Self Made CFP Cards Flashcards
(157 cards)
1
Q
Conduct Unacceptable and ALWAYS bar individual from becoming certified:
A
- Felony conviction for theft, embezzlement or other financially based crimes
- Felony conviction for tax fraud or other tax related crimes
- Revocation of a financial professional license, unless revocation is administrative
- Felony conviction for any degree of murder/rape
- Felony conviction for any other violent crime within the last five years
2
Q
Conduct deemed Presumptive bar and is PRESUMED to be unacceptable:
A
- Two or more bankruptcies
- Revocation or suspension of non financial professional license unless done by administrative nature
- Suspension of a financial professional license unless done by administrative nature
- Felony conviction for nonviolent crimes within the last five years
- Felony conviction for violent crimes other than murder or rape that occurred more than five years ago
3
Q
The Financial Planning Process
A
- Remember Uber Is A Drunk Persons Immediate Motor-vehicle
1. ) Understand clients personal and financial situation
2. ) Identify and Select goals
3. ) Analyze Clients current course and potential course of action
4. ) Develop Financial planning recommendations
5. ) Present financial recommendations
6. ) Implement Financial planning recommendations
7. ) Monitor progress and updating
4
Q
Life Insurance Benchmark
A
10-16 times gross income, if client has life insurance need
5
Q
Health insurance Benchmark
A
Client needs at least $1 million lifetime cap pre Affordable Cares Act.
6
Q
Disability Insurance Benchmark
A
If paying after-tax premiums, then policy paying about 60-70% of gross income
7
Q
Property Insurance Benchmark
A
Policy covering both home and auto for fair market value is sufficient
8
Q
Long Term Care Insurance Benchmark
A
Policy providing daily benefit for nursing home care, home health care, or help w/ ADL’s, with Inflation protection
9
Q
Personal Liability Umbrella Policy Benchmark (PLUP)
A
Need a PLUP with $1-3 million in liability protection
10
Q
Emergency Fund Benchmark
A
3-6 months of non-discretionary expenses
11
Q
Housing Ratio Benchmark
A
Primary mortgage, including principal, interest, taxes, and homeowners insurance shouldn’t exceed 28% of gross income
12
Q
Housing Ratio + All other Debt Ratio Benchmark
A
Primary mortgage plus all other recurring debt payments should not exceed 36% gross income
13
Q
Education Funding Benchmark
A
Save $3k, $6k, or $9k per year for 18 years to find a child’s education whether using public, semi-private, or private university respectively
14
Q
Retirement Amount Benchmark
A
At age 62-65 you should have 16 times amount of income needed annually saved for retirement
15
Q
Savings Rate Benchmark
A
Save 10-12% towards retirement when starting at early age. Education goal is extra
16
Q
Return on Investments Benchmark
A
Expect return on investments of 8-10%, using long term horizon
17
Q
Risk Benchmark
A
Standard deviation of a diversified portfolio of 8-14% is the benchmark
18
Q
Legacy Benchmark
A
Need a Will, Durable POA’s for healthcare, and Advanced Medical Directive. Client needs all three to hit benchmark
19
Q
Time of Declining GDP to be a Recession
A
6 consecutive months or 2 quarters
20
Q
Time of declining GDP for Depression
A
18 consecutive months or 6 quarters
21
Q
Define Reserve Requirement & effect if the RR is increased
A
- RR is % of deposits a bank needs to maintain in cash
- RR increased = Money Supply decreases, int. Rates increase
22
Q
Define Discount Rate & Effect of Discount Rate decreases
A
- Discount rate is overnight interest rate which member banks can borrow from the fed to meet reserve requirements
- DR decreases = short term interest rate decreases
23
Q
Define Open Market Operations & effect if used to buy treasuries
A
- OMO is when fed buys or sells government securities
- Fed buys treasuries = Money Supply Increases, Int. Rates decrease
24
Q
Define Excess Reserves & effect if ER is decreased
A
- ER is monies that a bank holds at the fed in excess of required reserve amount
- ER decreased = money supply increases, int. Rates decrease
25
Debts not discharged in Chapter 7 Bankruptcy
- student and government loans
- 3 years of back taxes
- alimony and child support
- monies owed due to malicious acts, drunk driving, criminal fines, and penalties, or embezzlement
- debts related to fraud
26
Assets exempt from creditors in Ch. 7 Bankruptcy
- homestead
- life insurance
- qualified plans & rollover IRAs
- Traditional and Roth IRAs exempt up to $1M, indexed every 3 years
27
Federal pell Grant need or not need based?
Strictly need based
28
Stanford loans need or not need based?
- Subsidized Stafford loan is need based
| - Unsubsidized Stafford loan is not need based
29
(PLUS) Parent Loans for undergrad students
Not need based
30
Grad PLUS loans need or not need based
Not need based
31
Federal Perkins Loan Program need or not need based?
It is need based.
32
Student Loan Interest Deductibility
- max above the line deduction ( before AGI) of $2,500
33
Qualified Tuition & Related Expenses deductibility
-Deduction repealed for tax years after 2020 by Taxpayer Certainty & Disaster Relief act of 2020
34
Lifetime Learning Credit Amount & Qualifications
- tax credit amount is 20% of up to $10,000 in qualified expenses per year and per family
- can be claimed for unlimited years and expenses need to be for tuition & fees, student activity fees, books, supplies, and equipment directly from eligible education school
- no room and board covered
35
American Opportunity Tax Credit Amount & Qualifications
- max tax credit amount is 100% of first $2,000 in expenses and 25% of second $2,000 in expenses per student
- qualified expenses are tuition & fees & activity fees direct to university as well as, books, supplies, equipment even if not paid direct to university
36
American Opportunity & Lifetime Learning Tax credit coordination rules
- person may claim American tax credit or lifetime credit in same year as taking money from 529 plan, just not for same expenses
- person may not claim American credit or lifetime credit for the same child, in the same year
- person may not use American credit or lifetime credit for the same expense paid by a qualified tuition program
- person may use American credit or lifetime credit in the same year as a distribution from a qualified tuition plan, just not for the same expense
37
Life Insurance Dividend Options (5)
```
Remember CRAP-O
1-cash
2-Reduced Premium
3-Accumulate at Interest
4-Paid up additional insurance
5-one year term a.k.a “5th dividend option”
```
38
LI Non-Forfeiture Options (4)
- Cash surrender value
- reduced paid up insurance
- Extended Term insurance
- Accelerated Death benefit
39
What is not covered by Medicare Part B?
- Dental Care, dentures
- Cosmetic surgery
- Hearing AIDS
- Eye exams
40
Once the contract is placed in written form, all previous and prior understandings of a verbal contract will not be allowed to contradict the written contract. This is known as:
Parol Evidence Rule
41
As a rule of thumb, it is best if consumer debt does not exceed:
20% of net income
42
Which of the following are included among the tools available the fed reserve can use to accomplish its responsibilities?
1. ) Open Market Operations
2. ) Deficit spending
3. ) Discount rate change
4. ) Treasury bull issuance
Answer is 1 and 3.
2. ) falls under fiscal policy in which the executive and legislative government branches control
4. ) Treasury Department issues treasury bonds not the fed
43
Which of the following statements of each industry and its regulatory body are true?
1. ) Insurance industry is primarily regulated by each of the 50 states
2. ) Majority of banks are subject to federal regulation by fed reserve system and the FDIC
3. ) Pension plans are primarily subject to federal regulation
4. ) Organized stock exchange, such as NYSE, are primarily regulated by the federal government
Answer is all are true.
44
What comes under an exemption from registration status of the investment advisors act of 1940?
Advisors whose only clients are insurance companies.
Note: LATEs, banks and bank holding companies that are not investment companies, and advisers who advise and service only securities obligated by the US government are all exceptions
45
When an employee accepted workers compensation, an employer is protected from being sued by who?
A suit by the employee
46
A shift “up and to the left” of the supply curve results in:
Results in a decrease of a good or service being supplied
47
You notice your clients business’ collection period for accounts receivable has been increasing. What does the increase suggest about the firms credit policy?
The credit policy is becoming too lenient.
48
Which is not considered a medical expense for a special needs individual?
A. Moving or modifying electric outlets or fixtures
B. Tuition for attendance at a special needs school
C. Admission and transportation to a medical conference
D. Mgmt. fees of special needs trust
D. Mgmt. fees for a special needs trust
49
When completing insurance planning for someone with special needs, what generations should be considered when calculating death benefit need?
Two generations should be considered. The generation of the individual w/ special needs and their parents generation.
50
Required delivery method of the Disclosure of material conflicts of interest prior to entering a financial planning agreement?
Material conflicts of interest can be disclosed either orally or in writing. It is not required to give these in writing.
51
CFP Board Code of Ethics are:
General statements expressing the ethical and professional ideals certificates and registrants are expected to display in their professional activities.
52
Integration factors of CFP boards financial planning and practice standards of planning process:
- # of relevant elements of the clients personal and financial circumstances that the financial advice may affect
- length of time the clients personal and financial circumstances may be affected by the financial advice
- portion and amount of the clients financial assets that the financial advice may affect
53
What is required in the first step of the financial planning process?
- obtaining qualitative and quantitative info
- Analyzing the info
- Address incomplete info
54
Securities Act of 1933
- Regulates issuing new securities
| - requires prospectus is with new issues before purchase
55
Securities act of 1934
- Regulates secondary market
| - created SEC to enforce security regulations and laws
56
Investment company act of 1940
- Authorized the SEC to regulate investment companies
| - 3 types of investment companies: open end, closed end, UITs
57
Investment advisors act of 1940
Required investment advisors to register with the SEC
58
Securities Investors Protection act of 1970
- Created SIPC insurance for investors from brokerage firm failures
- protects accounts opened regardless of citizenship
59
Insider Trading and securities fraud enforcement act of 1988
- defines insider trading as anyone with info not available to public
- insiders can’t trade of inside info
60
Treasury bills
- Issued in varying maturities up to 52 weeks
| - $100 denomination increments through treasury up to $5MM per auction. Larger Amt through competitive bid
61
Commercial paper
- short term loans b/w corporations
- mature 270 days or less and no SEC registration needed
- denomination of $100,000, sold at a discount
62
Banker Acceptance
- facilities Import/Export
- mature 9 months or less
- can be held till maturity or traded
63
Eurodollars
-deposits in foreign banks denominated in US dollars
64
Price-Weighted average vs Value weighted index
- price weighted uses price of the stock and ignores market cap values (DOW Jones)
- value weighted incorporates market cap of individual stocks into the average
65
Affect Heuristics define
-judging something, do they dislike or like a company based on non financial issues
66
Define Anchoring
-attaching or anchoring thoughts to a reference point even there it may have no logical relevance or not pertinent to issue in question
67
Define Availability Heuristic
-decision maker relies upon knowledge that is readily available in their memory
68
Define bounded rationality
Individuals make decisions, their rationality is limited by the available info, tractability of the problem, cognitive limitations, and time available to make the decision
69
Define confirmation bias
People tend to filter info and focus on info supporting their opinions
70
Define Cognitive dissonance
Tendency to misinterpret info that is contrary to an existing opinion or only pay attention to info that supports an existing opinion
71
Define Disposition Effect
Normal investors do no mark their stocks to market prices. They create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed
72
Define familiarity bias
Investors tend to overestimate or underestimate the risk of investments with which they are unfamiliar or familiar
73
Define Gamblers Fallacy
Investors often have incorrect understanding of probabilities which can lead to faulty predictions
74
Define Herding
People tend to follow the masses or the “herd”
75
Define hindsight bias
Hindsight is looking back after the fact is known and assuming they can predict the future as readily as they can explain the past
76
Define prospect theory
People value gains and losses differently. They value gains less than losses incurred. A loss of same amount of money is a bigger deal
77
Define Similarity heuristic
Used when a decision or judgement is made when an apparently similar situation occurs even though the situations may have very different outcomes
78
Name all systematic risks in investments
Remember acronym PRIME
- Purchasing power risk
- Reinvestment rate risk
- Interest rate risk
- Market risk
- Exchange rate risk
79
What are all the unsystematic risks in investments
Remember acronym ABCDEFG.
- accounting risk
- business risk
- country risk
- default risk
- executive risk
- financial risk
- government regulation risk
80
What measure of risk does the capital market line use?
Standard deviation.
81
What is Arbitrage Pricing Theory?
- asserts pricing imbalances cannot exist for any significant amount of time
- uses multi-factor model
- STD and Beta are not inputs used in formula
- attempts to explain return by sensitivity to factors
82
What is the dividend payout ratio?
Dividend payout ratio = Common stock dividend divided by EPS
83
What is the Return on Equity formula?
ROE = EPS divided by stockholders equity per share
84
What do technical analysts use in their analysis?
Use Dow Theory, charting, market breadth, advance decline line, short interest, odd lot trading, market volume
85
What do fundamental analysts use in their analysis?
Use financial statement analysis (ratios) and economic data
86
What does efficient market hypothesis weak form reject and support?
It supports fundamental analysis and rejects technical analysis as this form thinks security reflects all historical price and volume data
87
What does efficient market hypothesis semi-strong form support and reject?
It supports insider trading as means to get above average return and rejects both technical and fundamental analysis.
88
What does efficient market hypothesis strong form support and reject?
It suggests stock prices reflect all available info and react immediately to new info
-rejects technical, fundamental analysis and insider info to help
89
What are the three types of municipal bonds?
- general obligation bonds are back by full faith of taxing municipality
- revenue bonds are backed by the revenue of a specific project
- private activity bonds are used to finance construction of stadiums
90
What are the two insuring municipal bond companies?
- American municipal bond assurance corp.
| - municipal bond insurance association corp
91
Yield summary: Highest value to lowest value of a discount bond (ytm, ytc, etc.)
Yield to call
Yield to maturity
Current yield
Coupon or nominal yield
92
Yield summary: Highest value to lowest value of a premium bond (ytm, ytc, etc.)
Coupon or nominal yield
Current yield
Yield to maturity
Yield to call
93
Explain bond duration and modified duration aspects:
- bigger the duration the more price sensitive or volatile the bond is to interest rate changes
- duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk
- modified duration is a bonds price sensitivity to changes in interest rates
- bond portfolio should have a duration equal to the investors time horizon to be effectively immunized
94
How do you calculate net operating income?
Take your net income number and add back depreciation and interest.
-do not include debt payments in Calc of net income
95
How do you calculate the intrinsic value for a call and put option?
For a call option: stock price - strike price
| For put option: strike price - stock price
96
What does the Black Scholes model calculate and what variables does it use?
```
This models determines the value of a call option
Variables used:
-current price of underlying asset
-time until expiration
-risk free rate of return
-volatility of underlying asset
```
97
What does a put/call parity calculate or complete?
This model attempts to value a put option based upon a call option
98
What does the binomial pricing model calculate or explain?
The model explains prices based upon the underlying asset price can only move in one of the two directions
99
What is the group model of the HMO?
It is a arrangement that is sometimes known as the network model.
-also, all HMOs employ gatekeepers
100
What are the mandatory provisions for a HI policy?
Grace period and Reinstatement
101
A way to to perform risk sharing:
Incorporate. Incorporating is an example of risk sharing
102
Which branch of government interprets and enforces state insurance code rulings?
Executive branch - this branch enforces and the state insurance commissioner is at the executive branch level
103
What insurance covers the hull of a ship?
Ocean marine insurance
104
What does an inland marine insurance policy cover?
This covers against property losses to goods in transit.
105
What is the probation period in a disability income policy?
The time the insured must wait after the issue of the policy before specified conditions will be covered.
106
What are cancelable disability insurance policies?
Cancelable polices are not renewable. They are one time temporary policies, not common anymore and best avoided.
107
On homeowners policy where other structures are covered, coverage is what percent of dwelling?
10%
108
What does a HO-6 policy cover (condo)?
Covers all interior walls for a condo. Building and roof are covered by the condo association policy
109
What coverage does a commercial general liability contract not have?
“Other structures” coverage is not on a CGL contract
110
What is a split dollar LI policy?
It is an arrangement where an employer and employee general share the premium cost and cash value for death benefit of a life insurance policy covering the life of the employee
111
Non-forfeiture rights ensure what for an insurance policy?
It arranges a orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event insured terminated policy or coverage
112
What are LI conversion privileges?
Generally they are part of the term insurance policy that allows them to be changed over to a cash value insurance without proof of insurability
113
Collateral Source rule
Survival of a tort action means that even in event of death if the victim or the tortfeasor, the tort will remain actionable
114
What is a aleatory contract?
One party pays more than the other party
115
Express authority
Authority written in the contract
116
Implied authority
Actions assumed to be part of an agents repertoire within his or her rights
117
Apparent authority
Authority is when a 3rd party believes there is authority by signs, etc., but none exists
118
Personal use asset gain or loss treatment
Gains: short term or long terms, depends on holding period
Losses: not deductible or can not be recognized
119
Capital asset gain or loss tax treatment
Gains: long term or short term, depends on holding period
Losses: capital loss deductible to extent of gains plus $3000
120
Trade or business gain or loss tax treatment
Gains: short term or long term depends on holding period
Losses: Ordinary loss, deductible against ordinary income
121
Trade ordinary income gain or loss tax treatment
Gains: ordinary income
Losses: ordinary loss, deductible against ordinary income
122
What are AMT Preference items?
- preferences can only be positive & thus, preferences reduce the benefits initially received when computing regular tax
- Arise due to deductions or exclusions that provide large benefit
123
What are the 3 AMT preference items?
- percentage depletion: percentage taken for regular tax in excess of the adjusted basis of property
- Intangible Drilling costs: preference is excess of regular tax deduction over AMT amortization x (65% x oil/gas income)
- interest of private activity bonds: interest is included in income for AMT and expenses offset interest income for AMT
124
Examples of when to use 3-year general depreciation system for:
Tractors, rent to own property
125
Examples of when to use 5-year general depreciation system for
Autos, computers, taxis, office machinery
126
Examples of when to use 7-year general depreciation system for
Office furniture & fixtures, at machinery and equipment
127
Examples of when to use 27.5-years general depreciation system for
Residential rental home
128
Examples of when to use 39-year general depreciation system for
Office building, warehouse
129
The level of Dividend Reduced Deduction available in a C-Corp for less than 20% ownership:
50% dividend deduction
130
The level of Dividend Reduced Deduction available in a C-Corp for at least 20% and less than 80% ownership:
65% dividend deduction
131
The level of Dividend Reduced Deduction available in a C-Corp for at least 80% ownership:
100% dividend deduction
132
What are the 5 requirements placed on a corporation to be eligible for “S-Corp” tax status?
- corp can’t have more than 100 shareholders
- ownership of S-corp stock is restricted to individuals who are US citizens or US residents, estates, certain trusts, and charities. ESBTs is one trust allowed ownership
- must be eligible corp created under laws of the US or any state
- insurance companies, domestic international sales corps, and certain financial institutions not eligible
- are only allowed one class of outstanding stock
133
What are shares called that are repurchased by the corporation who issued them?
Treasury Shares
134
What is the “fourth market” in trading securities?
Fourths market is where corporations and institutional investors deal directly with each other.
135
What measure of risk does the capital market line use?
Uses standard deviation
136
What does the arbitration clause call for set by the SEC and FINRA?
Calls for voluntary negotiations first and then if that fails, they require arbitration to take place
137
How does the Value Line Average index compute daily value?
Uses geometric average
138
Who are highly compensated employees?
This with the following are:
- owner of more than 5% for current and prior year
- pay in excess of $130k for prior plan year
139
What entities can establish a 401k?
Corporations, Partnerships, LLCs, Proprietorships, Tax-exempt entities
140
Requirements for owners to sell business with a ESOP plan and qualify for no recognition of gain treatment?
- ESOP must own 30% of corp.’s stock right after sale
- sellers must reinvest proceeds into qualified replacement securities within 12 months and hold them for 3 yrs.
- corp establishing ESOP must have no class of stock outstanding that is tradable on the markets
- ESOP may not sell stock acquired from rollover for 3 years
- Sellers and 25% shareholders in the corp can’t have stock acquired by the ESOP through rollover
- stock sold to ESOP must be common or convertible preferred stock and must be owned for 3 years prior to sale
141
Exceptions to 10% early withdrawal penalty on retirement plan distributions
- death
- attainment of age 59 1/2
- disability
- substantially equal periodic payments (72t)
- medical expenses exceeding 7.5 percent AGI
- $5k per taxpayer for birth or legal adoption
- QDRO
- Qualified public safety employee who separates from service after age 50
- obtaining age 55 and separating from service
142
Prohibited IRA transactions:
- selling, exchanging or leasing property to an IRA
- Lending money to an IRA
- receiving unreasonable comp for managing the IRA
- pledging an IRA as collateral for a loan
- borrowing money from an IRA
- buying property for personal use with IRA funds
143
What act imposed the first constitutional income tax?
Revenue act of 1913
144
What is accrual accounting method?
Business recognizes income when the taxpayer has a right to collect
145
What costs must be capitalized by a business
Costs to improve, better, extend the life of an asset
146
What is max amount refundable for child tax credit?
$1400 per child if no tax obligation
147
What amount of capital losses can a bargain sale cause?
$0 - bargain sales do not generate capital losses
148
Requirements to disclaim a bequest
- Disclaiming party cannot benefit from the property
- can’t direct any future interest of property
- disclaimer must disclaim property within nine months of the date of death
- disclaim must be in writing
149
Exceptions to the terminable marital deduction rule include:
- six month survival contingency
- a terminable interest, over which the surviving spouse has a general power of appointment
- Qualified terminable interest property trust
- charitable remainder trust where a spouse is the only noncharitable bene
150
Common objectives of life insurance
- protect income stream for benes
- source of funds for education
- provide liquidity at death
- source for retirement income
- create or sustain family wealth
151
LI transfer for value exceptions
- to insured
- to a partner of the insured
- to a partnership in which the insured is a partner
- a corporation in which the insured is a shareholder or officer
- to a transferee who takes the transferors basis in the contract
152
Which is not a qualified retirement plan in the list: ESOP, 401k, 403b, target benefit plan
403b
153
A parent subsidary group exists if parent company owns what percentage of voting stock?
At least 80%
154
What is a spendthrift trust provision?
Most trusts contain it and it prevents any trust bene from using future distributions to secure credit/loans. Also, it prohibits payment to a creditor if it extends credit to a bene based on future income from trust
155
(A trust) GPOA trust, estate trust, and QTIP trust are all marital trusts which means:
They all dont allow income sharing or splitting
156
What does “net gift” mean?
The gift tax is paid out of the gift making it a net gift to someone
157
Method to value gifted securities
Average of the high and low trade price for the date of the gift.
