CFP FP511 Module 2 Practice Questions

Financial Enmeshment

(Enabling) - involves supporting an adult who should not need to be dependent on the enabler.

Money Beliefs

(Money Scripts) - unconscious attitudes regarding money, often a result of childhood experiences, which affect adult perceptions and behaviors

Mental accounting

(Money jar mentality) - tendency to put their money into separate accounts based on the purpose of the accounts.

Developing a financial plan often involves input from a team of financial advisors employed by the client. Members of this team may include which of the following professionals? A trust officer An estate-planning attorney A property and casualty agent A Certified Public Accountant (CPA)

all This team may also include other financial professionals, such as a life insurance agent.

Financial enabling

an individual agrees to provide financial assistance to another even though it may put the individual's own financial wellbeing at risk

Bertha, age 55, plans to retire in 10 years. Currently, her cash flow and net worth are steadily increasing as her debt is decreasing. Based on Bertha's current financial life cycle phase, which of the following goals is she is likely to have? A) Short-term goals, such as protection and maintenance of current lifestyle B) Long-term goals, such as investing for retirement C) Long-term goals, such as estate planning and preservation of capital D) Short-term goals, such as saving for a down payment on a home

b The answer is long-term goals, such as investing for retirement. Bertha is in the conservation/protection phase of the financial life cycle. As such, her goals are likely longer-term goals, such as investing to provide for future retirement income. In the accumulation phase of the financial life cycle, clients have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. Finally, in the distribution/gifting phase, estate planning and capital preservation are usually most important.

A financial planner asked a client the following questions. Which of them is open-ended? Do you have an IRA? What are your financial goals in terms of retirement? What are your feelings about investing in the stock market? Do you have an auto loan? A) I only B) II and III C) I, II, III, and IV D) II and IV

b The answer is II and III. Statements I and IV are closed-ended questions because they require only a "yes" or "no" answer. Statements II and III are open-ended questions because they require the client to answer in her own words.

A financial planner is meeting with a client. During a discussion of the client's estate plan, the client asks, "Would my brother be a good choice as executor of my will?" The planner answers, "What do you feel are your brother's qualifications to serve as executor?" The planner's answer is an example of A) body language. B) a leading response. C) emotional intelligence. D) verbal mirroring.

b The answer is a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Body language involves facial expressions, eye contact, gestures, and body posture. Verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in one's self and others and select socially appropriate responses.

During his initial interview with a financial planner, Sam explains the tradeoffs he is willing to make between potential risks and rewards. These tradeoffs illustrate Sam's A) risk perception. B) risk tolerance. C) risk capacity. D) loss aversion.

b The answer is risk tolerance. Risk tolerance refers to the tradeoffs people are willing to make between potential risks and rewards. Risk perception refers to a person's assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a person's financial resources can cushion risks. Loss aversion theory states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains.

Chloe has a kinesthetic learning style. When working with her to create her financial plan, which of the following approaches would be most useful? A) Having detailed discussions regarding goals before they are included in a written financial plan B) Allowing Chloe to write down her goals and objectives using bullet points as she expresses them C) Allowing Chloe to read information regarding financial topics before engaging in any discussions D) Using flowcharts and graphics to relate important concepts

b The answer is allowing Chloe to write down her goals and objectives using bullet points as she expresses them. Clients with a kinesthetic learning style understand concepts better using a hands-on approach. Writing down goals and objectives with bullet points as they are expressed engages clients with this learning style.

A financial planner asked a client the following questions. Which of them are open-ended? I. What are your long-term goals? II. Do you have a retirement plan through your employer? III. How many life insurance policies do you have? IV. Do your children plan to go to college? A) I, II, III, and IV B) I and IV C) II and IV D) I only

D) I only

Alan and Gretchen are completing a data survey form for their financial planner to use in reviewing their financial plan. Their planner has explained that a step in the financial planning process is understanding the client's personal and financial circumstances. During this step the planner obtains qualitative and quantitative information. Which of the following are qualitative rather than quantitative data? Copies of wills and trusts Risk tolerance level Employee benefits and pension plan information Goals and objectives

Risk tolerance level Goals and objectives The answer is II and IV. Risk tolerance levels as well as goals and objectives are qualitative wants and/or desires. Completed documents, such as a will or trust, and business-sponsored employee benefit plans are measurable and therefore quantitative.

Self-attribution bias

Taking credit for their successes and blaming others or external factors for failures to avoid cognitive dissonance

Outcome bias

Tendency for individuals to take a course of action based on the outcomes of prior events

Affinity bias

Tendency to make decisions based on how individuals believe the outcomes will represent their interests and values

Self-Control Bias

Occurs when individuals lack self-discipline and favor immediate gratification over long-term goals

Framing Bias

People are given a frame of reference - a set of beliefs or values that they use to interpret facts or conditions - as they make decisions

Financial manipulation

Playing on others emotions to convince them to give the manipulators money, credit, or other assets.

Attitudes

Reflect a person's opinions, values, and wants

Social Penetration Theory

a theory that predicts that as relationships develop, communication increases in breadth and depth

In developing a client-planner relationship, a CFP® certificant is allowed to do, or is governed by, which one of the following?

A CFP® certificant is not prevented from advertising the size, scope, and areas of competence of their financial planning practice. The answer is a CFP® certificant is not prevented from advertising the size, scope, and areas of competence of their financial planning practice .The size, scope, and areas of competence of a financial planning practice are appropriate types of information to be used in advertising. All of the other statements violate the rules and principles.

Behavioral Finance

A field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people act irrationally during the financial decision-making process

Hindsight bias

A selective memory of past events, actions, or what was known in the past.

Which of these statements regarding interpersonal communication is CORRECT? I. Also known as communicating one on one. II. Important throughout the financial planning process. III. Will ensure that the listener understands and responds effectively to the communicator. IV. Involves understanding differences when communicating across generations, cultures, and genders. A) I, II, III, and IV B) I, II, and IV C) I and II D) II and III

A) I, II, III, and IV Explanation The answer is I, II, III, IV. All the statements are correct. Effective interpersonal communication also involves the understanding and application of oral and nonverbal skills when interacting with clients. Proper use of these skills helps develop a relationship of honesty and trust between financial planners and their clients.

Mirtza's friends tell her an investment in Lose-Ease stock is a wise idea because the company sells popular health food that has helped millions lose weight. Even though Matt, her financial planner, advises her that investing in this stock is a poor decision; Mirtza makes the investment anyway. Which of the following statements regarding Mirtza's behavior is CORRECT? A) It is an example of confirmation bias. B) It is representative of mental accounting. C) It is representative of overconfidence. D) It is an example of anchoring.

A) It is an example of confirmation bias. Explanation The answer is it is an example of confirmation bias. Mirtza's behavior is representative of confirmation bias, which is paying attention to information that supports a preconceived opinion and poorly made decision while disregarding accurate, unsupportive information. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate "accounts" based on the function of these accounts. Overconfidence tends to make individuals believe their levels of ability are much higher than what they are.

Ernie sees himself as a consultant to his clients and allows their goals and values to drive his relationships with them. What is his approach to financial counseling? A) Strategic management approach B) Economic and resource approach C) Classical economics approach D) Cognitive-behavioral approach

A) Strategic management approach Explanation The answer is strategic management approach. Ernie uses the strategic management approach. In this approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant. The cognitive-behavioral approach believes a client's attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures.

Which of these best defines the concept of risk capacity? A) The degree to which a client's financial resources can cushion risks B) The client's tendency to make decisions based on perceived gains rather than perceived losses C) The trade-offs that clients are willing to make between potential risks and rewards D) The client's assessment of the magnitude of the risks being traded off

A) The degree to which a client's financial resources can cushion risks Explanation The answer is the degree to which a client's financial resources can cushion risks. Risk capacity is the degree to which a client's financial resources can cushion risks. Risk tolerance involves trade-offs that clients are willing to make between potential risks and rewards. The client's assessment of the magnitude of the risks being traded off is known as risk perception. The client's tendency to make decisions based on perceived gains rather than perceived losses is described by the loss aversion theory.

In making financial decisions, George tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupported information. George's behavior is an example of A) confirmation bias. B) framing effect. C) anchoring. D) herding.

A) confirmation bias. Explanation The answer is confirmation bias. George's behavior is an example of confirmation bias. Herding is following the actions of a larger group, whether rational or not. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. The framing effect states that people are given a frame of reference, a set of beliefs, or values, which they use to interpret facts or conditions as they make decisions.

Compulsive buying

Addictive shopping or spending behavior that results in financial difficulties

As a member of a financial adviser team, a financial planner's responsibilities for a client typically include which of the following? Drafting a will for the client Assisting the client identifying financial goals Analyzing the client's current financial status Monitoring whether the client is complying with a plan after implementation A) II and III B) II, III, and IV C) I, II, III, and IV D) I and IV

Assisting the client identifying financial goals Analyzing the client's current financial status Monitoring whether the client is complying with a plan after implementation The answer is II, III, and IV. Unless a financial planner is also a licensed attorney, the planner should not draft legal documents such as powers of attorney and wills to avoid the unauthorized practice of law.

Which of the following statements regarding behavioral finance concepts is CORRECT? I. A client's values represent what he believes to be right. II. Beliefs are a type of attitude because they reveal a person's understanding of some aspect of his life. III. A client's profile is largely influenced by context, which includes past history or any conditions that presently exist. IV. A planner should recognize his own attitudes, values, biases, and behaviors and be certain they do not impact recommendations made to clients. A) II, III, and IV B) I, II, III, and IV C) III only D) II and IV

B) I, II, III, and IV

Which of these statements regarding verbal mirroring is CORRECT? I. In verbal mirroring, the planner imitates the client's word use, tone of voice, and communication method. II. Verbal mirroring includes adopting a similar verbal style to the client. III. In verbal mirroring, the planner uses the client's body language. IV. The use of verbal mirroring can improve rapport with clients. A) III and IV B) I, II, and IV C) I and II D) I and IV

B) I, II, and IV Explanation The answer is I, II, and IV. Statement III is incorrect because the use of the client's body language is physical mirroring.

Which of these statements regarding interpersonal communication between financial planners and their clients are CORRECT? I. Mirroring is accomplished by imitating the client's body language or verbal style. II. Effective interpersonal communication involves the application of oral skills only. III. Body language can impact how clients receive and interpret messages more than any other type of communication. IV. Emotional intelligence includes the ability to recognize clients' expressions and select socially appropriate responses. A) I, II, and III B) I, III, and IV C) I and IV D) II and III

B) I, III, and IV Explanation The answer is I, III, and IV. Effective interpersonal communication involves the application of both oral and nonverbal skills, such as the effective use of body language.

Which of these statements best describes representativeness? A) People often consider their investment abilities to be much better than they actually are. B) People believe the past will persist and will classify new information based on past experience or classification. C) People tend to follow the actions of a larger group, whether rational or not in a particular case. D) People often make irrational decisions based on information that should have no influence on the decision at hand.

B) People believe the past will persist and will classify new information based on past experience or classification. Explanation The answer is people believe the past will persist and will classify new information based on past experience or classification. The prospect theory of behavioral finance states that people tend to fear losses much more than they value gains. Making irrational decisions based on information that should have no influence on the decision at hand is anchoring. Following the actions of a larger group, whether rational or not, is herding. Considering one's abilities to be much better than they actually are is overconfidence.

Which of these best defines the concept of herding? A) The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand B) The tendency of individuals to follow the actions of a larger group, whether rational or not C) The tendency of individuals to fear losses much more than they value gains D) The tendency of individuals to consider their abilities to be much better than they actually are

B) The tendency of individuals to follow the actions of a larger group, whether rational or not Explanation The answer is the tendency of individuals to follow the actions of a larger group, whether rational or not. Herding is the tendency to follow the actions of a larger group, whether rational or not. The tendency of individuals to fear losses much more than they value gains is the definition of prospect theory. The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand is anchoring. The tendency of individuals to consider their abilities to be much better than they actually are is overconfidence.

All of the following statements regarding the role of attitudes, beliefs, and values in the financial planning process are CORRECT except A) the client's attitudes reflect his opinions, values, and wants. B) a planner should disregard the client's attitudes, beliefs, and values in developing recommendations. C) beliefs are a type of attitude because they reveal the client's understanding of some aspect of his life. D) values are attitudes and beliefs for which the client feels strongly.

B) a planner should disregard the client's attitudes, beliefs, and values in developing recommendations. Explanation The answer is a planner should disregard the client's attitudes, beliefs, and values in developing recommendations. A planner must take into account the client's attitudes, beliefs, and values throughout the financial planning process, especially during client-planner communication and when developing and presenting the financial plan.

Overconfidence

Believe their abilities to be better than they are

Which of the following statements regarding a client's values and context is CORRECT? I. A client's values are attitudes and beliefs for which the client feels strongly. II. A client's context is affected by his cultural influences, religious preferences, family circumstances, and age. A) I only B) II only C) Both I and II D) Neither I nor II

C) Both I and II

Brett is meeting Kendra, a new client. To be effective as Kendra's financial planner, Brett must understand Kendra's psychological ability to deal with uncertain outcomes including risk tolerance, risk capacity, and risk perception. During which step in the financial planning process should Brett measure Kendra's abilities? A) Communicating recommendations B) Analyzing data C) Data gathering D) Monitoring the recommendations

C) Data gathering Explanation The answer is data gathering. As Brett collects data from Kendra, he should discuss her ability to accept uncertain outcomes. All of the other answer choices are steps that are too late in the process for this measurement.

Ellen has $10,000 in a savings account, which she has earmarked for a European vacation next year. Her car recently broke down and requires extensive repairs. Ellen does not want to spend the money in her savings account to make the repairs because she feels that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of the following behaviors? A) Prospect theory B) Confirmation bias C) Mental accounting D) Herding

C) Mental accounting Explanation The answer is mental accounting. This is an example of mental accounting because Ellen's irrational financial decision resulted from mentally putting her money into separate "accounts" based on the function of those accounts. Prospect theory occurs when a person makes a bad decision because she fears losses more than she values gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information.

A planner's ability to recognize emotional expressions in herself and the client and to select socially appropriate responses to the circumstances and the client's emotions is known as A) mirroring. B) active listening. C) emotional intelligence. D) body language.

C) emotional intelligence. Explanation The answer is emotional intelligence. A planner's ability to recognize emotional expressions in herself and the client and to select socially appropriate responses to the circumstances and the client's emotions is known as emotional intelligence. Active listening involves paying full attention to what the client is saying and responding by paraphrasing the client's comments. Mirroring is imitating the client's body language or verbal style. Body language involves facial expressions, eye contact, gestures, and body posture.

The trade-offs that clients are willing to make between potential risks and rewards are known as A) risk avoidance. B) risk perception. C) risk tolerance. D) risk capacity.

C) risk tolerance. Explanation The answer is risk tolerance. Risk tolerance refers to the trade-offs that clients are willing to make between potential risks and rewards. Risk perception refers to the client's assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a client's financial resources can cushion risks. Risk avoidance is a method of managing risk.

A client who has become more concerned about losing what she has than in accumulating more is most likely in which financial life cycle phase?

Conservation/protection phase The answer is conservation/protection phase. Clients generally become more risk averse in the conservation/protection phase and become aware and pay attention to risks they ignored in the asset accumulation phase.

Financial abuse

Controlling an individuals ability to use, obtain, or possess financial resources.

Michael is meeting with his client, Stephanie, to gather the information he needs to develop a financial plan. During the conversation, Michael imitates Stephanie's gestures and physical positions and uses a similar tone of voice. Which communication skill is Michael using to help develop a relationship of honesty and trust with Stephanie? I. Anchoring II. Loss aversion theory III. Verbal mirroring IV. Physical mirroring A) I only B) I, III, and IV C) II, III, and IV D) III and IV

D) III and IV Explanation The answer is III and IV. Michael is using verbal and physical mirroring. Adopting the client's body language is an example of physical mirroring. Imitating the client's tone of voice is verbal mirroring. Anchoring and the loss aversion theory are not communication skills. Anchoring involves clients making irrational decisions based on information that should have no influence on the decisions at hand. Loss aversion theory involves investors generally fearing losses much more than they value gains.

Which of these statements regarding clients who have an auditory learning style is CORRECT? They prefer to learn by using a hands-on approach. They respond well to graphs, charts, and visual presentations. They express themselves through words and often enjoy music and conversation. A) I and II B) I only C) II and III D) III only

D) III only Explanation The answer is III only. Statement I is incorrect because people who prefer to learn by using a hands-on approach have a kinesthetic learning style. Statement II is incorrect because people who respond well to graphs, charts, and visual presentations have a visual learning style.

During his initial interview with a financial planner, Sam explains the tradeoffs he is willing to make between potential risks and rewards. These tradeoffs illustrate Sam's A) loss aversion. B) risk capacity. C) risk perception. D) risk tolerance.

D) risk tolerance. Explanation The answer is risk tolerance. Risk tolerance refers to the tradeoffs people are willing to make between potential risks and rewards. Risk perception refers to a person's assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a person's financial resources can cushion risks. Loss aversion theory states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains.

Financial dependence

Dependence on others for income not related to employment, most often creating a fear for that person providing the support will stop at any time

John and Shirley Smith recently retired and are planning a Mediterranean cruise to celebrate John's 70th birthday. When they return, they would like to meet with you, their financial planner, to discuss charitable contributions they would like to make. The Smiths are currently in which life cycle phase?

Distribution phase The answer is distribution phase. The distribution/gifting phase begins subtly when a couple realizes that they can afford to spend on things they never believed possible. The asset accumulation and conservation/protection phases make this phase possible. For many people, there is a period when they are being influenced by all three phases simultaneously, though not necessarily to the same degree.

Financial control

Inequality among partners in setting financial goals or making decisions regarding money.

Loss Aversion Theory

Involves clients fearing losses much more than they value gains, and prefer avoiding losses to acquiring the same amount in gains.

Hoarding Disorder

Material goods are purchased and retained beyond their useful lives and the owner has difficulty disposing of them

Recency bias

New information, which is more recent, is considered more important and valuable than less current information

According to the rules established by CFP Board, which of the following uses of the certification marks are CORRECT? Frank Smith, C.F.P. Frank Smith, CFP® Frank Smith & Co., PA, CFPs Frank Smith, CERTIFIED FINANCIAL PLANNER™

Frank Smith & Co., PA, CFPs Frank Smith, CERTIFIED FINANCIAL PLANNER™ The answer is II and IV. The CFP® marks should never contain periods. In addition, the marks should not be used as part of or incorporated in the name of a firm.

Emotional biases

Not related to conscious thought and stem from feelings, impulses, or intuition

Status quo bias

Occurs when comfort with an existing situation leads to an unwillingness to make changes

Analyze the scenario. Ling, a CFP® professional, is providing financial advice to her client. After considering the client's goals, family medical history, tax situation, and financial resources, she develops a financial plan that recommends that the client purchase long-term care insurance. Which statement regarding implementation responsibilities is NOT correct?

Ling is not responsible for implementing this planning recommendation because it only involves the purchase of a single product.

When a client-planner engagement involves Financial Advice for which Financial Planning is required, and the client does not enlist the planner for services, the Planner must abide by Fiduciary Duty. the Code of Ethics. the Practice Standards for the Financial Planning Process. the Suitability Standard. A) I only B) I, II, and III C) I and II D) IV only

Fiduciary Duty. the Code of Ethics. The answer is I and II. In instances where the engagement involves Financial Advice that requires Financial Planning, but the client does not enlist the planner's services, the planner must uphold the fiduciary duty and abide by the Code of Ethics. Following the Practice Standards for the Financial Planning Process is not required.

Anchoring

Making irrational decisions based on information that should have no influence on the decisions at hand.

Representativeness

The tendency, when considering choices, to recall a past experience similar to the present decision-making situation and assume one is like the other.

Gambling disorder

The uncontrollable urge to continue gambling despite adverse financial consequences

Which of the following are primary reasons why a financial planner will ask for each family member's date of birth during the information gathering process? To calculate Social Security "blackout period" preretirement benefit amounts for qualifying individuals To calculate insurance policy internal rates of return To help determine funding for the children's education To help determine retirement planning needs

To help determine funding for the children's education To help determine retirement planning needs The answer is III and IV. A person's birth date has little or nothing to do with preretirement Social Security benefit determination. If they have qualified for benefits, then the amount is determined by the formula independent of their age. However, a person's birth date does have an effect on other potential Social Security benefits. Birthdates also have little to do with calculating an insurance rate of return.

Psychological profiles

Understanding the unique profile of a client will allow the planner to accurately predict the way the clients will perceive and judge any recommendations.

kinesthetic learning style

Understands concepts using a hands-on approach. Writing goals/objectives in bullet points is most effective. Express themselves through body language and tend to enjoy physical activities

conservatism bias

When individuals initially form a rational view but fail to change that view as new information becomes available

Herding

When investors trade in the same direction or in the same securities and possibly even trade contrary to the information they have available

Illusion of Control Bias

When market participants think they can control or affect outcomes when they cannot

Cognitive dissonance

When newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort

Harry owns a financial planning firm with $8 million under management. CFP Board recently told Harry that his rights to use the CFP marks were being suspended for six months. Harry immediately removed the marks from his stationery, business cards, and website. Thirty calendar days before the suspension was over, Harry filed an affidavit with the Board stating that he had fully complied with the terms of the suspension, then immediately added the marks back. Did Harry violate any Rules of Conduct?

Yes, Harry did not notify his existing clients that his right to use the marks had been suspended. The answer is yes, Harry did not notify his existing clients that his right to use the marks had been suspended. According to Rule 4.7 of the Rules of Conduct, Harry must advise all current clients of any suspension or revocation received from the CFP Board. If Harry had been an employee, he would have an obligation to report the suspension to his employer, but as the owner, there is no obligation to notify the employees. Any suspension that lasts less than one year will automatically end upon the certificant's filing with CFP Board within 30 calendar days of the expiration of the period of suspension an affidavit stating that the suspended certificant has fully complied with the order of suspension unless such condition was waived by the Commission.

Joyce has become more risk averse and is not focused on accumulating assets, but maintaining the values of the ones she has. Joyce is in which financial life cycle phase? A) Conservation/protection phase B) Distribution/gifting phase C) Preretirement phase D) Asset accumulation phase

a The answer is conservation/protection phase. People generally become more risk averse in the conservation/protection phase and become aware of the risks that were ignored in the asset accumulation phase.

When newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort, also known as cognitive dissonance. All of the following are characteristics of cognitive dissonance except A) Taking credit for individual successes and blaming others or external influences for failures B) Rationalizing actions in order to adhere to the original course C) Individual changes in attitudes, beliefs, or behaviors to reduce discomfort D) Registering only information that appears to affirm an already chosen decision

a The answer is taking credit for individual successes and blaming others or external influences for failures. Self-attribution bias is an ego defense mechanism in which individuals take credit for their successes and either blame others or external influences for failures.

The Mitchells have decided to set up an appointment with Justin, a CFP® professional, in order to get their finances in order. Up to this point, the Mitchells had been making their financial decisions on an as-needed basis, without any concrete plan or overall strategy. Currently, they believe that their life insurance coverage is inadequate and they need to update their wills due to the birth of their second child, Ryan. Unfortunately, they have been spending indiscriminately and are unable to build their savings and investments. What should be Justin's first step in working with the Mitchells after receiving all their documentation and analyzing their cash inflows and outflows? A) He should assist the Mitchells in preparing a budget. B) He should advise the Mitchells that they should consult with their life insurance agent about purchasing additional policies. C) He should have the Mitchells review their wills with an attorney Justin recommends. D) He should recommend that the Mitchells start an investment plan with their broker.

a The answer is he should assist the Mitchells in preparing a budget. Developing a budget is one of the most important ways to help clients in the savings process. The budget can reveal both problem spending areas and help clients adjust their cash flow.

Which of the following statements regarding people who have a visual learning style is CORRECT? They tend to respond to graphs, charts, pictures, and reading information. They retain information by hearing or speaking. They express themselves through facial expressions. They prefer their goals and objectives to be presented as a to-do list in bullet form. A) I and III B) IV only C) I, III, and IV D) II and III

a The answer is I and III. Statement II is incorrect because people who retain information by hearing or speaking have an auditory learning style. Statement IV is not correct because individuals who prefer goals and objectives to be presented in bullet form exhibit a kinesthetic learning style.

Which of the following statements regarding counseling theory is CORRECT? In the classical economics approach to financial counseling, it is believed that improved financial outcomes can result from increased financial resources or reduced financial expenditures. Financial counseling is a process in which the planner helps a client change poor financial behavior by making recommendations to improve financial status. Planners using the economic and resource approach assume clients are rational and will change to the most favorable behavior if given the appropriate counseling The cognitive-behavioral approach to financial counseling asserts that clients' attitudes, beliefs, and values influence their behavior. A) I, III, and IV B) II, III, and IV C) II only D) I and IV

a The answer is I, III, and IV. The belief in the classical economics approach is that increasing financial resources or reducing financial expenditures results in improved financial outcomes. Rational clients are assumed when using the economic and resource approach. Financial counseling is a process that helps clients change their poor financial behavior through education and guidance. The cognitive-behavioral approach to financial counseling believes that clients' behaviors are influenced by their attitudes, beliefs, and values. Making recommendations to improve clients' financial status is not part of financial counseling.

During a meeting with his financial planner, Jack asks, "Should I be investing in the stock market to meet my savings goals?" The planner answers, "That depends. How do you feel about the possibility that your investment may decline in value?" The planner's answer is an example of A) a leading response. B) physical mirroring. C) emotional intelligence. D) verbal mirroring.

a The answer is a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Physical mirroring is using the client's body language, and verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in oneself and others.

Rochelle is presented with two equal investment opportunities. The first is stated in terms of potential losses, and the second is stated in terms of potential gains. Without having any additional information, Rochelle selects the second investment. Her decision reflects A) loss aversion theory. B) the framing bias. C) herding. D) anchoring.

a The answer is loss aversion theory. Rochelle's decision reflects the loss aversion theory, which states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. The framing bias states that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions.

Caroline considers her investment skills to be much greater than they actually are. She takes credit for any investment decisions that have positive returns but blames the economy when her portfolio does poorly. Caroline's behavior is an example of A) overconfidence. B) confirmation bias. C) mental accounting. D) anchoring.

a The answer is overconfidence. Caroline's behavior is an example of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate "accounts" based on the function of these accounts.

Which of the following statements best describes representativeness? A) People believe the past will persist and will classify new information based on past experience or classification. B) People tend to follow the actions of a larger group, whether rational or not in a particular case. C) People often make irrational decisions based on information that should have no influence on the decision at hand. D) People often consider their investment abilities to be much better than they actually are.

a The answer is people believe the past will persist and will classify new information based on past experience or classification. The prospect theory of behavioral finance states that people tend to fear losses much more than they value gains. Making irrational decisions based on information that should have no influence on the decision at hand is anchoring. Following the actions of a larger group, whether rational or not, is herding. Considering one's abilities to be much better than they actually are is overconfidence.

Which of the following best describes data that is measurable or conveyed as a quantity? A) Quantitative data B) Qualitative data C) Quality data D) Qualified data

a The answer is quantitative data. Examples of quantitative, or objective, data include current financial statements, copies of wills and trusts, and a list of current investments.

Which of the following regarding financial counseling is CORRECT? It is a process that helps clients change poor financial behavior through education and guidance. Once clients gain knowledge and resources through financial counseling, they can set realistic short- and long-term goals and make appropriate financial decisions. A) II only B) I only C) Both I and II D) Neither I nor II

both The answer is both I and II. There are several approaches to financial counseling. In different ways, these approaches assist clients in changing poor financial behavior through education and guidance. Once clients become more knowledgeable and are exposed to valuable resources through financial counseling, they can set realistic short- and long-term goals and make appropriate financial decisions.

In which step of the financial planning process is a planner charged with providing the client ongoing support? A) Developing the Financial Planning Recommendation(s) B) Implementing the Financial Planning Recommendation(s) C) Monitoring Progress and Updating D) Identifying and Selecting Goals

c The answer is Monitoring Progress and Updating. It is within step seven, Monitoring Progress and Updating, that the planner is charged with providing the client ongoing support.

Michael is meeting with his client, Stephanie, to gather the information he needs to develop a financial plan. During the conversation, Michael imitates Stephanie's gestures and physical positions and uses a similar tone of voice. Which communication skill is Michael using to help develop a relationship of honesty and trust with Stephanie? Anchoring Loss aversion theory Verbal mirroring Physical mirroring A) I only B) II, III, and IV C) III and IV D) I, III, and IV

c The answer is III and IV. Michael is using verbal and physical mirroring. Adopting the client's body language is an example of physical mirroring. Imitating the client's tone of voice is verbal mirroring. Anchoring and the loss aversion theory are not communication skills. Anchoring involves clients making irrational decisions based on information that should have no influence on the decisions at hand. Loss aversion theory involves investors generally fearing losses much more than they value gains.

In 2010, the average national gas price was $2.79 per gallon. In 2012, the gas price national average rose to $3.64 per gallon. Responses to gas prices were generally negative. Prices fell to an average per gallon of $3.37 in 2014, and the reaction to the decreased price was positive, even though the price was higher than the 2012 price per gallon of $2.79. This behavior is known as A) confirmation bias. B) mental accounting. C) anchoring. D) herding.

c The answer is anchoring. When average gas prices rose in 2012 to a $3.64-per-gallon threshold, individuals reset their psychological anchors to that price. As the price declined in 2014 to $3.37, the reaction was positive because it was considered in light of the higher 2012 price.

Which of the following statements regarding learning styles is CORRECT? Visual learners express themselves through facial expressions. Kinesthetic learners prefer their goals and objectives to be presented as a to-do-list in bullet form. A) Neither I nor II B) II only C) Both I and II D) I only

c The answer is both I and II. Visual learners express themselves through facial expressions. Additionally, visual learners tend to respond to graphs, charts, pictures, and reading information. Individuals who prefer goals and objectives to be presented in bullet form exhibit a kinesthetic learning style.

Which of the following best defines the concept of risk capacity? A) The trade-offs that clients are willing to make between potential risks and rewards B) The client's tendency to make decisions based on perceived gains rather than perceived losses C) The degree to which a client's financial resources can cushion risks D) The client's assessment of the magnitude of the risks being traded off

c The answer is the degree to which a client's financial resources can cushion risks. Risk capacity is the degree to which a client's financial resources can cushion risks. Risk tolerance involves trade-offs that clients are willing to make between potential risks and rewards. The client's assessment of the magnitude of the risks being traded off is known as risk perception. The client's tendency to make decisions based on perceived gains rather than perceived losses is described by the loss aversion theory.

A client is usually in what phase of the financial life cycle from approximately age 45 to 60 or immediately preceding the client's planned retirement date? A) Asset accumulation phase B) Gifting phase C) Conservation/protection phase D) Distribution phase

c This defines the conservation/protection phase of the financial life cycle. In the asset accumulation phase, a client is usually age 45 or younger; however, this phase may occur later if the client's children are not yet independent. A client is usually in the gifting, or distribution, phase from approximately age 60, or the planned retirement date, until the date of death.

Which of the following statements regarding the classical economics approach to financial counseling is CORRECT? Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes. This approach features the use of a SWOT analysis. A) I and II B) II, III, and IV C) III and IV D) I and III

d The answer is I and III. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach. Statement IV is incorrect, the strategic management approach features the use of a SWOT analysis.

Terry has a kinesthetic learning style. Which of the following approaches would be most useful in working with Terry to prepare a financial plan? A) Giving Terry material to read before engaging in any discussions B) Using graphs, charts, and pictures to convey information to Terry C) Relying heavily on verbal discussions before Terry's goals and recommendations are reduced to writing D) Having Terry write down his goals and objectives as they are formulated with bullet points

d The answer is having Terry write down his goals and objectives as they are formulated with bullet points. Clients with a kinesthetic learning style understand concepts better using a hands-on approach. Writing down goals and objectives with bullet points as they are formulated engages clients with this learning style.

Which of the following statements regarding the pitch and inflection of one's voice is CORRECT? A) Voice tone is primarily dependent on the frequency of the sound wave. B) Pitch is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm. C) The inflection of one's voice is the sound quality of highness or lowness. D) Pitch and inflection influence the message conveyed more than the actual spoken words.

d The answer is pitch and inflection influence the message conveyed more than the actual spoken words. The pitch and inflection of one's voice influence the message conveyed more than the actual spoken words. The pitch of one's voice, not the inflection, is the sound quality of highness or lowness. Pitch is primarily dependent on the frequency of the sound wave. Voice tone, not pitch, is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.

The degree to which Zack's financial resources can cushion risks is known as A) risk perception. B) risk tolerance. C) emotional intelligence. D) risk capacity.

d The answer is risk capacity. Risk capacity is the degree to which Zack's financial resources can cushion risks. Risk tolerance refers to the tradeoffs clients are willing to make between potential risks and rewards. Emotional intelligence is the ability to recognize emotional expressions in oneself and the client and to select socially appropriate responses to both the circumstances and the client's emotions. A client's assessment of the magnitude of the risks being traded off is known as risk perception.

Endowment bias

occurs when an asset is felt to be special and more valuable simply because it is already owned

Confirmation bias

occurs when an individual searches for only evidence that will confirm his or her beliefs instead of evidence that might disconfirm them

Regret Aversion Bias

occurs when individuals do nothing out of excess fear that decisions or actions could be wrong

Emotional Intelligence

the ability to perceive, express, understand, and regulate emotions

Risk Preferences

the attitude a client has toward financial risks

Risk Capacity

the degree to which a clients financial resources can mitigate risks

Money illusion

the misunderstanding people have in relating nominal rates or prices with real (inflation-adjusted) rates or prices

Risk Perception

the subjective judgement that clients make when they are asked to describe and evaluate the risk of financial decisions

Risk tolerance

the tradeoff that clients are willing to make between potential risks and rewards

Beliefs

type of attitude because they reveal the understanding of some aspect of a persons life