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Flashcards in Sample Test Questions Deck (78):
1

All the following statements concerning a client's individually owned insurance policies are correct EXCEPT

(A) Life insurance coverage amounts are a factor in the value of the client's estate.

(B) Property insurance coverage amounts are a factor in the client's liquidity position.

(C) Disability insurance coverages constitute one element of the client's resources available for disability needs.

(D) Liability insurance coverages should be analyzed to see if they provide protection against potential liability losses.

The answer is (B).

Property insurance coverages should be analyzed to see if they provide adequate protection against potential property losses. They are not a factor in the client's liquidity position.

2

According to a survey conducted by the CFP® Board, the top three financial planning areas of specialization that advisors engage in include all the following EXCEPT

(A) Closely held business planning

(B) Pension/retirement planning

(C) Comprehensive planning

(D) Investment planning/advice

The answer is (A).

Closely held business planning is not one of the top three financial planning areas of specialization engaged in by advisors.

3

To develop rapport with clients an advisor must create an environment that promotes openness by doing all the following EXCEPT

(A) Alleviating the concerns of clients

(B) Having informal and unstructured meetings with clients

(C) Responding to the social styles of clients

(D) Communicating effectively with clients

The answer is (B).

In any kind of planned and purposeful communication setting, the first element that needs to be attended to is structuring. It serves to determine both the format and the subject matter of the interaction that is to follow. Proper structuring will not only alleviate most of the client's anxieties about the financial planning process, it will also help to build rapport with the client.

4

A financial service professional would devise client recommendations during which domain of financial planning?

(A) Communicating the recommendations

(B) Analyzing the client’s current financial status

(C) Developing the recommendations

(D) Gathering information necessary to fulfill the engagement

The answer is (C).

The advisor develops the recommendations during the developing the recommendations domain.

(B), and (D) occur before developing the recommendations and (A) communicating the recommendations, happens after.

5

Which of the following does not affect the determination of a student’s potential financial aid?

I. 20% of the student’s assets.

II. 529 plan assets with non-parent owners.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because 20% of student assets affect available financial aid.

II is correct because non-parental (dependent) 529 plans owned by an aunt or grandparent do not affect financial aid.

6

Which of the following is an appropriate investment for an emergency fund?

(A) A money market mutual fund

(B) Bonds

(C) Real estate

(D) Life insurance

The answer is (A). (B), (C), and (D) are incorrect because these assets are not liquid assets.Emergency fund assets must be able to be quickly converted to cash without loss of value in order to meet the client's needs. A money market mutual fund is a liquid asset that can quickly be converted to cash without loss of value.

7

Which of the following college savings vehicles eligibility are (is) limited by income?

I. Section 529 College Saving Plans

II. Coverdell Education Saving Accounts

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

Only the Coverdell has limitations

8

All the following statements concerning guidelines on risk assessment are correct EXCEPT

(A) Results from a questionnaire or other measurement device are only an approximation.

(B) The assessment should begin by looking at the client's demographic characteristics and personality makeup.

(C) The client's level of risk tolerance should be ascertained without involving him or her in the assessment.

(D) Biases that distort the client's true level of risk tolerance may be operating on his or her risk perceptions.

The answer is (C).

Assessing the client's risk tolerance is a cooperative venture. The advisor should use the information he or she collects to start a dialogue with the client about risk tolerance.

9

The second financial planning domain (determining goals and gathering data) is related to which of the following Practice Standards?

(A) Defining the scope of the engagement

(B) Defining the monitoring responsibilities

(C) Presenting the financial planningrecommendations

(D) Obtaining quantitative information and documents

The answer is (D).

(A) is incorrect because defining the scope of the engagement is related to domain 1 (establishing and defining the advisor-client relationship) of the financial planning process.

(B) is incorrect because defining monitoring responsibilities is related to domain 6 and 7 (implementing recommendations and monitoring the plan) of the financial planning process.

(C) is incorrect because presenting the financial planning recommendations is related to the fourth and fifth domains of the planning process (developing and communicating recommendations) of the financial planning process.

10

Which of the following statements concerning types of interviews is correct?

(A) A directive interview usually takes more time than a nondirective interview.

(B) The advisor usually controls the pace and content of a nondirective interview.

(C) A nondirective interview tends to be more flexible than a directive interview.

(D) The client usually controls the pace and content of a directive interview.

The answer is (C).

(A) is incorrect because a nondirective interview takes more time than a directive interview.

(B) is incorrect because the client usually controls the pacing of a nondirective interview through the depth of his or her responses.

(D) is incorrect because the advisor directs and controls both the pace and the content to be covered in a directive interview.

11

Active listening requires a financial planner to:

(A) Take the lead in a conversation and refrain from personal topics.

(B) Talk over 50 percent of the conversation, and listen less than 50 percent.

(C) Listen over 50 percent in a conversation, and talk less than50 percent.

(D) Engage their client and integrate nonverbal and verbal signals.

The answer is (D).

Engaging the client and integrate verbal and nonverbal signals

(A) Is incorrect because financial planning is full of personal discussion. (B) And (C) are incorrect because there is no prescribed percentage of talking and listening.

12

Which of the following statements concerning nonverbal behaviors is (are) correct?

I. They are linguistic signs used in communication.

II. Active listening is ineffective in interpreting these behaviors.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (D).

I is incorrect because nonverbal behaviors refer to those aspects of communication other than words themselves. They are nonlinguistic signs that convey a wealth of information.

II is incorrect because the active listener responds not only to the verbal message but also to the nonverbal message communicated by the sender's body, facial expression, and/or tone of voice.

13

The liquidity ratio is

(A) Total debt payments divided by gross income

(B) Net worth divided by total assets

(C) Liquid assets divided by total current debts

(D) Net cash flow (after tax) plus savings and investments divided by annual after-tax income

The answer is (C).

(A) is incorrect because it is the debt service ratio. (B) is incorrect because it is the solvency ratio. (D) is incorrect because it is the savings ratio.

14

Mariah (32) is considering attending an accredited university next year. Which of following is most likely to limit the amount of federal student aid she may receive?

(A) $5,000 of gifts received by Mariah from her parents last year.

(B) Mariah’s reported and taxable income this year of $25,000.

(C) Mariah’s savings account (estimated year-end balance of $1,000).

(D) Mariah’s parents estimated income next year.

The answer is (B).

50 percent of the student’s available income is considered part of the expected family contribution for a student and reduces the student’s financial need.

15

Which of the following statements concerning disintermediation is (are) correct?

I. It reduces reserves in the banking system.

II. It reduces deposits held in banks.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

16

All the following individuals may be required to have a fiduciary duty to the client EXCEPT

(A) A CFA® charter holder

(B) A registered investment adviser

(C) A CFP® Certificant

(D) An insurance agent

The answer is (D).

Insurance agents do not have a fiduciary duty to their clients in all instances. Many agents perform a dual role that can lead to conflicts of interest if they are not careful. This dual role finds them as agents for their companies while they are simultaneously serving their clients in an agent-like capacity.

17

52. Which of the following statements concerning client resistance in the financial planning environment is (are) correct?

I. The financial advisor should avoid discussing the client's marital problems.

II. The financial advisor should deal with covert hostility directly by focusing on the client's behavior.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because once a financial advisor recognizes that a couple is having marital problems, he or she should encourage the couple to focus on the problems. Otherwise, if the problems are ignored, whatever decisions are reached will be less valid than those that would have been reached after a full airing of the problems.

18

A comprehensive financial plan organized to follow the financial planning process should start by

(A) Describing the client's present situation based on both the personal and financial data gathered from the client

(B) Specifying the client's stated goals indicating the priority of each one and the time frame for achieving it

(C) Specifying the responsibilities of each party for implementing the plan and carrying it through to completion

(D) Identifying problems that the client would encounter in attempting to accomplish stated goals

The answer is (C).

(A) is incorrect because describing the client's present situation based on personal and financial data gathered from the client takes place during the second domain of the planning process.

(B) is incorrect because specifying the client's stated goals indicating the priority of each one and the time frame for achieving it takes place in the second or third domain of the planning process.

(D) is incorrect because identifying problems that the client would encounter in attempting to accomplish stated goals takes place in the third and fourth domains of the planning process.

19

All the following Practice Standards are related to domain 4 (developing a plan) of the financial planning process EXCEPT

(A) Identifying and evaluating financial planning alternatives

(B) Determining a client's personal and financial goals, needs, and priorities

(C) Presenting the financial planning recommendations

(D) Developing the financial planning recommendations

The answer is (B).

The Practice Standard of determining a client's personal and financial goals, needs, and priorities is related to the second and third domains (determining goals and gathering data) of the financial planning process. Practice standards involving regulation are addressed in the fourth planning domain.

20

All the following statements concerning state regulation of investment advisers are correct EXCEPT

(A) Many states require a minimum capitalization amount as a prerequisite to granting investment adviser registration approval.

(B) Almost every state requires that the participants in the registered investment advisory operation have certain FINRA registrations.

(C) The application of state law has been eliminated with respect to investment adviser representatives of SEC-registered advisers.

(D) State securities commissions may want to see all contracts, disclosure statements, documents, and literature the registered investment adviser used with the client.

The answer is (C).

All but seven states require individual investment adviser representatives—including those who are associated with SEC-registered firms—to pass examinations designed to test minimum competency.

21

Which of the following statements best describes cash flow planning?

(A) It involves identifying courses of action that will help optimize net cash flow.

(B) It is the process of gathering data about an individual's cash flow situation.

(C) It is the difference between an individual's income and expenses.

(D) It is the difference between an individual's total assets and total liabilities.

The answer is (A).

(B) is incorrect because it partially describes cash flow analysis, not cash flow planning.

(C) is incorrect because the difference between income and expenses is net cash flow, not cash flow planning.

(D) is incorrect because the difference between total assets and total liabilities is net worth, not cash flow planning.

22

All the following statements concerning advisor awareness of values are correct EXCEPT

(A) Advisors should seek to impose their values on clients.

(B) Advisors should be aware of their own value systems.

(C) Advisors should be aware that values can change.

(D) Advisors should be aware that values are deeply internalized.

The answer is (A).

Advisors who are aware of their own value systems have a better chance of avoiding the imposition of their values on the clients. This quality is of vital importance since the advisor wants to help the client make decisions that stem from the client's own value systems rather than from the advisors.

23

Which of the following is the appropriate standard of conduct for a fiduciary?

(A) Acting in the brokering firm's best interest.

(B) Acting as a prudent investor.

(C) Acting on a best efforts basis.

(D) Acting on self-interest.

The answer is (B).

(A) is incorrect because while acting in the firm’s best interest is important, it may not be enough. You must be able to prove in court that you have done what a prudent investor would have done in that situation.

(C) is incorrect because acting on a best efforts basis may simply not be enough if a prudent man would have done more.

(D) is incorrect because it is never appropriate to act on self-interest unless that happens to coincide with the client's interest.

24

Financial advisors who are subject to SEC regulation have all the following responsibilities EXCEPT

(A) Record keeping

(B) Recording conversations

(C) Delivering brochures

(D) Assigning contracts

The answer is (B).

Financial advisors who are subject to SEC regulation are not required to record conversations with their clients.

25

Exceptions to the Investment Advisers Act of 1940 exist for all of the following EXCEPT:

(A) Any accountant whose performances of such services are solely incidental to his profession.

(B) Any insurance agent whose performances of such services are solely incidental to his profession.

(C) A bank or bank holding company that serves or acts as an investment adviser to a registered investment company.

(D) The publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.

The answer is (C).

The Investment Advisor Act of 1940 applies to banks or holding companies acting as investment advisors.

26

Which of the following characteristics define Chapter 13 bankruptcy

I. A bankruptcy estate is formed and liquidated after 36 months ofpayments.

II. Debt is restructured and the debtor enters into a repaymentplan.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

Chapter 13 is the wage earners plan wherein debts are restructured and repaid. Liquidation is not a part of Chapter 13.

27

All the following methods of funding a college education are subject to income restrictions or demonstrated financial need a EXCEPT

(A) Section 529 prepaid tuition plan

(B) Coverdell education savings account

(C) Hope scholarship tax credit

(D) Federal Pell Grant

The answer is (A).

Section 529 prepaid tuition plans have no income restrictions nor do they require a demonstration of financial need.

28

All the following statements concerning basic communication principles are correct EXCEPT

(A) Communication is learned through experience.

(B) The same word may have different meanings to different people.

(C) Listening is a form of communication.

(D) Communication occurs mainly through verbal discourse.

The answer is (D).

Most sociological research claims that approximately two-thirds of an individual's total message is communicated via nonverbal channels.

29

Which of the following types of questions is likely to be the most effective in client counseling?

(A) Open-ended

(B) Close-ended

(C) Leading

(D) Either/or

The answer is (A).

Open-ended questions allow the client to select a response from his or her full repertory.

(B) is incorrect because closed-ended questions limit the client to a specific and narrow response, either a yes or no.

(C) is incorrect because leading questions are a type of closed-ended, manipulative question. More often than not they lead the client toward a conclusion that the counselor (not the client) has already formulated.

(D) is incorrect because either/or questions limit the client to only two options. Clients might prefer both options, neither one, or a third or fourth option. Opening up questions allows the client to respond freely from his or her own frame of reference.

30

Which of the following statements concerning interviews is (are) correct?

I. They typically take place in a formal and structured setting.

II. Digressions from the subject are encouraged.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because the subject matter discussed in an interview is specific to the overall purpose of the interview, and digressions from the subject are usually not encouraged.

31

All the following types of loans are secured EXCEPT

(A) Home equity line of credit

(B) Personal loan

(C) Auto loan

(D) Home equity loan

The answer is (B).

By definition, a personal loan is an unsecured debt. The creditor must rely entirely on the debtor's promise to repay since there is no collateral.

32

Which of the following financial planning domains is where the advisor identifies the strengths and weaknesses in the client's present financial condition?

(A) Establish and define the advisor-client relationship.

(B) Determine goals and gather data.

(C) Develop and present a plan.

(D) Analyze and evaluate the data.

The answer is (D).

(A), (B), and (C) are incorrect because in these steps of the financial planning process the advisor does not identify the strengths and weaknesses in the client's present financial condition. This is done in the third financial planning domain.

33

The Free Application for Federal Student Aid form (FAFSA) is used as the basis for estimating the expected contribution from all the following EXCEPT

(A) Parents

(B) Student

(C) Family

(D) Grandparents

The answer is (D).

The data contained in the FAFSA is used as the basis for estimating the expected parent contribution and the expected student contribution, which combined equal the expected family contribution. There is no expected contribution from grandparents.

34

All the following statements concerning the relationship between wealth and financial risk tolerance are correct EXCEPT

(A) Absolute risk tolerance increases with wealth since the wealthy have more money to spend on everything.

(B) People who earned their own wealth tend to be more risk tolerant than those who inherited their wealth from beloved relatives.

(C) Relative risk tolerance increases with wealth if housing is included in the definition of wealth or classified as a risky asset.

(D) People who acquired their wealth through a windfall are more apt to expose it to risk than those who worked hard for it.

The answer is (C).

Relative risk tolerance increases with wealth but only if housing is either excluded from the definition of wealth or classified as a riskless asset.

35

Reasons why an individual may want to reduce the size of an emergency fund include all the following EXCEPT

(A) The individual has worked for the same employer for many years.

(B) The individual has his or her own business.

(C) The individual has a life insurance policy with a large cash value.

(D) The individual has a home equity line of credit.

The answer is (B).

An emergency fund that covers 6 months or even a year's living expenses may be inadequate if the client is self-employed or works in an industry not known for job security.

36

Which of the following statements concerning the CFP® Board's Practice Standards is (are) correct?

I. They are enforceable by the CFP® Board against CFP® designees.

II. They are designed to be a basis for legal liability when they are breached.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because the CFP® Board's Practice Standards are not designed to be a basis legal liability.

37

Which of the following statements concerning a client's net cash flow is (are) correct?

I. A client should have a positive net cash flow in the long run if he or she wants the flexibility to fund additional financial objectives.

II. A client who has a negative net cash flow will have to invest (spend) additional resources in order to balance income and expenses.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because if a client has a negative net cash flow, the alternative courses of action available to correct this problem involve either an increase in income or a reduction in expenses. Investing additional resources will not rectify the problem but will aggravate it.

38

Which of the following statements concerning the financial planning pyramid is correct?

(A) As the client moves up the pyramid, the focus of the plan shifts from wealth accumulation goals to income protection needs.

(B) The middle part of the pyramid is built with emergency savings,insurance coverages, and a properly drawn will.

(C) The pyramid is a widely accepted approach for developing a comprehensive financial plan over a period of time.

(D) The foundation of the pyramid addresses both the management of retirement assets and the conservation/distribution of the estate.

The answer is (C).

(A) is incorrect because as the client moves up the pyramid, the focus of the plan shifts from income protection needs to wealth accumulation goals.

(B) is incorrect because the middle part of the pyramid is the wealth accumulation component of the financial plan. It involves growing money through various types of investments.

(D) is incorrect because the foundation of the pyramid is focused on protecting the client against an unexpected occurrence that could cause financial hardship. It is built with emergency savings, insurance coverages, and a properly drawn will.

39

Home equity loans and home equity lines of creditboth:

I. Offer lower interest rates because of the high quality id the collateral.

II. Usually standard fixed-rate installment loans.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

I is correct because the level of equity in the home decreases the lender’s risk.

II is incorrect because there are many different types of home equity loans that involve variable interest.

40

Which of the following statements concerning the Pension BenefitGuaranty Corporation is (are) correct?

I. It was created by ERISA in 1974.

II. It protects vested benefits in defined benefit plans.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct

41

Other things being equal, a client's net worth will increase as a result of which of the following actions?

I. The addition to assets through retaining income

II. A decrease in liabilities through forgiveness

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

42

All of the following are a part of the written financial services agreement according to Rule 1.3 EXCEPT

(A) The parties to the Agreement

(B) The date of the Agreement and its duration

(C) How and on what terms each party can terminate an Agreement

(D) The expected rate of return on investment recommendations

The answer is (D).

Expected investment rates are not included in a written financial services agreement.

43

Which of the following financial advisors using the financial planning process is practicing multiple-purpose financial planning?

(A) A multi-line insurance agent who sells life, health, and property and liability insurance to a client.

(B) A personal finance counselor who helps a client balance their checkbook.

(C) A stockbroker who advises a customer to buy shares of common stock in the "XYZ" company.

(D) A banker who opens a trust account for the benefit of a customer's handicapped child.

The answer is (A).

(B), (C), and (D) are incorrect because these financial advisors are practicing single-purpose financial planning, which is solving a single financial problem with a single financial product or service.

44

Tests used in determining whether a financial advisor's activities are subject to the provisions of the Investment Advisers Act of 1940 include all the following EXCEPT

(A) A compensation test

(B) A business standard

(C) Whether advice or analysis about securities is provided

(D) Whether commentary on general market conditions is provided

The answer is (D).

Providing commentary on general market conditions will not subject a financial advisor to the provisions of the Investment Advisers Act of 1940.

45

Which of the following statements concerning the Sarbanes-Oxley Act of 2002 is (are) correct?

I. It created an oversight board to monitor the auditing profession.

II. It increased corporate reporting responsibilities.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

46

Which of the following statements concerning ethics in business is correct?

(A) It is good public relations for a business.

(B) It is about creating a good image for a business.

(C) It is a luxury to indulge in after meeting the bottom line.

(D) It is about how people conduct business every day.

The answer is (D).

(A), (B), and (C) are incorrect because ethics is not public relations; it is not about creating a good image; and it is not a luxury to indulge in after meeting the bottom line. Ethics is about how people conduct business every hour of every day. Ethical behavior is being honest with ourselves and others.

47

As it relates to the Principle of Professionalism, a CFP® Board designee shall do all of the following EXCEPT

(A) Offer advice only in those areas in which the CFP® Board designee has competence.

(B) Use the marks in compliance with the rules and regulations of the CFP® Board.

(C) Return the client's original records in a timely manner after their return has been requested by the client.

(D) Comply with all applicable renewal requirements established by the CFP® Board.

The answer is (A).

Offering advice only in those areas in which the CFP® Board designee has competence relates to the Principle of Competence.

48

Federal income tax deductions are available to all taxpayers for which of the following types of education funding costs?

I. Interest on education loans up to an annual maximum deductible amount.

II. Qualified tuition and related expenses up to an annual maximum deductible amount.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (D).

I is incorrect because the deductibility of even a limited amount of interest on education loans is not available to all taxpayers. It is phased out for high taxpayers.

II is incorrect because the deductibility of even a limited amount of higher education expenses is not available to all taxpayers. It is phased out for high income taxpayers.

49

Which of the following statements concerning the public benefit from regulating the financial services industry is (are) correct? I. It fosters public confidence in institutions. II. It reduces the profit margins of firms.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

I is incorrect because regulating the financial services industry does not reduce the profit margins of firms.

50

Which of the following statements concerning the Pension Benefit Guaranty Corporation is (are) correct?

I. Single-employer pension plans pay a basic flat-rate premium.

II. Underfunded pension plans pay an additional charge per $1,000 of unfunded vested benefits.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

51

All the following statements concerning counseling by an advisor are correct EXCEPT

(A) The advisor's primary method of communication is asking questions.

(B) Counseling is less formal and less structured than interviewing.

(C) The advisor's role as a counselor takes place over a period of time.

(D) Through the counseling process, the advisor and client develop an interpersonal relationship.

The answer is (A).

While the advisor may ask questions in counseling, they are not his or her primary method of communication. The advisor may paraphrase what the client has said, reflect a feeling, share feedback or perceptions, clarify, summarize, interpret, provide information, and confront.

52

All the following typically are considered discretionary expenses for cash flow statement purposes EXCEPT

(A) Savings and investments

(B) Household furnishings

(C) Vacations and travel

(D) Household maintenance costs

The answer is (D).

Household maintenance costs are considered to be a fixed expense for cash flow statement purposes.

53

Which of the following allows the certificant to lend money to a client?

I. The client is member of the certificant’s immediate family.

II. The certificant is an employee of an institution in the business of the lending money and the money lent is that of the institution, not the certificant.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

II is correct because it is permissible to lend the money of an institution if that is one’s job,

I is correct because it is permissible to lend money to one’s family members.

54

Which of the following statements concerning The American College's Code of Ethics is (are) correct?

I. Enforcement of the code is through specified procedures.

II. Violations of the code are subject to disciplinary sanctions.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

55

All the following acts affect the securities industry EXCEPT

(A) Investment Company Act of 1940

(B) Trust Indenture Act of 1939

(C) Sarbanes-Oxley Act of 2002

(D) McCarran-Ferguson Act of 1945

The answer is (D).

The McCarran-Ferguson Act of 1945 states that regulation of insurance will remain with the states provided the states actually regulate the insurance companies operating within their borders.

56

Which of the following statements concerning financial advisors as professionals is (are) correct?

I. They are held to higher standards in the execution of their business duties.

II. They are expected to place their own business interests above those of clients.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because financial advisors are expected to place the interests of clients above their own.

57

Estimating the cost of funding a college education requires information about all the following EXCEPT

(A) Rate of increase in the consumer price index (CPI)

(B) Number of years until matriculation

(C) Number of years of college attendance

(D) Current cost of a year of college

The answer is (A).

The rate of increase in the consumer price index is not useful for estimating the cost of funding a college education. What is needed is the education inflation rate.

58

Assets classified as nonfinancial (personal) assets include all the following EXCEPT

(A) Residential real estate.

(B) Irrevocable trusts with an equity interest.

(C) Equity in privately held sole proprietorship.

(D) Tangible personal assets such as collectibles.

The answer is (B).

Trusts with an equity interest are classified as investment assets for financial position statement purposes

59

Most ethics codes applicable to financial advisors share which of the following common themes and sentiments?

I. They require advisors to continue the learning process throughout their careers.

II. They call on advisors to look out for their own best interests.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because the codes call on advisors to look out for the best interests of clients.

60

Which of the following lifestyle characteristics would seem to indicate that a client is disposed toward financial risk tolerance?

I. The client has been in the same job with the same company for 25 years.

II. The client's annual income has varied substantially from year to year.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because a stable employment history is more indicative of risk averters. The willingness to make frequent voluntary job changes is considered an indicator of a willingness to take financial risks.

61

According to a consumer survey conducted by the CFP® Board of Standards,the top reason why people begin financial planning is to

(A) Accumulate capital

(B) Purchase or renovate a home

(C) Build and liquidate a retirement fund

(D) Divorce planning

The answer is (C).

Building a retirement fund was the top reason why people begin financial planning. This was selected by 82 percent of the survey participants.

(A) Is incorrect because accumulating capital was selected by 31 percent of those surveyed. (B) is incorrect because purchasing or renovating a home was selected by 41 percent of those surveyed. (D) is incorrect because generating current income was selected by 25 percent of those surveyed.

62

Which of the following federal student aid programs is (are) need based?

I. Parent Loans for Undergraduate Students

II. Federal Perkins loan

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because the Parent Loans for Undergraduate Students (PLUS loans) are available for all family incomes and levels; they are not need based.

63

Cash flow management consists of all the following components EXCEPT

(A) Budgeting

(B) Cash flow analysis

(C) Cash flow implementation

(D) Cash flow planning

The answer is (C).

Cash flow implementation is not one of the recognized components of cash flow management. Cash flow analysis, cash flow planning, and budgeting are its three basic components.

64

The CFP® Board’s Practice Standard of defining the scope of engagement with the client before any financial planning service relates to the following:

(A) The Code of Ethic’s Principle of Fairness—impartiality, intellectual honesty and disclosure of material conflicts of interests.

(B) The relationship between the degree of formal education and risk tolerance increases through high school and then decreases.

(C) Rule 1.1—a certificant and client shall mutually agree on the services provided.

(D) Rule 3.7—a certificant shall not borrow money from a client.

The answer is (C).

(A), (B), and (D) are incorrect because defining the relationship consists of a mutual agreement regarding tasks performed as specified in (C).

65

Financial advisor activities considered to be part of developing financial planning recommendations in the financial planning process include all the following EXCEPT

(A) Reviewing the plan using numerous inflation rates.

(B) Presenting alternative plan strategies to the client.

(C) Writing a report for the client that describes the plan.

(D) Reviewing the plan to see that it is performing satisfactorily.

The answer is (D).

Reviewing the plan to see that it is performing satisfactorily is a financial advisor activity that is considered part of the seventh planning domain (review) of the planning process.

66

Which of the following questions must be answered in the affirmative before the value of an account can be counted toward meeting the $110 million threshold for assets under management?

I. Is the account a securities portfolio?

II. Does the account receive continuous and regular supervisory or management services?

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (C).

Both I and II are correct.

67

Which of the following statements concerning leading responses by the advisor is (are) correct?

I. The explanatory response is designed to make the client feel better in a time of need.

II. The interpretive response is designed to discourage self-interpretationby the client.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (D).

I is incorrect because the explanatory type of leading response is meant to be a relatively neutral description of the way things are. A reassuring response is intended to make the client feel better.

II is incorrect because the goal of the interpretive efforts including an interpretive type of leading response is self-interpretation by the client in order to increase the client's ability to act effectively.

68

The Investment Advisers Act of 1940 generally applies to the activities of a financial service professional if which of the following questions is (are) answered in the affirmative?

I. Does the financial services professional provide advice or analysis about securities?

II. Is the financial services professional registered with FINRA to sell securities?

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because the question is not one of the tests used to determine whether the activities of a financial service professional are subject to the Investment Advisers Act of 1940.

69

For SEC registration purposes, which of the following acts sets the limit for assets under management?

(A) Sarbanes-Oxley Act

(B) Investment Advisers Supervision CoordinationAct

(C) Investment Advisers Act

(D) Securities Exchange Act

The answer is (B).

(A), (C), and (D) are incorrect because while these acts pertain to the securities industry, they do not set the limit for assets under management.

70

All the following statements concerning auto leases are correct EXCEPT

(A) A closed-end lease permits the lessee to buy the car at the end of the lease for the car's residual value.

(B) An open-end lease permits the lessee to buy the car at the end of the lease for the car's residual value.

(C) A closed-end lease is riskier for the consumer than an open-end lease.

(D) Most auto leases are closed-end leases.

The answer is (C).

An open-end lease is riskier for the consumer than a closed-end lease. With an open-end lease, if the market value is less than the estimated residual value, the consumer is obligated to make up the difference. In the case of a closed-end lease, if the market value at the end of the lease is less than the projected residual value, the dealer absorbs the loss.

71

Monetary policy tools include which of the following?

I. Setting margin requirements on brokerage accounts

II. Changing federal income tax rates

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (A).

II is incorrect because changing federal income tax rates is not a monetary policy tool but a fiscal policy tool.

72

Which of the following financial planning domains is where the advisor reviews changes in the client's circumstances and the financial environment?

(A) Implement the plan.

(B) Monitor the plan.

(C) Establish and define the advisor-client relationship.

(D) Determine goals and gather data.

The answer is (B).

(A), (C), and (D) are incorrect because in these domains the advisor does not review changes in the client's circumstances and the financial environment.

73

Starting at a relatively young age, a career-minded person typically will pass through all the following phases of his or her financial life cycle in route to retirement EXCEPT

(A) Early career

(B) Career development

(C) Peak accumulation

(D) Postretirement

The answer is (D).

Postretirement is not one of the four phases of the financial life cycle that a career-minded person will pass through on route to the retirement phase. Besides the early career, career development, peak accumulation, and retirement phases, the other phase is preretirement.

74

Which of the following statements concerning net worth on the financial position statement is (are) correct?

I. Net worth is the key to understanding the nature of the client's assets and liabilities.

II. Net worth is what remains if all the client's assets are sold at their fair market values and all debts are paid.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because net worth reveals little about the nature of assets or liabilities; it is simply a residual—the difference between total assets and total liabilities.

75

All the following are exempt from regulation under the Investment Advisers Act of 1940 EXCEPT

(A) The publisher of a financial magazine with general or regular circulation.

(B) An accountant who gives investment advice in an incidental manner while practicing the accounting profession.

(C) A broker or dealer who receives special compensation for advisory services.

(D) A financial services professional whose only clients are insurance companies.

The answer is (C).

A broker or dealer who receives special compensation for advisory services is not exempt from regulation under the Investment Advisers Act of 1940.

76

Registered investment advisers must comply with all the following responsibilities imposed by the SEC EXCEPT

(A) Use the initials RIA after their names on all business cards and letterheads.

(B) Obtain a client's consent prior to transferring the account to another adviser.

(C) Refrain from charging performance fees unless the adviser manages $750,000 of the client's assets or reasonably believes the client's net worth is at least $1.5 million.

(D) Deliver a written brochure to every current and prospective client.

The answer is (A).

The SEC has taken the position that a registered investment adviser must not use the initials RIA after his or her name.

77

Which of the following statements concerning monetary policy is (are) correct?

I. It is used to manage the deficit.

II. It is used to manage inflation.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (B).

I is incorrect because fiscal policy is used to manage the deficit.

78

Which of the following is (are) guaranteed to keep pace with increases in college tuition costs for a state school?

I. CollegeSure CDs

II. Zero coupon bonds

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

The answer is (D).

I is incorrect because CollegeSure CDs pay an interest rate that is linked to the inflation rate in college costs as measured by the College Board's cost index for 500 independent colleges; it is not linked to tuition costs for state schools.

II is incorrect because baccalaureate bonds do not guarantee that they will keep pace with the increases in college tuition costs for a state school; they typically are poor inflation hedges.