ACC 356 Midterm
Reverend Lola Pak, a prospective client, came to your office for the first time today. Which is the most appropriate way to greet her?
"Welcome to my office, Reverend Pak." Rationale 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.
what is the savings rate equation
(savings + employer match) / gross pay
Thalmus, a local CFP® practitioner, recently met with one of his new clients, Merrell. During the course of the meeting, Thalmus did the following things: 1. Thalmus did not meet with Merrell until 10 minutes after the scheduled start time. 2. In order to establish Merrell's confidence in him, Thalmus told Merrell the names of several well known clients that currently do business with him. 3. Thalmus asked Merrell several questions regarding Merrell's family situation, hobbies, and activities.Which of these actions would be considered inappropriate?
1 and 2. Rationale 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.
Marcus and Theresa are married. Marcus is a police officer and earns $50,000 per year. He contributes 10% of his salary to his retirement plan. His employer also makes a 5% match contribution. Theresa stays at home with their children and contributes $5,000 to an IRA. What is their total saving rate?
25.0%. Rationale For married people, you add both spouses' contributions and income plus any employer match.Savings Rate = (Employee Contributions + Employer Contributions) ÷ Gross Pay25% = [(Marcus's Contribution of $5,000 + Employer Contribution of $2,500 + Theresa's IRA Contribution of 5,000) ÷ $50,000].
Perry, age 30, is a single father of one daughter, Katie, age 11. Perry works for an advertising agency with an annual income of $40,000. Due to his messy divorce and several student loans that drain his financial resources, Perry lives paycheck to paycheck. His doctor recently discovered that he has high cholesterol and Perry is worried that his health may fail. He wants to purchase a life insurance policy to protect Katie in the event of his untimely death (his employer does not yet offer a group plan). Assuming he wants to buy as much coverage as possible for the cheapest price, which of the following policies should Perry buy?
A 20-year term insurance policy. Rationale The term policy is the only policy that is not permanent and therefore, is the cheapest policy. The other three are permanent policies and will cost more for the same amount of coverage.
All of the following are appropriate savings or investment vehicles in which to maintain an emergency fund, EXCEPT: A)5-year certificates of deposit. B)Money market mutual funds. C)Savings accounts. D)U.S. Treasury bills.
A)5-year certificates of deposit.Rationale A 5-year CD would not be appropriate because emergency funds should be kept in highly liquid savings or investment instruments. Five years is too long to wait for emergency funds. Also, most CDs impose interest penalties for withdrawal of funds prior to maturity.
Which of the following would not be considered a personal risk?
A)Becoming disabled due to a car accident. B)Injuring a passenger in your vehicle during an auto accident that was your fault. Rationale Injury to another is considered a liability risk. The other three examples are personal risks. C)Dying at age 42 given a normal life expectancy of age 80. D)Being diagnosed with a curable form of cancer.
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.
All of the above.
Which of the following is/are basic premises in Behavioral Finance?1. Investors are normal.2. Markets are inefficient.3. The Behavioral Portfolio Theory governs.
All the above
Which of the following is most likely to be an insurable risk?
An automobile accident due to negligence. Rationale The losses should be accidental, measurable and determinable, not catastrophic to the insurer, with a large number of homogenous exposure units that allow for forecasting of losses. An automobile accident due to negligence would be insurable. Intentionally burning down your house is not accidental. Gambling losses are not accidental. War is often catastrophic to the insurer.
Nigel's financial planner is preparing his balance sheet. Which of the following would be considered an "investment asset?
An education fund. Rationale The education fund is an investment asset. CDs with maturity of 1 year are considered "Cash and cash equivalents." The unvested portion of a pension plan is potentially forfeitable, there- fore should not be included on the balance sheet. The vacation home is a personal use asset. (Note that a vacation home may be primarily rental which would make it an investment asset - but the planner should assume it is personal unless told otherwise.)
You recently met with your client, Tripp, to discuss his insurance policies. Tripp was reading a book on contracts and wanted to know how his insurance contract related to the material he was reading and to his circumstances. During your conversation, Tripp made several statements to clarify that he understood insurance. Which of the following statements would you have told him was incorrect?
An insurance contract is unilateral, where both parties agree to a legally enforceable promise. Rationale An insurance contract is unilateral, where one party agrees to a legally enforceable promise.
Raven 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?
Analyze the client's current course of action and potential alternative courses of action. Rationale During the planning process you have already established the relationship as well as gathered the client data and identified and prioritized goals. Your next step is to analyze the client's current course of action and potential alternative courses of action.
After meeting with your new client, Nala, you used a Monte Carlo simulation within your financial planning software to project the likelihood of meeting her retirement objective based on her current retirement plan contributions and investment portfolio allocation. Which part of the financial planning process were you engaged in?
Analyzing the client's current course of action and potential alternative courses of action. Use of available technology and tools such as Monte Carlo simulations to evaluate the client's likelihood of meeting goals based on the current course of action is part of the analyzing the client's current course of action and potential alternative courses of action step of the financial planning process.
If a risk has a high frequency of occurrence and a high severity, you should:
Avoid the risk. Rationale If the occurrence is frequent and high, you should avoid the risk.
Which is false: An individual's attitudes, values, and beliefs about money are frequently inherited from their parents and other family members. B)A client's perceptions of the purpose of money and how it should be used can have a profound impact, either positive or negative, on the financial planning process and the client's ability to meet their goals. C)Adults can be expected to mimic the money beliefs and behaviors observed and learned during childhood.Rationale D)A client's money beliefs may become an obstacle to reaching their goals.
C)Adults can be expected to mimic the money beliefs and behaviors observed and learned during childhood.Rationale Option c is a false statement. There is no set pattern that dictates how the money beliefs learned during childhood will manifest in adulthood. In some cases the adult will respond by acting in the opposite manner, while in other cases the adult will mimic the beliefs and behaviors from childhood.
Annabelle's financial planner is preparing his balance sheet. Which of the following would not generally be considered "cash and cash equivalents?"
Cash value in life insurance. Rationale The cash value in life insurance is generally considered an investment asset except when the client intends to withdraw it within the year. The other three are typical "cash and cash equivalents."
Levi's car was totaled in a wreck. He failed to yield to oncoming traffic and Levi was found to be at fault. The driver of the car he hit did not have insurance. Levi's own car insurance policy reimbursed him for the property damage to his own vehicle. What type of coverage would pay for this?
Collision coverage. Rationale Collision coverage would pay for property damage to your own vehicle when you are at fault in an accident. Liability coverage pays for bodily injury or property damage to others. Uninsured motorist coverage pays for damage when the other party at fault is underinsured or not insured. Note in this example the 3rd party is not at fault. Comprehensive coverage pays for things other than collision, for example theft.
Theo visited your office today. He is 55 years of age. He is divorced and has two children. One child recently graduated from college and the other child is just entering into high school. Theo earns $350,000 a year as the operator of a very specific type of medical equipment. There are only two of these particular machines in existence. He has provided you the following financial information.• Cash and Cash Equivalents - $100,000• Annual Non-Discretionary Expenses - $300,000Which of the following is true?
Given all the facts and circumstances, Theo probably does not have an adequate emergency fund. Rationale Theo probably does not have an adequate emergency fund. His emergency fund is 4 months ($100,000 ÷ ($300,000 ÷ 12)). This is within the normal range of 3 - 6 months, however, since he is older and has a very specialized job, 4 months is not likely to be an adequate amount of time for him to get another job paying the amount of money he is currently making. A slightly longer emergency fund ratio would be better for this particular client. Disability insurance is relevant in determining whether the emergency fund ratio is appropriate because some job losses are a result of disability. The elimination period incorporated in the disability policy should be considered.
Jay purchased a new home for $100,000. He put $20,000 down and financed the $80,000 balance. What is the impact of this transaction on his net worth?
His net worth remains the same. Rationale His net worth will remain the same. His cash account will decrease by $20,000, his personal use assets will increase by $100,000. His liabilities will increase by $80,000. Therefore, using the formula: Assets - Liabilities = Net Worth [($100,000 - $20,000) - $80,000 = $0] it becomes clear that net worth remains the same.
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?
Implementing the financial planning recommendations. Rationale By actually selling the insurance product you are now implementing plan recommendations.
Your client, Marvin, asked you to prepare his financial statements. He believes that his wife is the root of all of their financial problems because of her spending habits. His wife, on the other hand, believes that most of their money goes to pay routine expenses like house, auto, etc. Which financial statement will help them resolve this disagreement?
Income Statement. Rationale The income statement details the income and expenses of the household. The balance sheet identifies the assets the family owns, liabilities and the family's net worth. The statement of net worth explains the changes in net worth between two balance sheets by reporting financial transactions that are not reported on the other statements. The statement of financial position is another name for the balance sheet.
Jackson and April recently purchased a new home. They came to your office to ask several questions about their homeowner's policy. Which of the following is true regarding homeowners insurance?
Jackson and April should probably have an open perils and replacement value for all property covered under the homeowners policy.Rationale Jackson and April should probably have open perils and replacement value for all property covered under the homeowners policy because it provides the best coverage. Most policies do not cover all possible losses. For example, they often exclude losses due to earth movement, mold, rising water, sewer backup, war, nuclear accidents, neglect, dogs and intentional acts. Most policies require additional coverage for certain valuable collections or items, like guns, wine, coins, stamps, cash and jewelry. Broad peril coverage means the insurance company covers many perils, however, they are specific in nature.
Camila had a very bad year. She wrecked her car in January when she ran a red light (because she could not see properly having left her contacts at home) and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Camila decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Camila got in the habit of leaving her new car unlocked and it was stolen. After Camila bought another car she decided that she really liked the insurance adjuster and wanted to see him again, so, one day she purposefully set her car on fire. In her carelessness, she also caught her hand on fire. Camila was depressed over her circumstances and decided she didn't want to go back to work. She filed a falsified disability claim for the loss of use of her hand (even though she could still use her hand). Which of the following statements is true?
Leaving the car unlocked is a morale hazard. Rationale Driving with poor eyesight is a physical hazard. Leaving the car unlocked is a morale hazard. Burning the car on purpose and filing a false disability claim are both moral hazards
Your client, Meg, asked you several questions about her balance sheet. She doesn't understand how the assets, liabilities and net worth are related. Which of the following statements is true?
Liabilities = Assets - Net Worth. Rationale Option a is incorrect because Net Worth = Assets - Liabilities, which can also be written as Assets = Net Worth + Liabilities or Liabilities = Assets - Net Worth. Balance sheets reflect the assets, liabilities, and net worth at a particular point in time. A financial planner would need more than one balance sheet to measure how the assets, liabilities, and net worth changed over a period of time.
Utilizing the three panel approach, which of the following would be evaluated in Panel 1 - Risk Management?
Life Insurance. Rationale Life insurance would be evaluated as part of Panel 1 - Risk Management. The emergency fund would be evaluated as part of Panel 2 - Short Term Savings and Investment. The education and retirement funds would be evaluated as part of the Panel 3 - Long Term Savings.
Mai purchased a life insurance policy on her own life. Her husband, George, is the beneficiary of the policy. Which of the following is not a necessary legal element of the contract?
Listed beneficiary. Rationale The elements of a valid contract are:(1) offer and acceptance,(2) legal competency of all parties,(3) consideration, and(4) lawful purpose.A listed beneficiary is not a requirement of the contract.
Which of the following statements concerning the valuation of assets on the balance sheet is correct?
Money market accounts are unlikely to lose value over time. Rationale Money market accounts are considered "cash equivalents" and are unlikely to lose value over time. A publicly traded company is easier to value than a privately-held small business. Assets should be valued on the balance sheet using the current fair market value. The value of personal use assets is generally determined by client estimation.
Nathan, age 35, came into your office today. He has been a client of yours for a long time. He has neglected his insurance portfolio up until this point and wants to complete the personal risk management process. Together you determine that his insurance objective is to "insure, in the most economical way, only those risks that have the potential of causing catastrophic financial loss." You also identified all of the possible risk exposures. In evaluating these risks, which of the following is true?
Most, if not all clients, need health insurance. Rationale Loss frequency is the expected number of losses that will occur within a given period of time. Loss severity refers to the potential size or financial damage of a loss. Catastrophic risks are relative such that what may be catastrophic to one person may not be catastrophic to another. For example, death may seem catastrophic from a personal nature, it is not always catastrophic from a risk management perspective. While a client might emotionally feel the loss of a 95 year old grandmother, her death would not be catastrophic from a risk management perspective if she is not caring for any other individuals financially. It is rare that a client can self insure their health care therefore, in general, most if not all clients need health insurance. Perils are the proximate or actual cause of a loss that upon occurrence could lead to financial hardship.
Ginny and Max own a rental home on the Gulf Coast. They insured their property with their local insurance company. The policy provides protection against losses caused by perils that are specifically listed as covered in the policy. What type of policy do they have?
Named-perils policy. Rationale This is an example of named-perils policy. The all-risk or open-perils policy provides protection against all losses unless they are specifically excluded under the policy. The identified-perils policy is a fictitious term.
Holly is a well-known financial planner in your area. Her clients rave about how great she is and after meeting her you understand why. While describing her to your friend, Buddy, Buddy wanted to know what was so great about financial planners in general. You responded with the following statement "One of the most important qualities a professional financial planner brings to the client/planner relationship is: ________________." A)
Objectivity. 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.
Which of the following stated goals of a client is most workable for financial planning purposes?
Of most importance, to purchase a vacation home within 5 years at a cost of about $100,000. Rationale A workable goal for financial planning purposes should be specific, prioritized, and quantified. Answer choices a, b, and d fail to meet these criteria.
Chandra is a doctor that specializes in performing heart surgery on babies. She has a long-term disability policy that covers her in the event that she can no longer perform this type of surgery due to disability. What type of long-term disability insurance policy does she have?
Own occupation. Rationale This is an example of own occupation. Own occupation defines disability as being unable to carry out each and every one of the duties of your own employment. Any occupation defines disability as being unable work in any occupation for which you are qualified. A hybrid policy is one that contains characteristics from both own occupation and any occupation. Specific occupation is a fictitious term.
Lloyd is interested in purchasing a personal liability umbrella policy (PLUP). He has asked you to educate him on this type of policy. Which of the following is true?
PLUPs are usually sold in million dollars of coverage. Rationale PLUPs are generally inexpensive to purchase and should generally be purchased by everyone. Lloyd still needs a PLUP because his home and auto insurance policies are likely to be insufficient in coverage should Lloyd be subject to a large claim for liability.
A financial planner is currently preparing a client's cash flow statement. Which of the following would the planner classify as a financing activity?
Paying a credit card debt. Rationale Paying credit card debt is a financing activity. The other three are examples of investing activities. (other three The purchase of a new residence. B)A contribution to a retirement account. C)A cash inheritance.)
During your work with your new client, Lamar, you created several visual representations of how your client spends his money. Which approach to financial planning are you utilizing?
Pie Chart Approach. Rationale The pie chart approach provides a visual representation of how the client spends his money. The cash flow approach takes an income statement approach to recommendations. The financial statement approach helps establish where the client is today and uses ratio analysis to determine the client's weaknesses and strengths. The metrics approach utilizes quantitative benchmarks to determine where a client should be.
During your recent meeting with Spencer, a new client, you discussed the concept of risk. You defined several terms for Spencer. Which of the following terms is defined as: the possibility of loss, but no possibility of gain?
Pure Risk. Rationale Perils are the proximate or actual cause of a loss that upon occurrence could lead to financial hardship. Risk transfer is the transferring or shifting of risk of loss through insurance or warranty. Open-perils are called "all-risk" policies, and cover all risks except those which the policy specifically identifies as excluded.
The basic housing ratio is within the normal range, but the broad housing ratio is not.RationaleThe basic housing ratio (HR 1) is at 20% which is within the normal range of 0 - 28%. PITI ÷ gross pay = [($14,000 + $1,000 + $5,000) ÷ $100,000]. The broad housing and debt percentage (HR 2) is 43% [(PITI of $20,000 + Credit Card Debt of $12,000 + Student Loan Payments of $5,000 and Car Payment of $6,000) ÷ $100,000]) which is above the normal range of 0 - 36%.
Sensitivity Analysis. Rationale This process is called sensitivity analysis. Monte Carlo analysis is a mathematical simulation to determine the probability of an outcome. The other choices are simply distractors.
Which of the following statements concerning income and expenses listed on the Income Statement is correct?
Social Security taxes withheld is an example of a fixed expense. Rationale Social Security taxes withheld is an example of a fixed expense. Charitable contributions may be either discretionary or non-discretionary expenses dependent upon the client's perspective. The matching portion of a 401(k) contribution does not appear on the income statement. Entertainment expenses is an example of variable expenses.
Which of the following property ownership regimes has a right of survivorship feature?
Tenancy by the Entirety. Rationale Tenancy by the Entirety has a right of survivorship feature. The other types of ownership do not have a survivorship feature. Note that some community property states do allow for some right of survivorship features, but that is not consistent with this type of ownership.
Dale and Chip (two brothers) are joint property owners. Dale owns 60% and Chip owns 40%. How is this property owned?
Tenants in Common. Rationale The property cannot be owned as Sole Ownership because there is more than one owner. It cannot be Joint Tenancy because the brothers have unequal ownership interests. It cannot be Tenancy by the Entirety because the joint owners are not married to each other. Therefore, the brothers own the property as Tenants in Common.
You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known?
The CFP® certification is the oldest and best-known certification for financial planners.
A client, Claudia, age 35, came into a financial planner's office today. She provides the planner with the following information for the upcoming year:• Income - $100,000• Principal and Interest payments on home mortgage - $14,000• Homeowners insurance - $1,000• Property taxes - $5,000• Living Expenses - $40,000• Credit Card Debt Payments - $12,000• Savings - $5,000• Student Loan Payments - $5,000• Car Payment - $6,000
The basic housing ratio is within the normal range, but the broad housing ratio is not. Rationale The basic housing ratio (HR 1) is at 20% which is within the normal range of 0 - 28%. PITI ÷ gross pay = [($14,000 + $1,000 + $5,000) ÷ $100,000]. The broad housing and debt percentage (HR 2) is 43% [(PITI of $20,000 + Credit Card Debt of $12,000 + Student Loan Payments of $5,000 and Car Payment of $6,000) ÷ $100,000]) which is above the normal range of 0 - 36%.
Which of the following correctly describes motivational interviewing?
The focus of motivational interviewing is on overcoming ambivalence to change. Rationale Behavioral changes may be necessary in order for clients to achieve their financial goals. Motivational interviewing is a communication technique focused on overcoming ambivalence to change by guiding the client to:1. express the desire and reason a change is needed (their motivation for change), 2. discover their ability to change, and3. commit to making the change.
Kayne wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches?
The human life value method estimates the present value of income generated over a person's work life expectancy, after adjusting for the expected consumption of the survivors. Rationale The human life value method estimates the present value of income generated over a person's work life expectancy, after adjusting for the expected consumption of the insured (not survivors).
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?
The income tax bracket of your client's adult children. 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 is true regarding the financial needs method used to determine life insurance needs?
The readjustment period typically lasts for one to two years following the death of the breadwinner. Rationale Most clients do not want their dependents suffering a decrease in their standard of living. Final expenses and debts are a key feature of this method because they may be substantial and are often due close to death. The so-called blackout period is the period of time between when Social Security survivor benefits to a spouse under age 60 stop (when the youngest child reaches age 16) and retirement or widow(er) benefits begin at age 60 or later.
You recently met with your client, Leonardo, age 40. Leonardo is widowed and has one dependent child. During your meeting with him you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is not correct?
The selling of Leonardo's Jet Ski is an example of risk reduction. Rationale The selling of the Jet Ski is an example of risk avoidance (risk avoidance is the avoidance of an activity so that a financial loss cannot be incurred). Risk reduction is the implementation of activities that will result in the reduction of the frequency and / or severity of the loss. Not purchasing life insurance is an example of risk retention (the state of being exposed to a risk and personally retaining the potential for the loss). Risk transfer is the transferring or shifting of the risk of loss through insurance or warranty.
Ricky and Lucy Martin are married and both are 65 years of age. Ricky is retired from the military and receives a military pension as well as disability benefits from an injury he sustained during the Gulf War. Lucy is a retired nurse. Lucy is fairly healthy, although she is borderline diabetic. Ricky is diabetic and had a triple bypass several years ago. He also has extensive hearing loss in one ear that he sustained during his military service. Both have a family history of Alzheimer's disease. Their home is paid for and they just purchased a new car with financing. They have three self sufficient adult children and two grandchildren. The Martins have a life insurance policy on each of their adult children they purchased when the children were young with a death benefit of $10,000. All three policies have a cash value of $3,000 each. They also have policies on each other with a death benefit of $100,000. The Martins live comfortably with their pensions but do not have a lavish lifestyle or high net worth. Which of the following is their most important need/goal?
They should investigate long-term care insurance. Rationale The most likely need/goal for Ricky and Lucy is a long-term care insurance policy. In this case, both have some medical issues that may require long-term care. The policy may be cost prohibitive, so costs should be investigated. There is no indication that the Martins have a substantial net worth therefore a gifting program is not necessary. There is no indication that they need additional life insurance. They do not indicate that they have an income stream that needs to be replaced and there does not appear to be an estate tax consequence that will require insurance to provide liquidity. A disability policy is not necessary because Ricky does not have an income stream that needs to be protected (plus, he is unlikely to qualify anyway).
At what point in time should the financial planner and the client identify their specific responsibilities?
When establishing the relationship. The financial planner and the client should identify their responsibilities when they establish their relationship.
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?
You should consult your engagement letter to determine your rights to terminate the relationship. Rationale 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 sub-par planning as this can be considered malpractice. You should not bad mouth your clients as this violates confidentiality and is unprofessional.
The three panel approach includes
identification of risk management and goals identification and evaluation of long term goals identification of short term liability and debt goals
