pfp 351 exam chpts 1 & 2

True

At the introductory meeting, the financial planner will collect data, come to understand the client's values and goals, establish the scope of the engagement, and discuss fees. True or False?

False ; It is better to pay attention and provide supporting facial and/or body gestures (such as nodding in affirmation) when actively listening to encourage the speaker to continue and to con-vey that the information is important

It is better not to make any gestures to the speaker when an advisor is practicing active listening. True or False ?

You should consult your engagement letter to determine your rights to terminate the relationship. Reason: You should consult your engagement letter to determine your rights to terminate the relationship. All engagement letters should detail the services to be provided as well as details on how the relationship can be terminated. You should not begin to offer subpar planning as this can be considered malpractice. You should not bad mouth your clients as this violates confidentiality.

Roy Al Pain has been a client of yours for several years. During that time, Roy has been rude to both you and your staff on numerous occasions. He has used profanities in front of your staff and other clients, thrown things, and screamed at your staff. You have tired of working with Roy and want to terminate your relationship with him. Which of the following is true? A) You must continue the relationship since only clients can end the client/planner relationship. B) You should consult your engagement letter to determine your rights to terminate the relationship. C) You should start to offer subpar services to Roy in hopes that he will tire of you and end your relationship. D) You should bad mouth Roy in the community and hope it gets back to him so he will decide not to work with you anymore.

1 and 2. Reason : Asking questions about Merrell's family situation, hobbies and activities are appropriate because they convey a genuine interest in the client. Starting the meeting late, regardless of the reason, is inappropriate. Listing clients is generally inappropriate. If the clients have given prior permission then it would be fine, but without such permission, a financial planner should not divulge the names or specific financial information of existing clients.

Steve Stein, a local CFP® practitioner, recently met with one of his new clients, Merrell. During the course of the meeting Steve did the following things: 1. Steve did not meet with Merrell until 10 minutes after the scheduled start time. 2. In order to establish Merrell's confidence in him, Steve told Merrell the names of several well known clients that currently do business with him. 3. Steve asked Merrell several questions regarding Merrell's family situation, hobbies, and activities. Which of these actions would be considered inappropriate?

Interruptions or disruptions, such as texting and bathroom breaks, are common. Rationale Active listeners should give undivided attention and do not allow interruptions or disruptions.

Which of the following are NOT components of "active listening?" A) Requires the listener's undivided attention. B) The listener must put aside irrelevant thoughts. C) Interruptions or disruptions, such as texting and bathroom breaks, are common. D) The listener can nod occasionally to show interest.

Laziness. Reason: Laziness was not discussed in this chapter, whereas the other choices were discussed.

Which of the following are NOT heuristics or cognitive biases discussed in this chapter that can lead to less than optimal decisions by a normal investor? A) The Affect Heuristic. B) Overreaction bias. C) Overconfidence bias. D) Laziness.

All of the above. Rationale All of the above are components of passive listening discussed in this chapter.

Which of the following are components of "passive listening?" 1. Listening in a normal social setting, such as a sermon. 2. Communication rests on one speaker. 3. The listener screens out some information. 4. The listener is thinking about what to say in response which hampers listening. A) 1 only. B) 1 and 2. C) 1 and 3. D) All of the above.

1 and 2. Reason: Statements 1 and 2 are key components to the Humanistic Paradigm discussed in the chapter. Statement 3 is incorrect because the Humanistic Paradigm embraces a close, friendly relation- ship between the client and advisor, such that the client will open up and achieve congruence.

Which of the following are consistent with the Humanistic Paradigm? 1. The majority of Humanistic theories view clients as experts on themselves. 2. The alliance between the counselor and client is extremely important for humanistic counselors and is the basis of the treatment or plan of action. 3. There needs to be a professional distance between the client and advisor where the advisor should stay close to discussing numbers and data with the client. A) 1 only. B) 1 and 2. C) 1 and 3. D) All of the above.

All of the above. Rationale All of the above are used in Traditional Finance.

Which of the following are theories or equations used in traditional finance? 1. Mean-Variance Theory. 2. Modern Portfolio Theory. 3. The Capital Asset Pricing Model. A) 1 only. B) 1 and 3. C) All of the above. D) None of the above.

1 and 2. Reason: "Why" questions may help understand client motives, but they may have limited benefit to the client and could place the client in a defensive posture.

Which of the following are true about "why" questions? 1. While the "why" questions are tempting and may help understand the client's motives, the "why" question may be ill-advised because it could have limited benefit for the client. 2. A "why" question could place the client in a position of having to justify what was done, and that could put the client in a defensive posture. 3. "Why" questions are always the best questions to ask. A) 1 only. B) 2 only. C) 1 and 2. D) All of the above.

An open question starts with the phrase "Isn't it true that ..." Rationale A closed question starts with the phrase "Isn't it true that ...."

Which of the following choices are false as to open or closed questions? A) Open or closed questions are both effective tools for the financial advisor. B) An open question starts with the phrase "Isn't it true that ..." C) A closed question is narrow and can be answered with a word or two. D) None of the above.

An investor who at times is subject to emotion or cognitive biases. Rationale The normal investor is one who can be subject to emotions or cognitive biases. Option a notes a rational investor, which is, a hypothetical machine-like person in Traditional Finance. Option b involves a person not moved by emotion or biases who would apply to the realm of Traditional Finance. An investor guided by Beta calculations alone, would not apply to the premises of Behavioral Finance. D)

Which of the following investors would apply in the realm of Behavioral Finance? A) A rational investor who considers his or her portfolio as a whole at all times. B) An investor not moved by emotion or biases. C) An investor who at times is subject to emotion or cognitive biases. D) An investor guided by risk calculations based on Beta alone.

Markets are Inefficient. Rationale Markets are inefficient is NOT a premise in Traditional Finance. The premise is Traditional Finance is just the opposite, that markets are efficient and stock prices are equal to the fundamental or intrinsic value of the stock.

Which of the following is NOT a premise in Traditional Finance? A) Markets are Efficient. B) Investors are Rational. C) Markets are Inefficient. D) Modern Portfolio Theory Governs.

Posture means nothing. Reason: Posture has meaning and can be a nonverbal cue or sign in the communications process.

Which of the following is NOT true in communicating with a client? A) Posture means nothing. B) Good posture may indicate positive self-esteem. C) Slouching may indicate less interest. D) None of the above.

All of the above. Rationale All of the above are counseling paradigms.

Which of the following is considered to be a counseling paradigm or school of thought? A) Developmental. B) Humanistic. C) Cognitive-Behavioral. D) All of the above.

Behavioral Finance does not abandon Traditional Finance, though some key assumptions are changed. Rationale Behavioral Finance retains some of the helpful notions and equations from Traditional Finance. Behavioral Finance adds factors to some of the equations. Scientific method continues to benefit Behavioral Finance through the well-developed theories and studies developed over many decades. While Traditional Finance is seen as mature and well-developed, Behavioral Finance is not settled and still in its infancy.

Which of the following is the best choice for Behavioral Finance? A) Behavioral Finance throws out all notions and equations from Traditional Finance. B) Behavioral Finance does not abandon Traditional Finance, though some key assumptions are changed. C) Traditional Finance's introduction of scientific method into financial analysis has no benefit to Behavioral Finance. D) Behavioral Finance is a well-developed, well-matured and settled area of finance.

All of the above. Rationale All of the above are basic premises in behavioral finance.

Which of the following is/are basic premises in Behavioral Finance? 1. Investors are normal. 2. Markets are inefficient. 3. The Behavioral Asset Pricing Model applies. A) 2 only. B) 1 and 3. C) 2 and 3. D) All of the above.

The income tax bracket of your client's adult children. Reason: Knowing the income tax bracket of your client's children may be helpful in some situations (for example, when you are determining the most appropriate gift to give a particular person) however, it is generally not essential to the financial planning process. The other three items are more relevant.

Which of the following items of information is least likely to be obtained from your client during the data gathering portion of the client meeting? A) General attitude towards spending. B) The income tax bracket of your client's adult children. C) Employer sponsored employee benefits. D) Repayment term of outstanding debt.

CFP Reason: The CFP® certification is the oldest and best-known certification for financial planners.

Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known?

1 only. Rationale Behavioral Finance has, in recent times, brought more attention to the psychological and sociological aspects of individuals, markets and the financial industry.

Which of the following statements are true? 1. There has been a movement in recent times for the financial industry to be more in touch with psychology and sociology due to their effect and persuasiveness in financial matters. 2. There has been a movement in recent times for the financial industry to focus on asset prices and ignore psychology and sociology issues. 3. Behavioral Finance has nothing to do with issues concerning psychology and sociology. A) 1 only. B) 1 and 3. C) None of the above. D) All of the above.

All 3 schools of thought may be combined. Rationale It was discussed that there may be times that the client's style may necessitate a change to a different school of thought or combination of any two, or all three. These are decisions that should be made by the advisor using his or her best judgment.

Which schools of thought for counseling could an advisor combine? A) Developmental and Humanistic. B) Humanistic and Cognitive-Behavioral. C) Developmental and Cognitive-Behavioral. D) All 3 schools of thought may be combined.

Implementing the financial plan recommendations. Reason: By actually selling the insurance product you are now implementing plan recommendations.

Your client, Jed, engaged you to help him with his financial situation. During the course of your meetings you sold Jed a $1,000,000 life insurance policy. Which part of the financial planning process were you engaged in? A) Analyze and evaluate the client's financial status. B) Monitoring the plan. C) Developing and presenting the financial plan recommendations. D) Implementing the financial plan recommendations.

Process of Financial Planning

-The process of financial planning includes: (1) establishing and defining the client relationship, (2) gathering client data, (3) analyzing and evaluating the client's financial status, (4) developing and presenting financial plan recommendations, (5) implementing financial plan recommendations, and (6) monitoring the plan

CONFIRMATION BIAS

A commonly used and popular phrase is that "you do not get a second chance at a first impression." People tend to filter information and focus on information supporting their opinions.

Engagement Letter

A legal agreement between a professional organization and a client that defines their business relationship.

Financial plan

A written document that generally sets out a list of recommendations to achieve a set of goals and objectives based on an understanding of a client's current financial situation.

Analyze and evaluate the client's financial status. Reason: Preparing financial statements are part of the analyzing and evaluating the client's financial status step of the financial planning process.

After meeting with your new client, Sid, you prepared his current financial statements. Which part of the financial planning process were you engaged in? A) Monitoring the plan. B) Establish and define the client relationship. C) Analyze and evaluate the client's financial status. D) Developing and presenting the financial plan recommendations.

ANCHORING

Attaching or anchoring one's thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question. is also known as conservatism or belief perseverance.

True

Behavioral Finance is more subjective than Traditional Finance and does not have a single cohesive theory True or False?

False. Traditional Finance, not Behavioral Finance, is pure and concerned with risk-reward and risk-return

Behavioral Finance is pure and concerned only with risk-reward and risk-return. True or False?

DEVELOPMENTAL PARADIGM ("DEVELOPMENTAL" SCHOOL OF THOUGHT)

Believes that human development occurs in stages over time. Relationships that are formed early in life become a template for establishing relationships in adulthood. As to emotions, the _______ assumes that all humans develop and progress in a predictable sequence

False ; Normal investors are susceptible to less than optimal decisions due to cognitive biases. When combining the activity and decision of normal investors in the marketplace, biases can have an effect on stock prices.

Biases have no effect on stock prices. True or False?

BEHAVIORAL FINANCE

Contains much of the scientific framework and lessons learned from Traditional Finance, amends some of it with basic assumptions based on normal, more human-like behavior, and supplements other aspects of it with notions from psychology and sociology.

AFFECT HEURISTIC

Deals with judging something, whether it is good or bad

False. These items are external data information which can be obtained from education and professional reading. Internal data includes the client's pertinent family information, insurance portfolio, banking, investment, tax, retirement, and estate planning information.

Examples of internal data include current interest rates, housing market status, job market status, local cost of living, and the expected inflation rate. True or False?

True

Gestures and facial expressions are important clues to communication for the listener. True or False?

COGNITIVE-BEHAVIORAL PARADIGM (COGNITIVE-BEHAVIOR SCHOOL OF THOUGHT)

Humans are beings are subject to the same learning principles that were established in animal research. The basic principles of classical and operant conditioning are assumed to account for an individuals' behavior and understandings throughout their live

True

In Traditional Finance, investors are assumed to be rational. True or False?

Analyze and evaluate the client's financial status. Reason: During the planning process you have already established the relationship as well as gathered the client data. Your next step is to analyze and evaluate the data you received.

Lisa Cooper recently came to your office for her second appointment after receiving your engagement letter. During the meeting you collect several documents from her including her prior year tax returns, estate planning documents, and investment statements and history. You also worked with her on identifying her goals and objectives. Which of the following is the next step in the financial planning process? A) Establish and define the client relationship. B) Analyze and evaluate the client's financial status. C) Implementing the financial plan recommendations. D) Developing and presenting the financial plan recommendations.

False. Emergency funding is considered a short-term goal, along with debt management. All of the other planning subjects are included in long-term goal planning.

Long-term goal planning includes emergency funding, financial security planning, education planning, lump-sum purchase planning, and legacy planning. True or False?

False. Markets are assumed to be efficient in Traditional but not Behavioral Finance.

Markets are assumed to be efficient in both Traditional and Behavioral Finance. True or False?

GAMBLER'S FALLACY

One of the incorrect assumptions from the world of probabilities; in the realm of probabilities, misconceptions can lead to faulty predictions as to occurrences of events.

Objectivity. Reason: The most important quality the planner brings is objectivity. The client is often unaware of their true financial position and the objectivity provided by a knowledgeable financial planner can provide insight into the client's actual financial profile.

One of the most important qualities a professional financial planner brings to the client/planner relationship is: ________________.

True

Open-ended questions are answerable with lengthy response. True or False

True

Personal financial planning is the comprehensive process of formulating, implementing, and monitoring financial decisions that guide the client to achieve financial goals. True or False?

ACTIVE LISTENING

Requires the listener's undivided attention. involves concentration of what the speaker is saying. The listener must put aside irrelevant thoughts.

False. Returns are determined by risk (beta) in Traditional but not Behavioral Finance.

Returns are determined by risk (beta) in both Traditional and Behavioral Finance. True or False?

"Welcome to my office, Reverend Pak." Reason: You should always greet new clients with appropriate salutations. Since Lola is a Reverend you should identify her as such, even if you do not subscribe to her particular faith. Your goal is to make the client feel at ease with you and utilizing the client's formal salutation will help you achieve this. If she encourages you to use her first name then you can do so after your initial meeting.

Reverend Lola Pak, a prospective client, came to your office for the first time today. Which is the most appropriate way to greet her? A) "Welcome to my office." B) "Welcome to my office, Ms. Pak." C) "Welcome to my office, Reverend Pak." D) "Welcome to my office, Lola."

CLOSED QUESTIONS

Seeks a response that is very specific and commonly involves an answer that can be accomplished with a single word or two. ______________ lead with is, are, do, did, could, would, have, or "is it not true that...

False ; Self-talk refers to that ongoing internal conversation one has with oneself that can influence feelings.

Self-talk usually does not influence feelings or behavior True or False?

True

The Humanistic theory emphasizes accepting personal responsibility whereas the other two theories do not. True or False?

DISPOSITION EFFECT

The cognitive bias was "faulty framing" where normal investors do not mark their stocks to market prices. Investors create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed.

True

The nature of the relationship between advisor and client following the Cognitive-Behavioral approach is highly directed True or False?

Personal Financial Planning

The process of formulating, implementing, and monitoring financial decisions integrated into a plan that guides an individual or a family to achieve their financial goals.

HERDING

This cognitive bias is explained just by looking at the word. People tend to follow the masses or the "herd"

False ; Nonverbal communication, including body language, can play an important role in understanding communications, especially when verbal communication is contrary to body lan-guage.

Tone and pitch of voice can indicate congruence or incongruence with the words spoken. True or False?

True

Understanding behavioral biases can aid the financial advisor True or False?

AVAILABILITY HEURISTIC

When a decision maker relies upon knowledge that is readily available in his or her memory, the cognitive heuristic known as "availability" is invoked.

All of the above. Rationale All of the above are important in nonverbal communication and behavior.

Which of the following are important in nonverbal communication and behavior? 1. Body positioning. 2. Body movement. 3. Voice tone. 4. Voice pitch. A) 1 only. B) 1 and 2. C) 1 and 3. D) All of the above.

External Data external

_________ , also known as the ________ environment includes the current economic, legal, political, sociological, tax, and technology environments. Examples of ________________ are the current interest rates, status of the housing, job, insurance and investment markets, the local cost of living, and the expected inflation rate.

Internal Data

_____________ has both quantitative and qualitative elements. Some quantitative data includes family specifics, insurance, banking, investment, tax, retirement, and estate planning information. Some qualitative data includes the client's values, attitudes, expectations, goals, needs, and priorities.