At the beginning of this phase, a person may remain in both the asset accumulation and the conservation or protection phases. For many people, there is a period when they are being influenced by all three phases simultaneously, although not necessarily to the same degree. When clients purchase new cars for adult children, pay for a grandchild’s private school tuition, or treat themselves to expensive vacations, they are likely to be in the distribution or gifting phase.

Generally, this phase is characterized by the following: „
-Distribution strategies (e.g., lifetime gifts to heirs)
-Implementation of estate planning strategies
-High net worth and cash flow
-Low debt

30

For CFP® marks, do the following: „

-Always use capital letters.
-Never use periods. „
-Always use the ® symbol.
-Always use with one of CFP Board’s approved nouns (certificant, professional,
practitioner, certification, mark, or exam) unless directly following the name of the individual certified by CFP Board.
-Always associate with the individual(s) certified by CFP Board.