CFP PREP COURSE
ANOTHER NAME FOR "MONEY JAR MENTALITY"
"MENTAL ACCOUNTING"
The basic FDIC-insured amount of a depositor is...
$250,000
We can solve for two types of payments:
(1) a fixed, or equal, payment, and (2) a serial payment.
Psychoanalytic Approach
*NOT WIDELY USED* - Psychoanalysis is both a theory of mental illness and a type of therapy that focuses on the relationships between the conscious mind and the unconscious mind. - CONSCIOUS VS UNCONSCIOUS
Why buy a home?
- Income tax benefits - Ongoing itemized tax deduction for the interest costs associated with a home mortgage - The higher the marginal income tax bracket of the client, the greater the advantage of owning a home - Historically favorable appreciation - Longer time frames favor buying
Why rent?
- Many more costs associated with buying - Only three involved in renting • Monthly rent obligation • Renter's insurance policy • Utilities - Shorter time frames favor renting
Risk of ARMs without a cap
-can allow for negative amortization • Agreed upon monthly payment is less than the accruing interest charges • Mortgage becomes greater than the value of the home
Auditory
-clients with this learning style retain information by hearing or speaking - will express themselves with words and often enjoy music and conversation
***Myers-Briggs Assessment***
-introverted or extroverted -driven by senses or intuition -influenced by thinking or feeling -apt to perceive or judge
During the data-gathering step of the financial planning process, planners should measure their clients' psychological abilities to deal with uncertain outcomes. This is best done by collecting...
... qualitative, or subjective, data.
Credit Score Categories
1. Payment history. This category accounts for 35% of the credit score and is most heavily weighted because lenders want to know, first and foremost, whether individuals made payments to past credit accounts on time. Bankruptcies, foreclosures, and liens will negatively affect their payment history. 2. Amounts owed. This category measures how much individuals owe relative to how much credit they have available and accounts for 30% of the credit score. 3. Length of credit history. This accounts for 15% of the credit score. The longer the credit history, the better the credit score. This takes into consideration how long credit accounts have been established and how recently the individual used certain accounts. 4. New credit. This accounts for 10% of the credit score and measures how many new accounts the individual owns. 5. Credit mix. The mix of various types of credit that individuals maintain (credit cards, retail accounts, installment loans, and mortgages) accounts for 10% of their credit score.
During this risk assessment, three main components of risk should be measured:
1. Risk tolerance is the tradeoff that clients are willing to make between potential risks and rewards. 2. Risk perception is the client's assessment of the magnitude of the risks being traded off. 3. Risk capacity is the degree to which a client's financial resources can cushion risks.
Statement of Financial Position is organized into three distinct categories:
1. Total Assets(what the client owns) 2. Total Liabilities(what the client owes) 3. Net Worth(what the client is worth after all liabilities are fully paid)
PROFESSOR'S NOTE: BALLOON MORTGAGE
A balloon mortgage works well for clients purchasing homes during high interest rate periods who want to refinance when rates drop. It also works well for those with enough invested assets to finance the house without borrowing, or those who have access to family loans when the period ends and rates have not dropped
EXAMPLE: FV of a single amount: Carlos received $13,000 from an inheritance, and he wants to invest it for the next 11 years. If he can earn 7.5% annually after tax, how much will his account be worth at the end of 11 years?
Answer: The account is worth $28,803, with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 13,000, +/-, PV 11, N 7.5, I/YR Solve for FV = 28,802.9160 or $28,803
Which of these are savings strategies a financial planner can recommend to clients? Forgo premium cable channels Use an overdraft feature on debit cards Choose an economical cell phone plan Decrease deductibles on automobile insurance policies A) I, II, and III B) I and III C) I, III, and IV D) II and IV
B: The answer is I and III. Using an overdraft feature on debit cards may entice individuals to spend money they do not have available in their accounts. Decreasing insurance deductibles increases premiums, which is not a savings strategy.
Generally, __________ bankruptcy is more favorable for creditors because they receive at least some portion of what is owed them.
Chapter 13
Under _________, there is no assurance that creditors will receive anything.
Chapter 7
Individuals may declare one of two forms of bankruptcy, what are they?
Chapter 7 or Chapter 13
Confirmation Bias
Clients look for new information or distort new information to support an existing view
Interpersonal Communication
Communicating one-on-one. Mastering Interpersonal Communication skills involves understanding differences when communicating across generations, cultures, and genders.
The two most common measures of inflation are
Consumer Price Index (CPI) AND Producer Price Index (PPI)
DEBT MANAGEMENT RULES OF THUMB
Consumer debt: 20% or less of net monthly income Housing costs : 28% or less of gross monthly income Total debt: 36% or less of gross monthly income
______ is by far the largest component of the GDP of the United States, representing about two-thirds of the number.
Consumption
Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily objective. A planner may rely on financial ratios to assist in making this determination. A) Neither I nor II B) Both I and II C) I only D) II only
D: The answer is II only. Although a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses, this analysis is generally subjective.
2021-2022 Stafford Loan Interest Rates:
Direct subsidized loans (undergraduates): 3.73% Direct unsubsidized loans (undergraduates): 3.73% Direct unsubsidized loans (graduate or professional students): 5.28% **The normal repayment period is 10 years, but various repayment options, as well as repayment term extensions, may be available.
Cognitive errors
Due primarily to faulty reasoning and could arise from a lack of understanding proper statistical analysis techniques, information processing mistakes, faulty reasoning or memory errors.
PROFESSOR'S NOTE Loan amortizations (e.g., mortgages, auto loans) are calculated using
END mode because the interest on the principal balance is accruing from payment to payment on the balance of the debt.
Consequences and implications of regret aversion may include the following:
Excess conservatism in the portfolio may occur because it is easy to see that riskier assets occasionally underperform. Therefore, clients avoid riskier assets to prevent the regret experienced when they decline. Regret aversion leads to long-term underperformance and a failure to meet goals. Herding behavior is a form of regret aversion where participants go with the consensus or popular opinion. Essentially, the participants tell themselves they are not to blame if others are also wrong
Investment Company Act of 1940
Extended securities laws to investment companies (mutual funds)
Any planner or broker-dealer who wishes to sell securities must register with...
FINRA
FINRA DUTIES: ENFORCEMENT (define it)
FINRA has the authority to discipline securities firms and individuals in the securities industry who violate its rules, federal securities laws, and rules enacted by the Municipal Securities Rulemaking Board.
NASDAQ DUTIES: DISPUTE RESOLUTION (define it)
FINRA operates the largest dispute resolution forum in the world and handles about 90% of the securities arbitrations and mediations in the United States.
PROFESSOR'S NOTE: FINRA REGISTRATION
FINRA registration is nontransferable. A registered person who leaves one member firm to join another firm must terminate registration at the first firm on Form U-5 and reapply for registration with the new employing member firm on Form U-4. If a person terminates the registration with one firm, the individual must register with another firm within two years, or the individual will be required to requalify for the license.
Act & Provisions of Consumer Legislation
Fair Credit Reporting Act: REPORT-related Truth in Lending Act: CONTRACT-related Bankruptcy, General: Remains on credit report for 10 years Chapter 7: Liquidation; must wait 8 years to refile Chapter 13: Wage-earner (repayment) plan
EXAMPLE: The Prudent Investor Rule
For a century or more, trustees operated generally under the prudent man rule. With this rule, each potential investment was considered for its element of risk in isolation from a portfolio of investments and risk was measured in terms of maintaining nominal dollar value. The result was that trustees were hard-pressed to invest in other-than-cash equivalents. ERISA Section 404(a)(1)(B) provides that a fiduciary must act "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."
EXCEPTIONS TO USING "FAIR MARKET VALUE" DURING ASSET VALUATION
For example, in the case of direct participation programs (limited partnerships), it is advisable to use original cost unless another reliable value is available. If the partnership interest has been held for quite a while and is considered an income-producing asset, the planner might use the present value of future income streams. On the other hand, there may be situations in which determining the value is difficult; in such cases, a zero amount can be used
To terminate registration with the SEC, investment advisers must file...
Form ADV-W as soon as possible after ceasing to practice as an investment adviser.
FRAMING BIAS
Framing bias asserts that 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. This bias leads individuals to process and respond to information based on the manner in which it is presented. It may impact how investors perceive investment performance. Under this concept, individuals often choose a guaranteed positive outcome (while avoiding a chance of greater gain that also carries the possibility of no gain at all), but they will take a chance to avoid a negative outcome (rather than taking a certain smaller loss).
Freudian motivation theory
Freudian motivation theory posits that unconscious psychological forces, such as hidden desires and motives, shape an individual's behavior, like their purchasing patterns. *NOT WIDELY USED*
The formula that describes the components of GDP
GDP = C + I + G + NE where: C = consumption (generally spending by individuals on durable and nondurable goods and services) I = investment (generally business spending on inventory, plants, and equipment, but including new housing purchases by consumers) G = government spending, including federal, state, and local NE = net exports (total exports less total imports)
WHAT IS GDP MEASURED IN?
GDP is measured in constant, non-inflation adjusted dollars, which translates into a real GDP after accounting for inflation (subsequent to a predetermined base or index year).
Following the DEC's review of the petition, the DEC may do the following:
Grant the petition after determining the conduct does not reflect adversely on the individual's fitness as either a registrant seeking reinstatement or as a candidate for CFP® certification, or upon the profession or the CFP® certification marks, and CFP® certification shall be issued to the individual. Deny the petition after determining the conduct reflects adversely on the individual's fitness as a registrant seeking reinstatement or as a candidate for CFP® certification, or upon the profession or the CFP® certification marks, and the CFP® certification shall be permanently barred. Deny the petition but allow the individual to re-apply for CFP® certification after a period not to exceed five years. The individual shall be required to satisfy the education, examination, experience and ethics requirements of CFP® certification at the time of re-application.
Leading Responses
Guide clients to give more details, making a "meeting of the minds" more likely.-Should make your client feel understood and able to effectively discuss their most sensitive money issues
In evaluating the performance of a portfolio, this would include analyzing as follows:
How does the performance compare to similar portfolios (rather than solely to the general market)? Have there been changes in the portfolio management team? What is the general reputation of the management team? Has the portfolio or management team changed the style or investment approach due to changing market conditions?
STATEMENT OF FINANCIAL POSITION
INCLUDES: PERSONAL BALANCE SHEET, NET WORTH STATEMENT. IT IS A "SNAPSHOT" OF CLIENT'S NET WORTH ON ANY GIVEN DATE. PREPARED ANNUALLY
A business or municipal government that plans to issue securities usually works with a/an...
INVESTMENT BANK
Transfer of Funds: What are the TWO options available?
If an education account has accumulated a balance for one student that is no longer needed as a result of a scholarship or other award, two variables should be considered: portability of funds and control of the account at age of majority.
What should clients do if they have multiple goals, but lack the resources to fund them all?
If clients cannot delay or otherwise fund the additional goals, they may need to modify or eliminate them. You should not decide which of your client's goals should be modified; instead, you have the responsibility to provide guidance to your clients, who must ultimately make the best informed decision for themselves.
Acceptance of Proposed Consent Order.
If the DEC accepts and enters the proposed Consent Order, the Consent Order is the final decision of CFP Board.
POSITIVE NPV VS NEGATIVE NPV:
If the NPV is positive, it means that the investment would earn a return more than the discount rate (required rate of return). If the NPV is negative, it means the investor would earn a return less than the discount rate.
Transfer of Funds: Portability of Funds
In the event the college funds for Student A are no longer required, can the account be retitled for Student B? 529s, if the parents are owners, can be transferred to another beneficiary (e.g., Student A's sibling or cousin) if permitted by the plan. Coverdell ESAs (CESAs) can be transferred to another beneficiary. UGMAs and UTMAs cannot be transferred to another child. Trusts can be established individually or with multiple beneficiaries. In both cases, funds need to be allocated to the stated beneficiary. There are pot trusts that pool money for beneficiaries but do not specifically allocate. Treatment of trust funds is commonly spelled out at inception, not designed to switch beneficiaries.
RECENCY BIAS
In the recency bias, new information, which is more recent, is considered more important and valuable than less current information. Related is the concept of herding, which is when investors trade in the same direction or in the same
Economic and Resource Approach
In this approach, financial planners assume that their clients will be rational and will change if given the appropriate counseling. Your financial planner takes on the responsibility of guiding change. The focus on using this approach is to obtain and analyze quantitative data.
Self-Control Bias
Individuals lack self discipline and favor immediate gratification over long term goals
Requirements Prior to Filing for Bankruptcy Protection:
Individuals who consider filing for bankruptcy protection must FIRST receive a briefing from an approved BUDGET & COUNSELING (nonprofit only) service. Individuals must also complete an approved PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSE, which they must pay for themselves. Further, after filing under Chapter 7, an individual must now wait eight years before filing again (previously, a six-year hiatus was required).
COMMON WEAKNESSES
Insufficient savings (particularly for retirement) Inadequate emergency fund Low net worth, given client goals Financial goals that are not defined or unrealistic Poor or improper cash flow management skills Investments that are not aligned with risk tolerance, time horizon, and goals Insufficient amount of or no insurance coverage Lack of estate planning documents Unfavorable employment status
Prospect Theory
Investors fear losses more than they value gains
Loss Aversion Theory
Involves clients valuing gains and losses differently and as a result will make decisions based on perceived gains rather than perceived losses
Mental accounting (money jar mentality)
Involves the tendency of individuals to put their money into separate mental accounts based on the function of these accounts
Define "SERIAL PAYMENTS"
It commonly means payments increase each year by the amount of INFLATION
CFP Board Counsel.
It has "the authority to investigate and issue a Complaint against a Respondent for alleged violations of (a) the Code of Ethics and Standards of Conduct or, where applicable, its predecessors ("Code and Standards"), or (b) the CFP® Certification Candidate Agreement."
What is a BROKERAGE COMPANY?
It is an intermediary that facilitates transactions involving sales of investments or real estate.
What is an INSURANCE COMPANY?
It is primarily engaged in the business of furnishing insurance protection to businesses and consumers. Each state has its own department of insurance that regulates insurance companies in that state. National insurance programs, such as the National Flood Insurance Program, are exceptions.
What is a MARKUP?
It is the difference between the current interdealer offering price and the actual price charged to the client. The SEC is the primary regulatory body overseeing the sale and purchase of securities; however, much of this responsibility has been delegated from the SEC to FINRA
Public Company Accounting Oversight Board
It is the responsibility of the Board to establish "auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers." It also must conduct inspections of accounting firms, conduct investigations and disciplinary proceedings, and impose appropriate sanctions. The SEC has "oversight and enforcement authority over the Board" and can give the Board additional responsibilities.
What is a MUTUAL FUND COMPANY?
It pools money from shareholders and invests the funds in various types of securities (e.g., stocks, bonds, and money market instruments) according to the funds' prospectus. They are regulated by the SEC.
Federal Deposit Insurance Corporation (FDIC)
It provides protection for deposits at U.S. financial institutions
What is a BANK and what do they do?
It's an organization chartered by the federal or a state government to do any of the following: Accept deposits and, depending on the type of account, pay interest on deposits Make various types of loans Invest customer funds in securities Honor instruments drawn on accounts Issue cashier's checks Provide safe-deposit boxes
The Federal Student Loan award year runs from what date to what date?
JULY 1 to next JUNE 30
MODULE 8 KEY TERMS
KEY TERMS - ABLE accounts - American Opportunity Tax Credit college savings plans - Coverdell Education Savings Account (CESA) - Custodial accounts Expected Family Contribution (EFC) - Federal Supplemental Educational - Opportunity Grant (FSEOG) - Federal Work-Study Program - Lifetime Learning Credit Parent Loan for - ----- Undergraduate Students (PLUS loan) Pell Grants Perkins loans prepaid tuition plans scholarships Section 529 plan (Qualified Tuition Program) Stafford loans UGMA 529 accounts Uniform Gift to Minors Act (UGMA) Uniform Transfers to Minors Act (UTMA) UTMA 529 account
kinesthetic learning styles
Kinesthetic learners often express themselves through body language and tend to enjoy physical activities.
JUMBO LOANS or NONCONFORMING loans
LOANS THAT ARE ABOVE THE CONFORMING LOAN LIMITS SET IN PLACE BY FANNIE MAE AND FREDDIE MAC. Nonconforming loans may also be called subprime loans and have higher down payment and/or higher interest rate requirements. Loans for those with damaged credit may also be considered nonconforming.
The Procedural Rules outline investigation commencement and procedures that the CFP Board Counsel follows. After investigating a given matter, if the CFP Board Counsel finds probable cause, they must take one of the following actions:
Letter of Dismissal. Dismiss the investigation with a Letter of Dismissal. Settlement Offer. Present a Settlement Offer to the DEC. Complaint. Deliver a Complaint against Respondent. ** A settlement offer is an option only if probable cause exists.
Loss Aversion Theory
Loss aversion theory involves clients fearing losses much more than they value gains, and prefer avoiding losses to acquiring the same amount in gains. Loss aversion, which is related to fear of regret, explains why many investors will not sell anything at a loss.
Client profile for Adjustable rate mortgages ARMs
Lower initial monthly payments • Short ownership period (less than 5 years)
McCarran-Ferguson Act of 1945
Made it clear that insurance was to be regulated at the state level, as long as the states implemented and executed this regulation adequately
EXAMPLE: Mortgage amortization calculation Sarah and Sean have finalized a $135,000, 30-year loan with a 4.5% interest rate. Here are the keystrokes for the mortgage amortization calculation:
Make sure the calculator is in the END mode, 1 P/YR, C ALL. 135,000, PV 4.5÷ 12 = 0.3750, I/YR 30 × 12 = 360, N Solve for PMT = −684.0252, or $684.03
EXAMPLE 2: PV with annual payments calculation - 2 Enrique and Sofia would like to purchase a home in five years and need $30,000 for the down payment. They can save $3,600 at the end of each year and can get a 5% return on the investment account they are using. What lump sum do they need, in addition to their annual savings, to reach their goal?
Make sure the calculator is in the END mode, 1 P/YR, C ALL. 5, N 5, I/YR 30,000, FV 3,600, +/−, PMT Solve for PV = −7,919.6690, or $7,919.67 The initial deposit required to meet the client's goal is $7,919.67
Anchoring
Making irrational decisions based on information that should have no influence on the decisions at hand
HOMESTEAD EXEMPTION
Many states have an unlimited homestead exemption that would allow a primary residence to be maintained. However, the owner normally must have lived in the house for at least 40 months. When residency is less than 40 months, home equity retention may be limited to $125,000. As is the usual case, individual state limits can vary substantially.
Some of the more important tasks of FINRA include the following:
Market regulation. Member regulation. Enforcement. Dispute resolution. Advertising regulation/investment companies.
Monetary Policy vs. Fiscal Policy: What's the Difference?
Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the U.S. Federal Reserve.1 Fiscal policy is a collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the executive and legislative branches of the government.
Some rule-of-thumb ratios are helpful in understanding how a client's debt will be assessed by lenders, which can determine interest rates. Which of these is NOT correct regarding ratio descriptions and the related benchmark? A) The minimum required payments should be used in the calculation. B) Consumer debt is all nonmortgage debt. It should be no more than 20% of monthly net income. C) Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 28% of the prospective borrower's net income. D) Total monthly payment on all debts should be no more than 36% of gross monthly income.
Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 36% of the prospective borrower's net income. Keeping all debt payments under 36% is important in order to qualify for reasonable rates on credit. Helping clients understand what will make future debt more costly can give them motivation to stay within the guidelines. Monthly housing costs should be no more than 28% of the prospective borrower's gross, not net, income.
COSTS ASSOCIATED WITH OWNING A HOME
Mortgage payments Real estate property taxes Homeowners or condo association fees Homeowners insurance premium Home maintenance expenses Utility bills The potential return on investment forgone on funds used for a down payment and closing costs when purchasing the home (also referred to as opportunity cost) The time frame for residence can also be a factor in deciding whether to buy or rent. Shorter time frames favor renting, whereas longer time frames favor buying.
Subprime loans are:
Mortgages to borrowers of lower credit quality, or that have a lower-priority claim to the collateral in event of default, are considered
PROFESSOR'S NOTE: Graduated Payment Mortgage
Most clients should be very cautious when considering this type of mortgage. The upside is that it may allow them to qualify for a mortgage for which they otherwise would not have qualified. The downside is that negative/reverse amortization may result in the borrower owing additional money when the house is sold.
UGMA or UTMA Section 529 Plan
Most states that have previously established a Section 529 QTP plan will permit a contributor to roll over UGMA or UTMA proceeds to the Section 529 plan account on behalf of the child. These plans are commonly referred to as UGMA 529 accounts or UTMA 529 accounts.
the Securities Act of 1933 applies only to_____ issues?
NEW issues
Does the SEC guarantee the information provided on prospectuses?
NO
When an individual purchases an item with a credit card, HAS A CASH OUTFLOW OCCURED?
NO, It is not until a payment is made to the credit card company or individual store that cash is disbursed.
Endowment Bias
Occurs when an asset is felt to be special and more valuable simply bc it is already ownedOnce they own it, they act as if it is worth more than they would payex./common with inherited assets
FUTURE VALUE (FV) IS ALWAYS...
POSITIVE
PROFESSOR'S NOTE The Consumer Protection Act (Truth in Lending Act) and the FCRA:
PROFESSOR'S NOTE The Consumer Protection Act (Truth in Lending Act) and the FCRA are two landmark pieces of legislation that impact all consumers and borrowers. They provide basic protections for individuals that financial planners should be aware of, and these basic protections are often tested on the CFP® exam.
TEST TIP: FOOTNOTES
Pay attention to footnotes in practice questions and exam questions. Often, the information in the footnotes is needed to answer correctly. For instance, if a question were asked based on information in Figure 3.1 about the terms of the Smith's mortgage loan, you would need to reference the footnotes to answer the question correctly.
Framing Bias
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.Under this bias, people will generally choose what they perceive is positive versus negative, winning vs losing, or getting something of high value vs low
PERSONAL LOANS
Personal loans are one of the most common sources of borrowing. These loans can be secured, unsecured, installment, or single payment, and with fixed or variable interest rates.
Section 529 Plans: Prepaid Tuition Plans
Prepaid tuition plans permit contributors (usually parents) to prepay future tuition at today's tuition rates or purchase tuition credits (units) to apply to future tuition costs. Typically, these plans apply to tuition and mandatory fees only. This type of program also usually requires that the designated beneficiary (usually the contributor's child) go to any public college or university within the state (or the specific private institution) that established the QTP. If the student chooses to attend a college or university not covered by the prepaid tuition plan, provisions are made to pay a sum for that purpose, although the payment will likely not be an equivalent amount. Prepaid tuition plans are becoming less common. Whereas 18 states once offered plans, the number has recently diminished to 11.
After determining that the Financial Advice provided requires Financial Planning, if the client does not agree to move forward with the Financial Planning services, a planner may do any of the following:
Provide the requested services after informing the client how Financial Planning would benefit the client and how the decision not to enter into a Financial Planning engagement may limit the Financial Advice Not enter into the Engagement Limit the Scope of Engagement to services that do not require Financial Planning Terminate the Engagement
Which of the following most accurately describes the McCarran Ferguson Act of 1945?
Provides that insurance is to be regulated at the state level as long as the state's regulation is adequate
RIA Fiduciary Standard
RIAs are also held to a fiduciary standard. This standard has been developed by case law since the landmark Supreme Court case ruling of SEC v. Capital Gains Research Bureau in 1963. RIAs are also held to a fiduciary standard. This standard has been developed by case law since the landmark Supreme Court case ruling of SEC v. Capital Gains Research Bureau in 1963.
REAL GDP
Real GDP allows statisticians, economists, and investors to determine true production year-to-year.
Recency Bias and Availability Bias (used interchangeably)
Recent information is is given more importance bc it is most vividly remembered
Regret aversion bias occurs when..
Regret aversion bias occurs when individuals do nothing out of excess fear that decisions or actions could be wrong.
Adjustment
Remaining anchored to an initial estimate and not adjusting for new information
Repayment of PLUS loans begins when?
Repayment begins within 60 days of disbursement, and although repayment may be delayed until the student is out of school, the interest on the loan continues to build during this time.
USA PATRIOT Act of 2001
Requires broker-dealers, among others, to have internal policies, procedures, and controls to meet the know your customer mandate as an effort against funding terrorism by money laundering
Securities Exchange Act of 1934
Requires companies with previously issued securities to keep information current Created the SEC to enforce securities laws Requires brokers and dealers to register with the SEC
Investment Advisers Act of 1940
Requires registration for and regulates activities of investment advisers
Securities Act of 1933
Requires registration of initial public offerings
strategic management approach
SWOT (strengths, weaknesses, opportunities, and threats) analysis-Financial planner serves as a consultant
What ACT is called the Truth In Securities law?
Securities Act of 1933
_______ debt is best used for purposes of convenience.
Short-term
TEST TIP: COVERDELL
TEST TIP Make sure you understand that contributions are limited to $2,000 per year per child, regardless of the number of donors to the account.
WHO IS responsible for fiscal policy?
THE FEDERAL GOVERNMENT
Self-Attribution Bias
Taking credit for their successes and blaming others or external factors for failures to avoid cognitive dissonance
Which of the following best describe(s) the actions of a fiscal policy economist? Increase in government spending Decrease in the money supply Decrease in income taxes Increase in the inflation rate A)I only B)I and III C)II and IV D)I, II, III, and IV
The answer is I and III. Fiscal policy economists believe that the economy can be controlled through the use of government spending and income tax adjustments. Statements II and IV describe economists who believe that economic activity is controlled through the use of the money supply.
Identify items that CFP® professionals must consider during Step 4—Developing the Financial Planning Recommendation(s)—of the Practice Standards for the Financial Planning Process. 1.) How the recommendation integrates relevant elements of the client's personal and financial circumstances 2.) The likelihood of the client to renew the client-planner engagement 3.) How well the proposed recommendations will align with the Firm's financial planning philosophy 4.) The anticipated material effects of the recommendation on the client's financial and personal circumstances A)I only B)I and IV C)III and IV D)I, II, III, and IV
The answer is I and IV. Statement II and Statement III are incorrect; during Step 4—Developing the Financial Planning Recommendation(s) of the Practice Standards for the Financial Planning Process the financial planner must consider how the recommendation is designed to maximize the potential to meet the client's goals the anticipated material effects of the recommendation on the client's financial and personal circumstances, and how the recommendation integrates relevant elements of the client's personal and financial circumstances (this requires a CFP® professional to look at how the recommendation takes into account other aspects of the Client's life).
Which of the following statements regarding the Standards in the Code and Standards is CORRECT? 1.) The Standard of Professionalism requires a CFP® professional to treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect. 2.) The Standard of Diligence demands honesty and candor, which may be subordinated to personal gain. A)II only B)Both I and II C)Neither I nor II D)I only
The answer is I only. The Standard of Integrity, not Diligence, demands honesty and candor, which may not be subordinated to personal gain.
With respect to business cycles, the classic definition of a recession is A)a decrease in real GDP for two consecutive quarters. B)a decrease in real GDP for two out of the last four quarters. C)an annualized year over year decrease in real GDP. D)a decrease in real GDP for the quarter and a stock market decline of greater than 10%.
The answer is a decrease in real GDP for two consecutive quarters. The classic definition of a recession is when GDP has experienced a decrease in real terms for two consecutive quarters or a minimum of six months from a baseline of zero.
Select the exception(s) to the Confidentiality and Privacy guidelines (Standard A.9) of the Standards of Conduct. 1.) Information used for ordinary business purposes (e.g., personal information necessary for an estate planning attorney to draft a will) 2.) Information transferred for legal and compliance purposes (e.g., subpoenas) A)I only B)Both I and II C)Neither I nor II D)II only
The answer is both I and II. Both of these are correct. A CFP® professional is required to keep confidential and protect the security of personal nonpublic information about clients; however, the Code and Standards sets forth the circumstances when confidential information may be disclosed for 1) ordinary business purposes, or for 2) legal and enforcement purposes.
The Keaton family has decided to invest $375 each month into a 529 for their newborn daughter, Annie. Ideally, Annie will attend the Keatons' alma mater, Central State University. The current tuition is $15,000 per year, education inflation is expected to be 5.25%, and the anticipated rate of return on their 529 is 8%. Annie will attend school beginning at 18 years old for 5 years. Using these facts, calculate to determine whether the current investment plan ($375 monthly deposits), will meet the education savings goal. A)Exceed the goal by $994.50 B)Fall short of the goal by $44,091,48 C)Exceed the goal by $2,194.72 D)Fall short of the goal by $44,679.30
The answer is exceed the goal by $994.50. Step 1: Determine the future cost of college for the first year. 15,000 +/- PV 5.25 I/YR 18 N Solve for FV = 37,678.1126, or $37,678.11 Step 2: Determine the account balance necessary to fund college education. BEG mode (money is needed at the beginning of college) 37,678.1126 +/- PMT 2.6128 I/YR [(1.08 ÷ 1.0525) - 1] × 100 = 2.6128 5 N Solve for PV = 179,037.7955, or $179,037.80 Step 3: Calculate future value of current payments. 375 +/- PMT (8 ÷ 12) 0.6667 I/YR (18 × 12) 216 N Solve for FV = 180,032.2980, or $180,032.30 Step 4: Subtract future education need from future value of current payments. $180,032.30 ‒ $179,037.80 = $994.50
All of the following are ways to lose federal student aid eligibility except A)failure to pay on a subsidized Stafford Loan while enrolled at least half time. B)be in default on a federal student loan. C)failure to maintain satisfactory academic progress in college or career. D)conviction of a drug offense.
The answer is failure to pay on a subsidized Stafford Loan while enrolled at least half time. Repayment on federal student loans generally does not begin until after you leave college or drop below half-time enrollment.
Which one of the following is the highest level of responsibility an adviser can have to a client? A)Fiduciary B)Recommending suitable products as solutions C)Trusted friend D)Adviser
The answer is fiduciary. The highest level of responsibility an adviser can have to a client is that of fiduciary, which requires the adviser to always put the client's needs first.
Which of the following statements is true concerning bankruptcy? A)Planners can rely on state laws to supersede federal laws in regard to property retention. B)Student loan debt is often reduced in bankruptcy. C)A debtor is generally not required to relinquish Social Security payments, unemployment insurance, royalties, and alimony payments. D)A debtor may not file for bankruptcy again under Chapter 7 for six years.
The answer is planners can rely on state laws to supersede federal laws in regard to property retention. It is true that planners can rely on state laws to supersede federal laws on property retention. Planners should rely on state laws versus federal laws for property retention. Debtors may be required to relinquish royalties.
Which of the following is the act that requires the registration of new issues of securities in the primary market?
The answer is the Securities Act of 1933. In addition, this Act provides applicable procedures for issuing an initial public offering (IPO) of securities while specifying which securities are exempt from registration requirements. The 1933 Act also deals with the paperwork involved in offering new securities to potential investors.
Which of the following best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels? A)Contraction B)Peak C)Expansion D)Trough
The answer is trough. A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.
Risk perception
The client's asessment of the magnitude of risks being traded off
Suitability Standard
The standard that registered representatives and insurance agents are held to, is the suitability standard. Additionally, verbal disclosure is often all that is needed under this standard, whereas fiduciaries have written disclosure and contract requirements.
BENEFITS OF HOME OWNERSHIP
The tax benefits of home ownership—particularly, the itemized deductions for property taxes and home mortgage interest—are likely the reasons many people decide to buy a home. Generally, the higher the client's marginal income tax bracket, the greater the advantage of owning a home. In addition, historically, in some areas of the country, the fair market value of homes has appreciated more rapidly than that of many other assets (including securities). F
TONE
The tone is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm
What does net-investment-assets-to-net-worth ratio compare?
This ratio compares the value of investment assets (excluding equity in a home) with net worth.
WHAT DOES THE CURRENT RATIO REPRESENT?
This ratio represents the ability of an individual to service short-term liabilities in case of a financial emergency.
Calculator KeyStrokes for FV
USUALLY A POISTIVE INPUT TO CALCULATOR
THE SNOWBALL TECHNIQUE
With this method, smaller balances are paid off first so clients feel encouraged by their success and motivated to continue the process.
Consumer Credit Reporting Reform Act is also known as...?
also known as the Consumer Credit Reporting Act
you must first analyze your client's ___before you can prescribe any solutions for proper management. ____
debt situation
The CFP Board's Code of Ethics and Standards of Conduct (Code and Standards) Does...?
define the expected level of professional conduct and practice for CFP® certificants.
What does CPI do (increase or decrease) during EXPANSION phase of Business cycle?
goes DOWN
What does CPI do (increase or decrease) during CONTRACTION phase of Business cycle?
goes UP
SERIES 6:
his entitles the holder to sell all open-end investment companies (mutual funds), variable annuities, variable life insurance, and initially offered (not secondary) unit investment trusts.
EXAMPE OF "RULE OF 72":
if the client's objective is to double a $1,000 investment that is earning a compound annual rate of return of 9%, it will take approximately eight years (72 ÷ 9 = 8). Alternatively, if the investor wants to double his original investment in 10 years, divide 72 by 10 to derive an approximate required annual interest rate of 7.2%.
When life insurance needs or estate values are being determined, the cash value of any policy should be
ignored, and the total death benefit used instead
Personalities can be assessed as...
introverted or extroverted; driven by senses or intuition; influenced by thinking or feeling; or likely to perceive or judge
Representativeness appears when
investors become overly negative about investments that have done poorly in the past and overly positive about investments that have done well in the past. From this, stocks, in particular, can become undervalued or overvalued.
UNSECURED (SIGNATURE) LOAN
is a loan for which the client merely promises to repay the debt in exchange for the borrowed funds. In the event of default, lenders can take legal action, but most often will attempt to settle the debt for less than the amount owed. However, this will negatively affect an individual's credit rating
SHORT-TERM LOAN
is a loan that is due within one year (up to and including one year from a specified date).
The FEDERAL FUNDS RATE
is the interest rate charged on short-term borrowing (often overnight to fulfill reserve requirements) between banks; the Fed targets, but does not directly control, this rate in all of its interest rate decisions.
SELF-PROTECTING BIAS
is the irrational denial of responsibility for failure.
a LEIN is...?
is the legal right to repossess the property, which serves as collateral in the event the borrower defaults on the loan.
MONEY ILLUSION
is the misunderstanding people have in relating nominal rates or prices with real (inflation-adjusted) rates or prices. With this bias, individuals have a tendency to think one dollar has the same value today, tomorrow, and into the future, without considering inflation.
SAVING
is the process of putting cash aside in safe, liquid accounts, such as the emergency fund discussed in the previous section. Clients should be able to easily access these cash reserves in times of need. Only after these reserves are established can you address secondary considerations for the balance of the money your clients have in savings—namely, keeping pace with inflation by investing
The PRIME RATE:
is the rate of interest charged by commercial banks to their best business and personal customers. This rate is set directly by commercial banks; however, it normally is about 3% higher than the federal funds rate
Price elasticity
is the responsiveness of the quantity of a good demanded to changes in price, all other economic forces remaining constant. Goods differ in their elasticity in relation to price. D
Macroeconomics
is the study of an economy as a whole. For example, macroeconomics examines factors that affect a country's economic growth.
To determine the payback period for refinancing:
is to divide the total closing costs by the monthly savings.
DEPRESSION occurs....?
is when the GDP has experienced a decrease in real terms for six consecutive quarters or a minimum of 18 months from a baseline of zero.
If the Fed wants to expand economic activity:
it will buy government securities in exchange for money, thereby increasing the money supply and driving down overall interest rates.
Exempt from the registration requirements
lowering the cost of offering securities, certain issues—such as those of limited size; private offerings to a limited number of institutions or persons; intrastate offerings; and offerings of local, state, and federal governments
MENTAL ACCOUNTING
lso known as money jar mentality, involves the tendency of individuals to mentally put their money into separate accounts (or money jars) based on the purpose of these accounts.
SAMPLE-SIZE NEGLECT
makes the initial classification based on an overly small and potentially unrealistic sample of data.
Judgement
making conclusions about what has been perceived
Consequences and implications of self-control bias
may include insufficient savings accumulation to fund retirement needs and taking excessive risk in a portfolio to try and compensate for insufficient savings accumulation. **Self-control bias might be overcome by establishing an appropriate investment plan and budgeting to achieve sufficient savings.
NONRECOURSE LOAN
meaning that the homeowner, or the homeowner's heir(s), will never have to pay back more than the value of the home; the amount in the end is never negative. A REVERSE MORTGAGE IS A NONRECOURSE LOAN
Prime Loans are...
mortgages made to borrowers with good credit are referred to as
MODULE 3 KEY TERMS 2 OF 2
net worth net worth statement nonconforming loans nonmortgage debt-to-income ratio open-end lease outflows personal balance sheet personal use assets prime loans pro forma cash flow statement reverse amortization reverse mortgages saving secured loan short-term loan single payment (bridge) loan statement of cash flows statement of financial position subprime loans total debt ratio unsecured (signature) loan variable (adjustable) rate loan variable outflows Veterans Administration (VA) loans
Key Procedural Rules Time Requirements: Chair of the DEC delivers to Respondent a Notice of Hearing that provides the date, place, and time of the hearing
not fewer than 30 days
Emotional Biases
not related to conscious thought and stem from feelings, impulses, or intuition
The Securities Act of 1934 also requires many issuers of securities to
provide ongoing information about their business affairs by filing quarterly financial statements with the SEC, sending annual reports to shareholders, and filing 10-K reports (which have more financial information than the annual reports) with the SEC annually.
Ratio analysis is intended to...
provide perspective and gain additional insight into your client's financial situation and behavior.
home equity line of credit (HELOC)
provides a set amount of credit from which funds may be drawn as needed. Because a HELOC is a line of credit, borrowers make payments only on the amount they actually borrow, not the full amount available.
Electronic Fund Transfer Act (EFTA)
provides for recovery by those who suffer losses due to a financial institution failing to follow the provisions of the act.
Amortization
refers to the repayment of loan principal over time
Attitudes
reflect a person's opinions, values, and wants
ATTITUDES
reflect a person's opinions, values, and wants.
The business cycle
reflects movements in economic activity and illustrates the concepts of supply and demand.
FINRA's registration and licensing requirements also apply to...
registered representatives of broker-dealers.
SEC regulates...
regulates those who offer investment advice (as well as the actual offering and sale of securities).
What does PITI stand for and when is it used?
rent or monthly mortgage includingprincipal and interest payments, property taxes,and homeowner's insurance premium [PITI]It is used to calculate the 28% and 36% financial stability tests.
The Federal Bankruptcy Act of 1938
requires a court-appointed trustee to oversee the affairs of a firm for which bankruptcy charges have been filed. This act provides for the liquidation of hopelessly troubled firms and provides for the reorganization of troubled firms that might be able to survive. ** Amended in 1978
Form ADV is also referred to as:
the "adviser's brochure"
Herding
the human tendency to follow the crowd
loan-to-value ratio (LTV)
the percentage of the value of the collateral real estate that is loaned to the borrower.
Consumer Financial Protection Bureau (CFPB)
was also created under Dodd-Frank, and it has been tasked with making sure banks, lenders, and financial companies treat consumers fairly and comply with existing federal consumer protection laws.
Values
what a person believes to be right
RECESSION occurs....?
when the GDP has experienced a decrease in real terms for two consecutive quarters or a minimum of six months from a baseline of zero. Recessions are characterized by several features, including high unemployment, reduction in manufacturing, increases in inventory of durable goods, a decline in GDP, contractions in corporate profits, and lower consumer spending.
Base rate neglect
when the base rate (probability) of the initial classification is not adequately considered. Essentially, the classification is taken as being 100% correct with no consideration that it could be wrong.
Current Ratio
• A liquidity ratio derived by dividing current assetsby current liabilities
Examples of emergency fund assets
• Checking accounts • Passbook savings accounts • Money market deposit accounts • Money market mutual fund accounts • Time deposits
***What are the financial stability ratios?***
• Housing cost ≤ 28% of gross monthly income • Total debt ≤ 36% of gross income
Client profile for conventional home loans
• Stable cash flow• Predictable mortgage payment
Key Procedural Rules Time Requirements: Response to a written complain
20 days
FINRA BEGAN OPERATIONS IN...
2007
Define supplemental educational opportunity grant
"A Federal Supplemental Educational Opportunity Grant (FSEOG) Is a Grant for Undergraduate Students With Exceptional Financial Need." Federal Student Aid. "The U.S. Department of Education Offers Low-interest Loans to Eligible Students to Help Cover the Cost of College or Career School.
Integration Factors include the following:
"The number of relevant elements of the client's personal and financial circumstances that the Financial Advice may affect" "The portion and amount of the client's Financial Assets that the Financial Advice may affect" "The length of time the client's personal and financial circumstances may be affected by the Financial Advice" "The effect on the client's overall exposure to risk if the client implements the Financial Advice" "The barriers to modifying the actions taken to implement the Financial Advice"
Financial Planning is defined in the Code and Standards as...
"a collaborative process that helps maximize a client's potential for meeting life goals through financial advice that integrates relevant elements of the client's personal and financial circumstances." **In addition to presenting the CFP Board's definition of financial planning, the guidelines for determining when financial planning is required is described in the Financial Planning and Application of the Practice Standards for the Financial Planning Process section of the Code and Standards.
Scholarships
* are often merit-based and almost always given by the institution as an incentive for the student to study at the awarding institution. * The scholarship is usually granted for either academics or athletics but may also be given for such activities as theater, art, or music. * Like loans or grants, scholarships may be awarded for either undergraduate or graduate study. * Some scholarships are awarded based on financial need. ** A FAFSA is required to apply for need-based scholarships.
The best way to structure a savings plan to fund college expenses is by
* maintaining the funds in a manner that will maximize tax-deferral opportunities and selecting investment vehicles to achieve the greatest possible return consistent with preservation of the funds. * Using current income—the "pay as you go" method—is expensive because it fails to account for the time value of money. Similarly, relying on student loans, grants, or scholarships has some disadvantages. The availability of such money changes year to year and, as a result, lacks predictability.
Federal Work-Study program
* eligible students are provided employment, which may be on or off campus, to help cover the cost of their education. * Federal funds are used by individual schools to administer the program. * The government and the employer share in the payments made to students. * Eligibility is based on financial need. * College work study is available to both undergraduate and graduate students and to both part-time and full-time students. * The program has a limit on the number of hours worked, which is based on course load and academic progress. * Work-study programs provide income to students, which may be used to reduce college expenses. * Undergraduate students are paid by the hour. * Graduate students may be paid by the hour or by salary
TOTAL DEBT
(recurring debt including monthly housing costs, consumer debt payments, monthly alimony, child support, and maintenance payments)—should not exceed 36% of gross monthly income. This is also known as the back-end ratio. total monthly debt total debt ratio = __________________ monthly gross income
Direct Consolidation Loans
* This program allows for the combination of multiple student loans into one loan. * A parent loan cannot be consolidated with student loans and become the student's responsibility to repay. * for Direct Consolidation Loans, the interest rate remains the weighted average of the interest rates on the loans included in the consolidation, rounded to the next highest one-eighth of 1%
Investments Allowed in UTMAs & UGMAs
* UGMA and UTMA accounts allow parents to put cash and securities in a custodial account for a child. * An UTMA account may be funded with any cash-type asset, including securities and mutual funds, but it may also include real estate (although uncommon). * An UGMA account may not be funded with real estate assets of any kind. * Although a parent may elect to be appointed custodian on an UGMA or UTMA account, the child is considered the owner of the assets within the account. * As a result, UGMA and UTMA assets will be included at the child's rate of 20% when calculating the EFC for financial aid.
Parent Loans for Undergraduate Students (PLUS loans)
* parents may borrow funds for their children's undergraduate studies. * The amount that can be borrowed is unlimited, except the total of all aid received cannot be higher than the total cost of schooling. * Part-time students are not eligible for PLUS funds, but students enrolled in programs that are shorter than an academic year may be eligible for reduced loan amounts. * These loans are not need-based. * graduate and professional students can borrow money directly (i.e., for themselves) through the Grad PLUS loan program.
6 main components of a financial plan:
***(S.R.I.T.R.E.)*** 1. Savings, budgeting, emergency funding, and education planning 2. Risk management and insurance planning 3. Investment planning 4. Tax Planning 5. Retirement savings and income planning 6. Estate planning *Tax planning is inherent in all 6 components
Deposits maintained in different categories of legal ownership are ___________ insured.
**SEPARATELY Accordingly, a depositor can have more than $250,000 of FDIC insurance coverage in a single institution if the funds are owned in different ownership categories. The most common ownership categories are single (or individual) ownership, joint (or joint tenancy) ownership, retirement account (e.g., IRA) ownership, and revocable trust ownership (the $250,000 limit is per beneficiary with this type of ownership).
An investment adviser must deliver the disclosure to the client...
...No less than 48 hours prior to entering into any written or oral contract. The client has a right to terminate the contract without penalty within five business days after entering into the contract.
A client's profile is largely influenced by
..CONTEXT. which includes past history or any conditions that presently exist. These conditions are affected by cultural influences, religious preferences, individual family circumstances, as well as individuals' ages and current life cycle stages.
If the client is delinquent in payments, then
..then the amount overdue, along with accrued interest, should be added to the outstanding principal balance.
cognitive-behavioral approach
- Clients' attitudes, beliefs, and values influence their behavior. - Planners use this approach attempt to substitute negative beliefs that lead to poor financial decisions with positive attitudes, which should result in better financial results.
Characteristics of Adjustable rate mortgages (ARMs)
- Interest rate may change monthly or yearly according to some specified benchmark - Often limit the amount by which the interest rate and the monthly payment can change (cap) - Many ARMs begin as low fixed -rate mortgages, then convert to a variable rate
Calculator KeyStrokes for PV
- Usually, a negative number when solving for FV
3 months emergency of funds
- a single wage earner with a second source of sizableincome,- married and both spouses are employed outside of thehome, or- married with one spouse employed outside the home,but there is a second source of sizeable income.
6 months of emergency funds
- a single wage earner, or- married with one spouse employed outside of thehome.
economic and resource approach
- clients assumed to be rational and will change to a more favorable behavior if given appropriate counseling - planner focuses on obtaining and analyzing quantitative data
classical economics approach
- clients choose based on objectively defined cost-benefit and risk-return tradeoffs - increasing financial resources or reducing expenditures results in improved outcomes
Kinesthetic
- clients with this learning style understand concepts using a hands-on approach. - writing goals and objectives with bullet points - will express themselves through body language and enjoy playing sports
Custodial Account Types (TWO)
1.) UGMA 2.) UTMA
3 criteria for adviser registration
1 Providing advice or issuing reports or analysis regarding securities 2 Being in the business of providing such services 3 Being compensated for such services
Three consequences that can occur whenever cash is used to complete a transaction:
1. A client's assets are increased2. A client's liabilities are decreased3. Cash outflows are increased
Trusts used in college education funding come in THREE basic forms, what are they?
1. A minor's trust, established under the provisions of Internal Revenue Code (IRC) Section 2503(c) 2. A current income trust, structured according to the terms of IRC Section 2503(b) 3. A demand, or Crummey invasion, trust
The CFP Board's Code of Ethics comprises six principles that apply at all times to individuals holding the CFP® marks. Specifically, the Code of Ethics requires CFP® professionals to do the following:
1. Act with honesty, integrity, competence, and diligence. 2. Act in the client's best interests. 3. Exercise due care. 4. Avoid or disclose and manage conflicts of interest. 5. Maintain the confidentiality and protect the privacy of client information. 6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.
The Three components of the cash flow statement are:
1. Cash Inflows (Salary, Rental Income, Capital Gains...etc) 2. Cash outflows(Fixed and Variable) 3. Net Cash Flow
Total Assets may be further categorized as follows:
1. Cash and Cash Equivalents- also known as Current Assets, tend to be short term in nature. Commonly invested in the money market 2. Investments(invested assets including retirement funds) tend to be longer term and invested in the capital market. 3. Personal Use Asset- owned and used by a client as part of their personal lifestyle, not as an investment. Ex.) a home or primary residence
Generally, there are three types of learning styles
1. Clients with visual learning styles tend to respond to visual objects, such as graphs, charts, pictures, and reading information. Including visuals in data collection software programs or presentations are beneficial for clients with visual learning styles. 2. Clients with auditory learning styles retain information by hearing or speaking. The financial planning process will be most effective if clients' needs, priorities, and goals are discussed before being reduced to writing. 3. Clients with kinesthetic learning styles understand concepts better using a hands-on approach. For example, writing goals and objectives with bullet points as they are formulated engages clients with this type of learning style
There are three types of Fiduciary standards related to investment and retirement advice, which vary depending upon the type of advisor involved:
1. Department of Labor (DOL) fiduciary standard 2. Registered investment advisor (RIA) fiduciary standard 3. Registered representatives (RRs) and agents suitability standard
Two fundamental questions regarding Emergency Funds
1. How much cash, or cash equivalents, should be kept in this fund? 2. Which assets should this fund be invested in for easy access? married and both spouses are gainfully employed; or married and only one spouse is gainfully employed, but a second source of considerable income is available.
According to Article 3 of the Procedural Rules, a Complaint must include the following:
1. Numbered paragraphs setting forth the grounds for discipline, including a detailed factual description of the conduct and a specific statement of the alleged violations. 2. A range of likely hearing dates. The Notice of Hearing, provided in accordance with Article 10.1, will set a final hearing date
National banks are subject to regulation by three independent federal agencies:
1. Office of the Comptroller of the Currency (OCC). This agency charters, supervises, and regulates national banks and federal branches of foreign banks located in the United States. 2. Federal Reserve Board. This group makes monetary policy, which is discussed in Module 7 of this course. 3. Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits in U.S. banks and savings and loan associations against bank failures.
In determining the EFC for students, four separate calculations are made, the total of which constitutes the EFC. These four calculations are summarized in as follows:
1. Parental income. This includes taxable and nontaxable income from two years prior to the award year (two-year lookback) and is reduced by a specified income protection allowance. The percentage of parent income included in the EFC ranges from 22% to 47% and depends on the parent's AGI from two years prior, number of dependents enrolled in college, marital status of the parents, and special family circumstances. 2. Parental assets. This includes almost everything owned by the parents with the notable exceptions of home equity, cars used for regular transportation, the cash value of a life insurance policy, and the parents' accrued benefit or account balances in any retirement plans. Most nonretirement assets (e.g., cash, investments, and savings) are assessed from 5% up to a maximum of 5.64% toward the EFC. 3. Student income. This includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance ($6,970 in 2021) and taxes. Student income above the protected amount is included at a rate of 50% in the EFC calculation. 4. Student assets. This includes the value of everything the student owns or that has been saved on his behalf (e.g., a custodial account such as an UTMA or UGMA). Custodial accounts, trusts, and other student-owned assets are assessed at 20% toward the EFC.
CASH & EQUIVALENTS (CURRENT ASSETS)
1. With the first category of cash and cash equivalents (or current assets), these are low-risk assets that may be readily converted to cash. Typically, the cash and cash equivalents category will include assets such as checking accounts, savings accounts, and money market funds and accounts. This category could also include short-term certificates of deposit (CDs) with a maturity date of 90 days or less. Some of these assets will be earmarked for a client's emergency fund, which is discussed later in this module. Cash and cash equivalents are sometimes listed as invested assets, especially when the cash is earning interest. However, in this module, the two categories will remain separate.
Key Procedural Rules Time Requirements: Respondent must deliver to CFP Board Counsel evidence of compliance with the Interim Suspension Order
10 days
Key Procedural Rules Time Requirements: Response to an Amended written complaint
10 days
Many financial planners recommend that clients allocate at least ______% of gross income to savings.
10%
Characteristics of a Conventional fixed-rate mortgage
15-year, and30-year mortgages- Level interest rate for the term- Shorter term = higher payment- Fixed payment amortization schedule shows interest and principal portion of each payment
Key Procedural Rules Time Requirements: CFP Board must respond to any request and produce documents
20 calendar days
Key Procedural Rules Time Requirements: Response to Complaint for Single Bankruptcy
20 days
Direct Consolidation Loans; A loan that continues to be delinquent for ____ days under the Federal Direct Loan Program or the Federal Family Education Loan Program is considered to be in default.
270
Key Procedural Rules Time Requirements: Respondent delivers documents/information in response to initial request
30 calendar days
Key Procedural Rules Time Requirements: Respondent to notify CFP Board of any changes to email/ mailing address
30 calendar days
Keystrokes—Step 3 (serial payment):
38,902.5428, FV [1.08 ÷ 1.06 − 1] × 100 = 1.8868, I/YR [OR] 1.06, INPUT, 1.08, DOWNSHIFT, % CHG, I/YR 15, N Solve for PMT = -2,268.0164 × 1.06 = -2,404.0973, or $2,404.10
The SEC also requires investment adviser records, including electronic mail, be maintained for...
5 YEARS
Keystrokes converting future dollars into today's dollars are as follows:
93,232.2076, FV 15, N 6, I/YR Solve for PV = -38,902.5428, or $38,902.54
Disclose and Manage Conflicts of Interest (Standard A.5)
A CFP® professional must do the following: 1. Avoid or fully disclose material conflicts of interest by providing sufficiently specific facts. 2. Obtain informed consent. 3. Manage the conflict of interest. Material conflicts of interest that could affect the professional relationship must be disclosed to the client.
Integrity (Standard A.2)
A CFP® professional must perform professional services with integrity. Integrity demands honesty and candor, which may not be subordinated to personal gain or advantage. The standard also contains the standard antifraud language that exists in law and regulation, the interpretations of which will guide interpretation of this standard.
Firm Element
A type of Continuing Education required for REGISTERED REPRESENTATIVES where courses are related to the profession and securities products.
Duties When Selecting, Using, and Recommending Technology (Standard A.14)
A CFP® certificant must have a reasonable basis for believing the technology produces reliable, objective, and appropriate outcomes; exercise reasonable care and judgment when selecting, using, or recommending technology; and have a reasonable level of understanding of technology's assumptions and outcomes.
Comply With the Law (Standard A.8)
A CFP® professional is required to comply with the laws, rules, and regulations governing professional services. CFP® professionals are prohibited from intentionally or recklessly participating or assisting another person's violation of the Standards or the laws, rules, or regulations governing professional services.
Duties When Communicating With a Client (Standard A.11)
A CFP® professional must provide a client with accurate information in a manner and format that a client reasonably could be expected to understand. The information must be provided in accordance with the terms of the engagement (the oral or written agreement, arrangement, or understanding between the CFP® professional and the client) and in response to reasonable client requests.
Competence (Standard A.3)
A CFP® professional must provide professional services with competence, which means with relevant knowledge and skill to apply that knowledge.
Diligence (Standard A.4)
A CFP® professional must provide professional services, including responding to reasonable client inquiries, in a timely and thorough manner.
Privacy Act of 1974
A Federal Law that Restricts the way in which personal data can be used by federal agencies Individuals must be permitted access to information stored about them and may correct any information that is incorrect. Agencies must insure both the security and confidentiality of any sensitive information. **established a code of fair information practices that regulates the types of personal information the federal government can collect and how this information can be used.
What is another name for Custodial accounts?
A Poor Man's Trust
nonmortgage debt-to-income ratio.
A generally accepted rule in personal financial planning is that monthly consumer debt payments should not exceed 20% of net monthly income.
Individuals who are excluded from the definition of an investment adviser:
A lawyer, accountant, teacher, or engineer (LATE) whose performance of advisory services is solely incidental (as separately defined in the SEC regulations) to the practice of her profession A broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation A bank or bank holding company, as defined by the Investment Advisers Act of 1940 A publisher of a bona fide newspaper or financial publication of general or regular publication A person whose advice is limited to securities issued and guaranteed by the U.S. government
Minor's trust [2503(c)]
A minor's trust is designed to use the $15,000 ($30,000 for a married couple using gift splitting) annual gift tax exclusion for 2021, although it may permit accumulation of income on behalf of the child under the trust terms. Its form is dictated by IRC Section 2503(c), which provides that a gift to an individual under 21 will not be considered a gift of a future interest as long as the property and its income are payable to the child at age 21. In addition, the minor's trust permits income to escape the kiddie tax by allowing the trustee to accumulate more income at the trust's separate tax bracket. Unfortunately, changes in tax law have resulted in the income retained in trusts being taxed at the highest personal rate, even at relatively low levels. Simply put, if money is put into this kind of trust for a child, the potential taxes may be higher than the child's or parent's tax brackets. Additionally, the funds generally must be given to the child when he or she reaches age 21.
What is a TRUST COMPANY?
A trust company is typically owned by one of three entities (i.e., an independent partnership, a bank, or a law firm), each of which specializes in managing estates and serving as the trustee for various types of trusts.
WHAT IS ANOTHER NAME FOR THE "STATEMENT OF FINANCIAL POSITION"
A personal balance sheet
PROFESSOR'S NOTE: LICENSES REQUIRED FOR VARIABLE PRODUCTS
A planner who wishes to sell variable contracts, such as variable life insurance or variable annuities, must hold a FINRA Series 6 or Series 7 registration (and, in most states, a Series 63 or Series 66 registration) as well as the particular state's variable insurance license.
RULES-BASED APPROACH (FIDUCIARY STANDARD)
A rules-based approach to a fiduciary standard is just that, namely a series of rules and guidelines—essentially a checklist of dos and don'ts. There are several challenges with a rules-based approach, especially as the numbers of rules increase. Having numerous rules increases complexity, creates opportunities for possible loopholes, and leads to enforcement issues.
RULE OF 72
A shortcut method may be used to determine the number of years it will take for a single amount to double in value or, alternatively, the interest rate that is required for an investment to double within a specific number of years. *** to calculate the number of years for an investment to double in value, simply divide 72 by the annual interest rate.
ABLE accounts (Achieving a Better Life Experience act of 2014)
ABLE accounts provide individuals with disabilities and their families with the ability to fund a tax-preferred savings account to pay for qualified disability-related expenses. Contributions may be made by the person with a disability (the designated beneficiary), parents, family members, or others. The annual limitation on contributions is the amount of the annual gift tax exemption ($15,000 in 2021). However, effective for tax years before January 1, 2026, after the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount), an ABLE account's designated beneficiary can contribute an additional amount up to the lesser of (1) the federal poverty line for a one-person household or (2) the individual's compensation for the tax year. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit for contributions made to his ABLE account. The act also requires that a designated beneficiary (or person acting on the beneficiary's behalf) maintain adequate records for ensuring compliance with the limitations. For distributions, amounts from QTPs (a.k.a. Section 529 accounts) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account or a member of such designated beneficiary's family. Such rolled-over amounts are counted toward the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
ACTIVE LISTENING
ADVISORS SHOULD practice active listening by paying full attention to what their clients are saying and responding by paraphrasing the clients' comments. T
the Code and Standards builds the cornerstone of financial planning with three specific fiduciary duties.
According to the CFP Board, to function as a fiduciary, a planner must uphold and remain committed to the following (Standard A.1 from the Code and Standards): Duty of Loyalty. A CFP® professional must place the interests of the client above the interests of the CFP® professional and the CFP® professional's firm. A CFP® professional also must avoid conflicts of interest, or fully disclose material conflicts of interest to the client, obtain the client's informed consent, and manage the conflict. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances. Duty to Follow Client Instructions. A CFP® professional must comply with the terms of the client engagement and follow all directions of the client that are reasonable and lawful.
Regulatory Element Continuing Education
Additional Continuing Education Requirements whose course cover ETHICS, COMPLIANCE, and SALES PRACTICES.
Gramm-Leach-Bliley Act of 1999
Addresses the manners in which financial institutions manage the private information of individuals; repealed the Glass-Steagall Act of 1933
COMMON STRENGTHS
Adequate savings (particularly for retirement) Appropriate emergency fund Appropriate net worth, given client goals Well-defined financial goals Excellent cash flow management skills (including proper debt management) Appropriate investments given client risk tolerance, time horizon, and goals Appropriate insurance coverage Valid and current estate planning documents Employment status stable or promising
An investment bank's functions may include the following:
Advising corporations on effective strategies to raise long-term capital Raising capital for issuers by distributing new securities Buying securities from issuers and reselling them to the public Distributing large blocks of stock to the public and institutions Helping issuers comply with securities laws
Context
Affects a client's profile. Includes past history and present conditions- cultural influences, religious preferences, family circumstances, age, life-cycle phase
Federal Deposit Insurance Corporation (FDIC) (EXPANDED NOTES)
All individuals are entitled to FDIC insurance for a deposit at a U.S. financial institution. Such insurance protects deposits that are payable in the United States but not overseas. In addition, only cash and cash-equivalent deposits (e.g., a certificate of deposit) are covered by FDIC insurance; securities, mutual funds, and other types of investments are not afforded such protection. Money market mutual funds offered by investment companies (not the same as money market deposit accounts) are also denied FDIC coverage.
Federally Funded Loans
All of the following loans come directly from the U.S. Department of Education under the Direct Loan Program. Loans used to pay education expenses may be dispersed directly to the student (direct student loans) or dispersed by the institution (campus-based aid). In addition, most loans (regardless of their source) may be used for either undergraduate or graduate education.
It is strongly recommended that you read and learn the complete Code and Standards and supporting materials.
All of the materials related to these ethics and their requirements can be found at CFP Board's website, www .cfp.net, under "For CFP® Professionals." Bookmark this website and check it frequently to find the most up-to-date information about the various requirements that are expected of a CFP® professional
IDENTIFYING GOALS AND EXPECTATIONS
Alongside analyzing and evaluating the client's current financial status, this is often the most important activity in the financial planning process. T
FRONT-END RATIO
Also called the housing ratio, this shows what percentage of your income would go toward housing expenses. This includes your monthly mortgage payment, property taxes, homeowners insurance and homeowners association fees, if applicable
The following are exempt from the requirement to register as an investment adviser:
An intrastate adviser (single-state adviser) for unlisted securities An adviser whose only clients are insurance companies Foreign private advisers Charitable organizations and plans Commodity trading advisers Private fund advisers Venture capital advisers Advisers to Small Business Investment Companies (SBICs)
Using Retirement Plans to Fund College Expenses
An often-overlooked means of saving for a child's college education is a parent's retirement plan. Many qualified retirement plans permit a participant to borrow from the plan without imposing the premature distribution penalty. Even if the plan terms do not allow for loans, a tax rule may offer relief. Under the "substantially equal periodic payment" exception to IRC Section 72(t), a participant can turn some or all of his retirement account (including an individual retirement account) into a period certain or life annuity for preretirement use at any time without the usual 10% premature distribution penalty. As long as the participant withdraws roughly equal amounts from his retirement plan annually for at least five years following commencement of distributions, or until reaching age 591⁄2 (whichever is later), retirement money can be used for any reason.
ANCHORING
Anchoring involves individuals making irrational decisions based on information that should have no influence on the decisions at hand. Anchoring is especially risky when people know little about the product being purchased, the service being delivered, or the investment being made.
NASDAQ DUTIES: Advertising regulation/investment companies. (define it)
Another FINRA task is evaluating members' advertising and communications regarding securities to ensure that they are fair, accurate, and not misleading. These include advertisements for mutual funds and variable annuities in newspapers, magazines, electronic media, and other sales literature such as direct marketing materials.
EXAMPLE: Solving for an equal payment Amul purchases a new car and finances $21,000 with a 5.9% loan over three years. Assuming each payment is due at the end of the month, what is the amount of Amul's monthly car payment?
Answer: Amul's car payment is $637.91, with keystrokes on the HP10bII/HP10bII+ as follows: END mode 12 P/YR DOWNSHIFT, C ALL 21,000, +/-, PV 5.9, I/YR 3, DOWNSHIFT, N (this is xP/YR; 36 should appear on display) Solve for PMT = −637.9096, or $637.91 (Note: Because the PMT is a cash outflow for Amul, it is displayed as a negative number.)
EXAMPLE 2: Calculate an inflation-adjusted interest rateWhat would the inflation-adjusted interest rate be with a 6% rate of return and a 2.5% inflation rate?
Answer: _ 1.06 1.025 = 1.034146 (1.034146 − 1) × 100 = 3.41% (rounded)
EXAMPLE 3: Auto loan amortization calculationOne final auto loan calculation. This time we know the payment and the terms, and we want to find out what interest rate is being charged.Jack is considering purchasing a car from another dealer and would be borrowing $18,000 for five years with a monthly payment of $341.75. What interest rate is he being charged?
Answer: Make sure the calculator is in the END mode, 1 P/YR, C ALL. 18,000, PV 341.75, +/−, PMT 5 × 12 = 60, N Solve for I/YR = 0.4375 × 12 = 5.2503, or 5.25%
EXAMPLE 3: Application of guidelines Zoe, a CFP® professional, has a conversation at a cafe with Henry that covers specifics about several elements of his personal and financial situation. As they talk through each issue, Zoe provides handwritten recommendations on the back of a napkin corresponding to each planning area. Henry and Zoe agree to continue to meet at the cafe regularly to design a comprehensive planning strategy. Zoe sends Henry text messages periodically with suggested adjustments to the plan and additional action items.
Applicable guidelines Code of Ethics Standards of Conduct (that apply at all times) Fiduciary Duty Managing Conflicts of Interest Practice Standards for the Financial Planning Process Based on the content and character of their interactions, Zoe has provided Financial Advice and Financial Planning. As a result, she must abide by Standard A.1, Fiduciary Duty, manage any conflicts of interest, adhere to the Code of Ethics, and follow the Standards of Conduct (that apply at all times). Finally, Zoe has to follow the seven-step financial planning process presented in the Practice Standards for the Financial Planning Process.
Application of the Code of Ethics
As a CFP® professional, the Code of Ethics must be upheld in all instances and encounters. In addition, all duties owed to clients, firms, subordinates, and CFP Board (except Fiduciary Duty or Managing Conflicts of Interest) apply.
Federal Bankruptcy Act of 1938
As amended in 1978, provides for the liquidation of hopelessly troubled firms and provides for the reorganization of troubled firms that might be able to survive
Broker-Dealer Exceptions: Solely Incidental
As per the SEC, investment advice is solely incidental to brokerage services when the advisory services rendered are "in connection with and reasonably related to the brokerage services provided."
Duties Owed to CFP Board
Avoid any adverse conduct. Report incidents involving adverse conduct to CFP Board within 30 days. Provide a narrative statement to CFP Board on reportable matters. Cooperation with CFP Board throughout investigations and disciplinary proceedings. Compliance with the Terms and Conditions of Certification and License (Terms).
Behavioral Finance
Behavioral finance is 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.
Identify the item that should be included on the statement of financial position. A. Auto loan payment B. Auto loan balance C. Original mortgage amount D. Section 401(k) elective deferrals
B. Auto loan Balance
Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily subjective. A planner may rely on financial ratios to assist in making this determination. A) I only B) Both I and II C) II only D) Neither I nor II
B: The answer is both I and II. During this subjective process, a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses.
Joe and Mary believe in stress management. Several times each year, they take a short vacation to relax and recharge as part of their overall approach to maintaining good health. Their regularly planned vacations are an example of what type of expense? A) Variable nondiscretionary expense B) Variable discretionary expense C) Fixed nondiscretionary expense D) Fixed discretionary expense
B: The answer is variable discretionary expense. Although Joe and Mary believe the vacations to be important for good health, the vacations are considered a variable discretionary expense.
Statement of Financial Position
Balance Sheet or Net Worth Statement.-Provides a snapshot of a clients net worth on a given date, usually at the end of a calendar year.
Duty to Keep Current
Because tax laws, product offerings, and the fortunes of individual securities issuers—and, indeed, entire industries—change over time, anyone operating as a professional in the financial services industry has an ethical Duty to Keep Current
FISCAL POLICY: DECISION MAKERS
Both Congress and the president (the Administration) make fiscal policy decisions. Neither branch of government can make a fiscal policy decision without the involvement of the other. The president may propose a certain fiscal policy action, such as raising income tax rates for the wealthy; however, unless Congress passes legislation to raise tax rates for high-income individuals, no change will occur.
Which of these statements regard the theory of communication is CORRECT? Language is composed of nothing more than a series of signs. Writing best models comunication as a series of signs.
Both of these statements are correct. Fundamentally, language is a series of signs. Writing is the best example of communication as a series of signs.
BUYING VS RENTING A HOME
Buying ■ Intends to live in an area for at least five years ■ Can benefit from the income tax advantages of ownership ■ Wants to improve the appearance or structure of the residence Leasing ■ Does not have the funds for a down payment ■ Has a temporary housing need (e.g., moving to a new city for a job change and does not know the duration of the job) ■ Expects housing needs to change substantially in the foreseeable future and does not now own a home ■ Is looking for a job or changing careers, which would likely require a move within a few years
BUYING VS LEASING A VEHICHLE
Buying ■ Keeps an auto for many years ■ Drives well over 15,000 miles per year ■ Wants to discontinue payments eventually Leasing ■ Wants to have a new auto every two to four years ■ Does not have the funds for the 20% or more down payment ■ Will not drive the auto more than 12,000-15,000 miles per year ■ Uses the auto for business ■ Needs a lower monthly auto payment and is willing to give up ownership for the lower payment
Which of these are tax implications of owning a personal residence? The points paid are tax deductible for the buyer Mortgage interest is generally tax deductible for the buyer Capital gains may be nontaxable within specific limits Homeowners may depreciate their personal residence A) II and III B) I and III C) I, II, and III D) I, II, and IV
C: The answer is I, II, and III. Although I, II, and III are tax implications of home ownership, exceptions and restrictions apply to these benefits. A taxpayer of any age can exclude $250,000 of gain ($500,000 for joint filers) from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years immediately preceding the sale. Generally, an individual cannot claim depreciation on a personal residence.
What is the appropriate date to identify the statement of financial position of a calendar-year client for the year 2021? A) For the period from January 1 to December 31, 2021 B) On January 1, 2022 C) On December 31, 2021 D) For the period beginning January 1, 2021
C: The answer is on December 31, 2021. The statement of financial position (personal balance sheet) is presented as of a specific date in time (i.e., a snapshot). The answer choice "For the period beginning January 1, 2022" could be correct, but the question specified the date was for a calendar-year client.
Prohibition on Circumvention
CFP® certificants are prohibited from using a third party to conduct business that violates the Code and Standards.
Confidentiality and Privacy (Standard A.9)
CFP® professionals are required to uphold client confidentiality and privacy. There are two exceptions: 1. Information used for ordinary business purposes (e.g., personal information necessary for an estate planning attorney to draft a will) 2. Information transferred for legal and compliance purposes (e.g., subpoenas)
Refrain From Borrowing or Lending Money and Commingling Financial Assets (Standard A.15)
CFP® professionals must refrain from borrowing or lending money. Commingling of financial assets is prohibited. Borrowing and lending is allowed if the client is a member of the CFP® professional's family or if the lender is a business organization or legal entity in the business of lending money. This standard explicitly prohibits indirect borrowing.
________ bankruptcy is available for those whose debts total less than certain amounts and who have regular income?
CHAPTER 13
Individuals may declare one of two forms of bankruptcy, which are?
CHAPTER 7 OR CHAPTER 13
Hindsight Bias
Clients have a selective memory of past events, actions, or what was knowable in the past. Clients tend to remember correct views and forget errors
BUDGETING ADVANTAGES
Clients may be encouraged to use budgets because of the following benefits: Budgeting allows clients to choose where they want to allocate their resources rather than allowing habit to drive spending decisions. Budgeting may be used to establish financial goals and determine the feasibility of meeting them. Family stress and conflicts over money can be addressed before they become issues. The probability of achieving financial goals increases if attention is given to resources that can help meet these goals
Conservatism Bias
Clients rationally form an initial view, but then fail to change that view as new information becomes available
Illusion of Control Bias
Clients think they can control or affect outcomes when they cannot ex./ company stock
Guidelines to Follow in the Client-Planner Relationship: At All Times
Code of Ethics Standards of Conduct (that apply at all times)
Guidelines to Follow in the Client-Planner Relationship: When Providing Financial Advice
Code of Ethics Standards of Conduct (that apply at all times) Fiduciary duty Managing conflicts of interest
Guidelines to Follow in the Client-Planner Relationship: When Financial Advice Requires Financial Planning and the Client Engages
Code of Ethics Standards of Conduct (that apply at all times) Fiduciary duty Managing conflicts of interest Practice Standards for the Financial Planning Process
Adviser Registration: Compensation Test
Compensation for services is a more obvious test; one receives compensation for services if a separate fee is charged for investment advisory services. **However, the SEC's position is that the commissions received from sales of products also can be considered compensation in this context.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Created the Consumer Financial Protection Bureau and the Financial Stability Oversight Council; also addresses transparency and accountability for derivatives
Direct Transfers and Custodial Accounts: Custodial Account
Custodial accounts are another way of building a college fund. Sometimes referred to as a poor man's trust because they have virtually no administrative costs, custodial accounts involve naming an individual as the manager of property belonging to a minor child. It is important to understand that custodial accounts are not trusts, but, rather, accounts. As previously discussed, there are two types of custodial accounts. Assets can be set aside in a state-sanctioned UGMA account or, in most states, an UTMA account. Some states may only allow one type of custodial account (e.g., an UTMA), while other states may allow either or both. Individual state laws should be consulted to determine which of these custodial arrangements is in effect in your state. To most parents, a custodianship is preferable to a direct transfer of property to a minor. Almost any type of property may be placed under a custodian's care; however, in states where only the UGMA has been adopted, some restrictions on permissible investments may apply. Custodial arrangements also have some disadvantages. The child or beneficiary must be given the right to possession of the property upon reaching the age of majority (age 18 in most states). This must occur even though the child may choose not to use the funds for a college education, a choice that is usually contrary to the donor's wishes. Also, a custodial account is relatively inflexible in avoiding the kiddie tax. A formal trust may be a better way to minimize these problems.
BUDGETING CHALLENGES
Developing a budget is time consuming, and clients must make a commitment to the process. Initially, there may be family conflicts when deciding what is important and what expenses to reduce or eliminate. If inaccurate information is used to develop the budget, it will be of little or no value. Using a budget as an absolute control of spending may preclude a client from taking advantage of financial opportunities that might aid in reaching goals. For example, if a client starts a new job and has a new opportunity to contribute to a 401(k) plan, there should be some flexibility in the budget to allow him to make contributions to meet his retirement goals.
Which of these are reasons a client should consider purchasing a home rather than renting one? Mortgage interest is generally income tax deductible Adequate liquid assets are available for a down payment Client plans to live in the home three years or longer A) I only B) II and III C) I, II, and III D) I and II
D: The answer is I and II. The deductibility of mortgage interest when a client itemizes deductions is a definite tax advantage in purchasing a home as opposed to renting one. If clients intend to live in their residences for several years (more than three) and have enough money for a down payment (without depleting the emergency fund), they should consider purchasing a home.
Troy and Kacie realize they are in need of an emergency fund. Troy is a marketing executive for a local advertising firm, and Kacie is an office manager for a national distribution company. They come to you, their financial planner, and ask how much money they should have in this fund. Which of the following is the best response? A) An amount equal to 12 months of expenses Failed B) An amount equal to 1 month of expenses Failed C) An amount equal to 6 months of expenses Failed D) An amount equal to 3 months of expenses
D: The answer is an amount equal to 3 months of expenses. Three months' worth of expenses should be set aside if the clients are married and both are employed outside the home. A client who is a single wage earner or one who is married with a spouse not employed outside the home should have an amount equal to 6 months of expenses in an emergency fund.
INELASTIC
Demand for necessities, such as food or gasoline, responds relatively little to price changes; therefore, those types of goods are said to be...INELASTIC. Alternatively, the demand for luxuries, such as a new motorboat, responds relatively more to price changes; therefore, those types of goods are said to be elastic or demonstrate a great deal of price elasticity
What to invest in during times of DEFLATION:
During deflation, issuers of debt can have difficulty meeting their principal and interest payments, and investment strategies must take this into consideration. Lower-quality bonds should be avoided because the likelihood of default increases during a deflationary period. High-quality bonds, especially U.S. Treasury obligations, can be a good investment because interest rates fall significantly in this period. Bond prices rise and purchasing power increases during deflation. If the deflation is relatively mild, selective purchases of defensive common stocks could be profitable. Food and beverage stocks might do well as the prices of their raw materials (commodities) fall. If deflation is severe, such as was experienced in the 1930s, an investor should not hold stocks. A deflationary period also can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value.
To uphold the fiduciary standard, the CFP® professional is required to fulfill the following three duties:
Duty of Loyalty. Involves placing the client's interests ahead of the CFP® professional, the CFP® professional's firm, or any other entity. Includes avoiding, fully disclosing, obtaining consent, or managing material conflicts of interest. Duty of Care. The CFP® professional must engage the client with care, skill, prudence, and diligence. Fulfillment of this duty requires consideration of the client's goals, risk tolerance, objectives, and circumstances. Duty to Follow Client Instructions. CFP® professionals are obligated to adhere to the terms of the engagement and must follow "reasonable and lawful" client instructions.
Coverdell Education Savings Accounts vs. 529 Plans
ESAs may be established at brokerages and other financial institutions. These accounts are comparable to another tax-free college savings plan, 529, with a number of differences. There is no annual limit on the amount that may be deposited into a 529 plan. In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) expanded 529 plan regulations, and now 529 plans can be used to pay off up to $10,000 in student loans and to pay for qualified expenses related to apprenticeship programs approved by the U.S. Department of Labor.2 There are no restrictions on the income level of the contributors to a 529 plan. However, fees can be extracted from 529 accounts and the investment can also lose money as there are no guaranteed returns on such plans. It is permissible to have a 529 plan as well as an ESA for the same beneficiary's education expenses.
Low inflation (falling Consumer Price Index [CPI]) is a characteristic of the _______ phase of the business cycle?
EXPANSIONARY phase
When are interest rates determined for new loans being made for the upcoming award year?
Each SPRING
A client's emergency fund should be kept in liquid assets....Examples
Examples-Checking Accounts-Savings Accounts-Money market deposit accounts-Money market mutual funds accounts-Time deposits (certificates of deposit) that are close to maturity(less than one year)
Qualifying for Financial Aid: Federal Grants Include...
Federal Pell Grants Federal Supplemental Educational Opportunity Grants (FSEOG) Teacher Education Assistance for College and Higher Education (TEACH) Grants Iraq and Afghanistan Service Grants
WHO IS responsible for monetary policy, implement changes within the economy by using available economic tools?
Federal Reserve Board
Gift Tax Implications for Section 529 Plans
Federal gift tax rules applicable to Section 529 plans are quite favorable. An individual may make a contribution to a 529 plan up to the annual exclusion amount of $15,000 without any tax implications to the donor or recipient. In addition, donors are eligible to deposit up to five times the annual exclusion amount through an accelerated, or ratable, contribution. For example, in 2021, a contributor is permitted to make one $75,000 contribution (the gift tax annual exclusion of $15,000 multiplied by five) and treat the contribution as if made ratably over the current year and the next four years (a total of five years). In addition, if the contributor splits that gift with a spouse, a one-time contribution (every five years) of $150,000 may be made to any beneficiary, including the account owner, if so desired. However, if the contributor does not outlive the five-year period, the $75,000 contribution exclusion is prorated annually; for example, if the contributor-owner dies after three years, $30,000 (or $15,000 multiplied by two) would be included in her estate.
Application of Fiduciary Duty
Fiduciary Duty, must be adhered to in instances where it has been determined that Financial Advice is occurring or has been provided. If Financial Advice is provided for which Financial Planning services are required and the client engages the planner, the Fiduciary Duty applies as well.
Question Review Approach
Follow these steps: Step 1: Read the last line of the question. Step 2: Make notes. Step 3: Answer all questions that can be answered without reading the case. Record your answers. Eliminate any answers to questions that cannot be a part of the answer. Step 4: Read the case to answer the questions that involve specific case facts. Record your answers. Step 5: Make sure all questions are answered. Step 6: Review the answers.
FOOTNOTES 2
Footnotes clarify items in the statement or indicate values or circumstances not disclosed in the body of the statement. They can also indicate relevant contingencies, such as an inheritance or a pending lawsuit that may affect future assets or liabilities.
Gross National Product (GNP)
GNP measures activity by ownership and takes into account any production by a company both in-and outside the home country, it is not as widely followed.
How can you help your clients resolve conflicting demands on cash flows?
GOAL PRIORITIZATION
THE DECISION TO BUY OR LEASE
Generally, if an item has a limited useful life for your clients, it may be wise for them to lease it.
Gestalt psychology
Gestalt psychology suggests that we do not simply focus on every small component. Instead, our minds tend to perceive objects as elements of more complex systems. A core belief in Gestalt psychology is holism, or that the whole is greater than the sum of its parts.1 This school of psychology has played a major role in the modern development of the study of human sensation and perception.
Rejection of Proposed Consent Order and Counteroffer
If the DEC rejects the proposed Consent Order and proposes a Counteroffer, Respondent must accept the Counteroffer within 20 calendar days of service of the Counteroffer or the Counteroffer will be void. If Respondent accepts the Counteroffer, the DEC will enter the Counteroffer as a Consent Order. If Respondent does not accept the Counteroffer, the investigation will continue, the matter will proceed to hearing, or CFP Board Counsel and Respondent will present another proposed Consent Order to the DEC.
Transfer of Funds: Control of Funds at Age of Majority
If the education fund has accumulated an account balance that is no longer needed, who assumes control of the assets at 18, or age of majority? 529s: Account owner's assets; the funds are not transferred to the student at age 18 Coverdell (CESA): All funds must be used before child reaches 30 UGMA and UTMA: Custodial accounts in the child's name; when child reaches age of majority (18 or 21 depending on state), they assume ownership of the account and are not required to use the funds for education Trusts 2503(b): Can hold funds beyond beneficiary's age of majority; 2503(c)—principal or income required to be distributed by age 21; trust with spendthrift provision—disburses funds for college expenses only and remains in the control of the trustee beyond the age of majority
EXAMPLE: Failure to Disclose Risks and Commissions
In a complaint brought against a CFP® certificant, a couple alleged that the planner advised them to get out of their stock and bond investments and use the money to purchase limited partnership units. This change was contrary to their expressed wish for low-risk investments. According to the complaint, the planner failed to inform them as to the illiquidity of the partnerships. Further, the complaint alleged that the planner told the couple that he worked on a straight-fee basis and failed to disclose that he earned an estimated $7,500 to $10,000 in commission from these partnership investments. Following a hearing before the CFP Board, the planner had his credentials revoked.
Mortgage insurance is...
Is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than 20%.
Tone
Is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.
TEST TIP: PRO FORMA CASH FLOWS
Make sure you understand the purpose of a pro forma cash flow statement and how it is used when your clients' planning strategies affect their cash flows. For your exam, it will not be necessary for you to create a pro forma cash flow statement.
VERTICAL FORMAT
Many planners prefer a vertical format, with net worth at the bottom of the column. This approach allows them to line up prior or subsequent statements on the same page for purposes of comparison.
What does the Securities Investor Protection Corporation (SIPC) do?
Oversees the liquidation of brokerage firms and to insure investors' accounts up to a maximum value of $500,000 (of which only up to $250,000 can be cash balances) in the case of bankruptcy of a brokerage firm.
Self-Attribution Bias
One ego defense mechanism is the self-attribution bias. Individuals take credit for their successes and either blame others or external influences for failures. Self-attribution bias is an ego defense mechanism because analysts use it to avoid the cognitive dissonance associated with having to admit to making a mistake
Home ownership has several tax implications. What are they?
One is that points paid are generally income tax deductible for the buyer of a home, up to a certain level of mortgage debt. Another is that interest on mortgages used for home purchases or substantial improvements can be considered an itemized tax deduction, subject to specific limits. Capital gains on the sale of a home are taxed only under certain circumstances.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
One of the major areas that the act addressed is the general stability of the financial system. Regulators have pressed banks, especially the largest and most important ones, to have more capital and hold more liquid assets. ** Came about as a result of numerous problems that came to light during the financial crisis in 2008,
WHAT TYPE OF QUESTIONS should be used to develop a client's psychological profile.
Open-ended questions
The Sarbanes-Oxley Act of 2002
Prior to this act, abuses or alleged abuses had taken place in the area of public accounting. These abuses included the conflicts of interest that can arise from a public accounting firm that audits a company also supplying more lucrative consulting services. In the interest of selling these consulting services, it was alleged that a firm might "go soft" on the audits of the company. ** It also set up the Public Company Accounting Oversight Board
Glass-Steagall Act of 1933
Prohibited financial institutions from consolidating and offering any combination of traditional commercial banking, investment banking (brokerage firms), and insurance. (enacted in response to the financial collapse during the Great Depression), which had prohibited commercial banks from engaging in investment banking activities. *** REPEALED IN 1999
PROFESSOR'S NOTE: ILLUSION OF CONTROL
Research has shown that traders with higher levels of illusion of control perform less well than those with lower levels.
Key Procedural Rules Time Requirements: Respondent subject of an Order of Public Censure, Temporary Bar, or Permanent Bar provides written evidence
Respondent subject of an Order of Public Censure, Temporary Bar, or Permanent Bar provides written evidence
FISCAL POLICY: PARTIES AND TOOLS AVAILABLE:
Responsible party ■ Congress and the president Authority of responsible party ■ Congress passes legislation; the president signs into law. Tools available to implement policy changes ■ Makes changes in tax laws ■ Increases and decreases government spending
Coordination Rules
Rules or provisions are included in the Internal Revenue Code specifying how all of the favorable education tax benefits may be used together by an eligible taxpayer. A taxpayer can claim an American Opportunity Tax Credit or Lifetime Learning Credit for the taxable year and can also exclude from gross income amounts distributed from a Section 529 plan or CESA, but only if the Section 529 plan or CESA tax-free distributions are not used to pay the same expenses for which either the American Opportunity Tax Credit or Lifetime Learning Credit was claimed. The American Opportunity Tax Credit and Lifetime Learning Credit may not both be claimed in the same year for the same student. Taxpayers may waive the American Opportunity Tax Credit or Lifetime Learning Credit even when they qualify for one of the credits. This may be the case if the tax savings resulting from the credit is less than the savings from the income tax-free treatment of Section 529 plan withdrawals. The student loan interest deduction may be used in combination with any of the other educational tax benefits, including the American Opportunity Tax Credit or the Lifetime Learning Credit.
Coverdell Education Savings Account (CESA)
Serves as an incentive for parents, grandparents, and others to save for a child's education expenses The CESA is established either in a trust or custodial account on behalf of the child. Total contributions to all CESAs for a beneficiary, who must be under age 18 when the contribution is made, cannot be more than $2,000 per year Contributions are subject to phaseout. In 2021, this phaseout amount is $95,000-$110,000 of modified adjusted gross income (AGI) for single taxpayers and $190,000-$220,000 of modified AGI for married taxpayers filing jointly. Currently, the phaseout amount does not adjust for inflation. All funds within the CESA must be used before the student reaches age 30. Any remaining funds will be disbursed to the CESA beneficiary, and the earnings will be subject to income tax and a 10% penalty. However, in order to prevent this from occurring, the owner of the CESA has the right to change the beneficiary to another family member of the original beneficiary. Only one rollover for a CESA is allowed per individual per year. Contributions to a CESA are NOT tax deductible BUT the earnings on the account accumulate tax-free Can be used for tuition, room, and board expenses for all education expenses, not just higher education ** expenses for private elementary and secondary education (K-12) are also allowed. In addition to tuition, expenses for room and board are permitted.
What Is a Stafford Loan?
Stafford loan is a type of federal, fixed-rate student loan available to college and university undergraduate, graduate, and professional students attending college at least half-time. These loans are also called direct loans and are given out under the William D. Ford Federal Direct Loan Program.1 They are intended to supplement existing personal and family resources available for higher education costs, including scholarships, grants, and work-study. Federal direct loans can be used to pay for the costs of education, including tuition, room and board, books, and other education-related expenses.
Which Act is a possible major cause of the subprime mortgage crisis that caused the market meltdown in 2008?
The Gramm-Leach-Bliley Act of 1999
Which Act is also known as the Financial Services Modernization Act,?
The Gramm-Leach-Bliley Act of 1999
Outcome Bias
Tendency for individuals to take a course of action based on the outcomes of prior events
Appeals Committee.
The "CFP Board Counsel or Respondent may appeal a final order to CFP Board's Appeals Committee of the Board of Directors ('Appeals Committee'). The Appeals Committee is composed primarily of CFP® professionals and has the authority to issue CFP Board's final decision." The Appeals Committee is composed of up to four members of the Board of Directors (formerly Board of Governors), at least two of whom are first-year members of the Board. Members of the Appeals Committee may not be members of the DEC.
What Is the American Opportunity Tax Credit (AOTC)?
The American opportunity tax credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student's post-secondary education. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent, or a spouse making post-secondary education payments can claim the AOTC on their tax return Room and board, medical costs, transportation, and insurance do not qualify, nor do qualified expenses paid for with 529 plan funds. To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly).
The Bankruptcy Abuse Prevention and Consumer Act of 2005
The Bankruptcy Act of 2005 provides for the following: Comprehensive changes to the bankruptcy code went into effect October 17, 2005, Individuals who have the ability to pay their debts (as defined in the act) are required to file under Chapter 13 of the Federal Bankruptcy Code. This is in substitution for having their debts canceled entirely under a Chapter 7 filing. Consumer use of Chapter 7 filing is limited to the liquidation of credit card bills or loans that are not secured by a house or other asset. Debtors who want to file for Chapter 7 are required to submit to credit counseling before doing so. Lenders are required to provide consumer information about the financial dangers of paying only minimum balances on credit card debts.
What does CPI produce monthly?
The CPI program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.
Fiduciary Duty (Standard A.1)
The Code and Standards state, "At all times when providing Financial Advice to a client, a CFP® professional must act as a fiduciary, and, therefore, act in the best interests of the client."
internal rate of return (IRR) is also known as:
The Compound Return
PROFESSOR'S NOTE: D.E.C.
The DEC is actively involved in the consideration of cases involving a presumptive bar of a candidate for CFP® certification or Professionals Eligible for Reinstatement (PER) in accordance with the guidelines presented in the Fitness Standards.
What is the CFP Board's Disciplinary and Ethics Commission (DEC) responsible for?
The DEC is responsible for investigating, reviewing, considering recommendations, and issuing a final decision in these instances.
The __________ Act provided the SEC with discretionary authority to adopt a fiduciary duty rule that would cover both broker-dealers and investment advisers?
The Dodd-Frank Act
Which act changed the original Investment Advisers Act of 1940 thresholds for registration with the SEC?
The Dodd-Frank Act
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
The FDIC insures deposits in U.S. banks and savings and loan associations against bank failures.
FINRA
The Financial Industry Regulatory Authority
Which act requires investment advisers to register with the SEC by filing Form ADV?
The Investment Advisers Act of 1940
What federal legislation established the Securities Investor Protection Corporation (SIPC) to insure investors against losses arising from the failure of any brokerage firm?
The Securities Investor Protection Corporation Act of 1970
Consumer Credit Protection Act amendments include?
The act has been amended several times since 1968, and it now requires the issuer of installment credit to provide written disclosures in easy-to-understand language. It also prohibits credit card companies from issuing cards that the consumer has not requested. In addition, the act now protects the consumer from unauthorized credit card use. The credit card holder is liable for only $50 of unauthorized charges if they report to the issuer that the credit card has been lost or stolen. In practice, credit card companies often reduce this to $0, but the law states that they can hold the holder liable for up to $50 for unauthorized charges.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, advisers with assets under management equal to or greater than what amount must register as investment advisers with the Securities and Exchange Commission (SEC)?
The answer is $100 million. Under this Act, advisers with assets under management of $100 million or more must register as investment advisers with the SEC unless an exemption/exclusion applies. Advisers with assets under management of less than $100 million will generally be required to register as investment advisers with the states in which they maintain clients.
John Hedrick wants to pay one-half of the college costs for his daughter, Ruth. She will be attending a private college with annual costs of $20,000 today. Ruth is 10 years old and will be starting college in eight years. If these costs are expected to increase annually by 8%, how much will Mr. Hedrick need to provide for her first year of college? A)$18,509 B)$74,037 C)$23,409 D)$37,019 E)$27,371
The answer is $18,509. You are just being asked to arrive at the inflated value of one-half of the first year's tuition payment. As such, this becomes a simple future value calculation with the following keystrokes: 8 N; 8 I; 10,000 PV (1/2 of $20,000); FV = $18,509.
What federal legislation established the Securities Investor Protection Corporation (SIPC) to insure investors against losses arising from the failure of any brokerage firm?
The answer is the Securities Investor Protection Corporation Act of 1970. This is true of the Securities Investor Protection Corporation Act of 1970. The Maloney Act of 1938 brought the over-the-counter (OTC) market under the regulation of the Securities and Exchange Commission (SEC) and called for self-regulation of OTC securities dealers. The Securities Exchange Act of 1934 addressed the regulation of securities to the secondary market or exchanges. The Securities Act of 1933 requires the registration of new issues of securities or issues in the primary securities market and provides applicable procedures for issuing an initial public offering (IPO) of securities, while also specifying which securities are exempt from registration requirements.
The Arnolds established a Section 529 plan for their daughter, Lisa. If Lisa decides not to attend college, which of the following statements is CORRECT? A)The account balance must be distributed to Lisa by age 30, and she will be subject to a 10% tax penalty. B)The account balance may be rolled over to another eligible family member. C)The account balance must be distributed to the Arnolds when Lisa reaches age 25, and they will be subject to a 10% tax penalty. D)The account balance reverts to the sponsoring state.
The answer is the account balance may be rolled over to another eligible family member. If the child for whom a Section 529 plan was established does not attend college, the account balance may be rolled over to another eligible family member.
PROFESSOR'S NOTE: SIPC
The cost of this insurance is paid by members of SIPC. All brokers and dealers that are registered with the SEC and all members of national securities exchanges must be members of SIPC
Crummey Invasion trust
The final form of trust is the demand, or Crummey invasion, trust, which is an effective mix of the best attributes of the minor's and current income trusts. It transfers money from one individual to a trust for the benefit of another in a way that avoids gift taxes and keeps the money out of the estate of the donor. It permits the beneficiary to withdraw from the trust an amount equal to the lesser of the annual addition to the trust or the annual gift tax exclusion. In addition, rather than requiring trust property to be distributed to the beneficiary at age 21, the demand trust allows distribution at any age chosen by the grantor. However, if the demand trust accumulates income and it is taxed to the trust itself, the tax rates are high.
CHAPTER 7 Bankruptcy
The forfeiture of an individual's assets in exchange for the discharge of debts. The debtor is not required to give up certain payments received, including Social Security benefits, pension benefits, unemployment compensation, and alimony. In a Chapter 7 bankruptcy, many states provide for retention by the debtor of all or a portion of the cash values of life insurance and annuities. Upon completion of Chapter 7 bankruptcy proceedings, most debts are discharged completely—the debtor is no longer responsible for their repayment. However, certain debts cannot be discharged. Student loans and unpaid taxes can only be discharged in extremely rare situations. Loans for education can only be discharged through a Chapter 7 bankruptcy if it can be proved that repaying them would create an undue hardship. Tax liens remain in place even after a Chapter 7 bankruptcy, but it is possible for unpaid taxes to be discharged if proper returns have been filed and the tax became due more than three years prior to filing bankruptcy. Child support, alimony debts, and 401(k) loans are not dischargeable through bankruptcy. When a person borrows against their 401(k), they are the borrower and lienholder, and a person cannot discharge a debt to themselves.
Define: "KIDDIE TAX"
The kiddie tax applies to unearned (i.e., investment) income greater than $2,200 (in 2021) received by children under age 19, or under age 24 if a full-time student. In essence, the first $1,100 of unearned income is not taxed because it is offset by the limited standard deduction; the second $1,100 of unearned income is taxed at the child's marginal tax rate; and all unearned income exceeding $2,200 is taxed at the estates and trusts marginal income tax brackets. In general, investment vehicles selected for education funding when the child is subject to the kiddie tax should be structured for growth rather than income to avoid the kiddie tax.
Savings and Loan Associations (Thrift Institutions)
The main purpose of a savings and loan association (S&L), also called a thrift institution, is to accept savings and provide home loans. S&Ls are not permitted to provide demand deposits (e.g., checking accounts); however, they can offer interest-bearing NOW (negotiable order of withdrawal) accounts, which are similar to demand deposit accounts. All federal and many state-chartered S&Ls are regulated by the OCC.
Duty to Diagnose
The obligations to know your customer and to investigate the suitability of any products recommended as investments are complementary and fall within the ethical duty to Diagnose. This ethical duty is supported by formal requirements. New York Stock Exchange (NYSE) Rule 405 stresses the importance of learning all the essential facts about a client and that client's account.
Two tools are used in exercising fiscal policy:
The power to tax The power to spend
BUYING OR LEASING A HOME DEPENDS ON...
The price of existing homes and the level of mortgage interest rates in a particular area The length of time the client expects to live in the home and the degree of uncertainty associated with this issue The extent to which home prices are expected to increase or decrease over the period the client expects to own the home The perceived income tax benefits of home ownership
PRINCIPLE-BASED APPROACH (FIDUCIARY STANDARD)
The principle-based approach is more aspirational in nature and is the current approach instituted by RIAs and CFP® professionals.
Compounding is...
The process of interest being earned on increasing sums of principal and interest over time is known as
What is the PURPOSE of the Securities Act of 1933?
The purpose of this act is to require the registration of securities with the SEC by issuing a registration statement that provides full disclosure of material facts about the securities that the issuer is about to offer.
REASON FOR USING GROSS INCOME IN BOTH RONT-END AND BACK-END RATIOS IS...
The reason for the use of gross (before-tax) income in both the housing cost (front-end) and total debt (back-end) ratios is the tax-favored status afforded to mortgage interest payments. Because consumer debt is afforded no such tax-favored status, this calculation is done on a net income (after-tax) basis
Series EE and I Savings Bonds
The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I bonds issued after 1989. ** To qualify for the exclusion, the bondholder(s) must be at least 24 years old when the bond is purchased and the taxpayer, the taxpayer's spouse, or the taxpayer's dependent at certain postsecondary educational institutions must incur tuition and other educational expenses. Individuals with incomes above certain thresholds may not be eligible to participate. This phaseout restriction will be in place when the distribution occurs, so it is important to monitor the client's income compared to the phaseout. Series EE bonds can be converted tax-free to Section 529 plans, but, again, there are income restrictions. Monitoring this situation can be a great added benefit for clients owning Series EE bonds *** The costs of room and board, as well as books, are not eligible expenses. The amount of eligible expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other tuition reduction. Eligible expenses must be incurred during the same tax year in which eligible bonds are redeemed. **** A child can be named as a beneficiary on a bond, but the child cannot be a co-owner of the bond. The only eligible owners are the taxpayer (purchaser) and their spouse. Additionally, spouses must file a joint tax return to qualify for the tax benefit. The income phase-out range to determine qualification for the education tax exclusion is $83,200-$98,200 (single) and $124,800-$154,800 (married filing jointly) of modified adjusted gross income (AGI) for 2021. There are additional requirements and limitations.
The statement of financial position..
The statement of financial position, also known as a net worth statement, is a profile of what is owned (assets), what is owed (liabilities), and your client's net worth on a specific date.
Risk tolerance
The tradeoffs that clients are willing to make between potential risks and rewards
Components of the Fiduciary Duty:
The word fiduciary comes from the Latin fiducia, which means trust. According to Black's Law Dictionary, a fiduciary relationship exists whenever one person trusts in or relies upon another. More specifically, a fiduciary relationship arises whenever "confidence is reposed on one side, and domination and influence result on the other." In the case of fiduciary relationships involving investment advisors and clients, the U.S. Supreme Court has described the advisor's duty as "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts" (SEC v. Capital Gains Research Bureau, 375 U.S. 180, 1963).
REASONS FOR USING A BUDGET
There are many important reasons to use a budget. Budgets can be used to accomplish specific financial goals by dedicating the right amount to budget categories for the time frame; to avoid the need to use credit cards or other forms of debt for expenses that can be anticipated (e.g., auto maintenance); as a written plan that includes goals (e.g., travel or paying down debt) that are communicated to the family so they will know why spending is limited in one area or another and get everyone engaged in staying on track; when family economics are complex (e.g., when income and/or expenses are widely fluctuating); when clients need to understand where money is being spent; when it is important to keep track of spending in one specific area or by certain individuals; when the family believes it is important to establish financial incentives for its members; and when a family wants to shift or improve control of household expenses.
LIQUID ASSETS
These are assets that may be quickly accessed by the client without the risk of a significant loss to principal.
Federal Housing Administration (FHA) mortgage loans
These mortgages appeal to buyers who may not meet the financial underwriting requirements for a conventional home loan (i.e., a 15-or 30-year fixed mortgage or adjustable-rate mortgage). A key feature of the FHA mortgage is a very low initial down payment and, sometimes, a lower interest rate because of the federal government's guarantee of repayment.
What are BROKERS?
They are agents that arrange trades for clients and charge commissions. Brokers, or agents, arrange trades between buyers and sellers.
SERIES 65:
This entitles the holder to provide investment advice to clients within the holder's primary state of residence. Note that the CFP Board has entered into a reciprocity agreement with many state securities departments permitting a waiver of this examination if the individual is a CFP® certificant.
Adviser Registration: The advice test
This first test clearly will be met if an individual gives advice, issues reports, or recommends to a client that they acquire a specific security. **Furthermore, an individual who provides advice to a client as to the selection or retention of an investment manager also meets this first test.
FEDERAL RESERVE BOARD
This group makes monetary policy.
Respondent.
This is any person who has agreed to the CFP Board's Terms and Conditions of Certification and Trademark License or CFP® Certification Candidate Agreement. A person deemed to be a Respondent must comply with the guidelines and processes outlined in the Procedural Rules.
Duties When Representing Compensation Method (Standard A.12)
This standard establishes criteria for determining the appropriate compensation method to disclose to clients. Fee-only, fee-based, and sales-related compensation categories are defined as follows: Specific representations. CFP® professionals may only represent their compensation in one of the following ways: - Fee only—only planning fees (no sales-related compensation) - Fee based—planning fees + sales-related compensation Sales-related compensation. This is defined separately in Standard A.12 and includes commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, referral or solicitor fees, or similar consideration.
CLOSED-END LEASES ARE USED FOR...
This type of lease is used by businesses to acquire equipment. It is also an option for consumers interested in leasing an automobile.
SELECTIVE DECISION-MAKING
This usually occurs when commitment to an original decision course is high. Selective decision-making rationalizes actions that enable a person to adhere to the original course
Broker-Dealer Exceptions: Special Compensation
To avoid receiving special compensation, a broker or dealer relying on this exclusion must receive only commissions, markups, and markdowns.
Sarbanes-Oxley Act of 2002
Toughens the accountability for accuracy of financial information released by corporations; requires independence on corporate boards and sets stricter rules for auditors
As part of the Fitness Standards, the CFP Board established a list of transgressions that will be presumed to be unacceptable and thus bar certification, unless the Disciplinary and Ethics Commission (DEC) reconsiders and makes a different determination after a review. This list includes the following:
Two or more personal or business bankruptcies. Revocation or suspension of a non-financial professional (e.g. real estate, attorney) license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees. Suspension of a financial professional (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees. Felony conviction for non-violent crimes (including perjury) within the last five years. Felony conviction for violent crimes other than murder or rape that occurred more than five years ago.
Chapter 13 bankruptcy
Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding debts within a specified time period—normally three to five years. Frequently, the amount owed is reduced so that payments will be manageable.
THE 3 COSTS ASSOCIATED WITH LEASING...
Under the leasing option, generally three costs are involved: (1) the periodic rent obligation, (2) the cost of the renter's insurance policy on his personal property (if the tenant chooses to purchase such a policy), and (3) the cost of utilities. A security deposit
some practitioners prefer to list the client's residence as an invested asset
Upon retirement, some people intend to sell their home to take advantage of the tax code provision that allows them to avoid some, if not all, of the taxes on the gain from the sale. Then, using the balance of the cash received from the sale, they move to a smaller residence. Alternatively, clients may have plans to use a reverse mortgage, discussed later in this module, to supplement their retirement income.
VISUAL LEARNING STYLES
Visual learners will express themselves through facial expressions and often have interests such as movies and spectator sports.
Hearing Panel.
When a formal complaint is filed, a hearing takes place before a panel of a minimum of three individuals. At least one member of every hearing panel is a member of the Disciplinary and Ethics Commission (DEC), and at least two members must be CERTIFIED FINANCIAL PLANNERTM professionals. The respondent is entitled to appear in person or telephonically, be represented by counsel at the hearing, cross-examine witnesses, and present evidence on their own behalf
Duties When Recommending, Engaging, and Working With Additional Persons (Standard A. 13)
When engaging or recommending another professional, a CFP® professional must have a reasonable basis for the recommendation or engagement based on the other professional's reputation, experience, and qualifications; and disclose any arrangement by which someone other than the client will compensate the CFP® professional, the CFP® professional's firm, or a related party for the engagement or recommendation. For engagements, the CFP® professional must take reasonable steps to protect the client's interests. When working with another professional on a client's behalf, the CFP® professional must communicate with the other professional about the services each will provide and their respective responsibilities; and inform the client in a timely manner if the other professional did not perform the services in accordance with the scope of services to be provided and the allocation of responsibilities.
Sound and Objective Professional Judgment (Standard A.6)
When exercising professional judgment, CFP® professionals must act objectively to serve the interests of clients, rather than themselves, their firms, or anyone else. CFP® professionals may not solicit or accept any gift, gratuity, entertainment, noncash compensation, or other consideration that could reasonably be expected to compromise their objectivity.
Attempting to Nullify Duties by Use of Written Statements
When in doubt, the cautious investment professional should consult the firm's compliance or legal department.
Cognitive Dissonance
When newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort, also known as cognitive dissonance. **When in a state of cognitive dissonance, individuals will often change some of their attitudes, beliefs, or behaviors to reduce their discomfort; maintain psychological stability.
DEFLATION
When prices are falling in absolute terms, deflation exists. - In general, a deflationary period is one where preservation of capital should be of primary concern; investments should center on very high-quality debt instruments. - Not since the depression of the 1930s has the United States experienced pronounced deflation.
I/YR (interest rate or rate of return): Calc Def:
When using the 1 P/YR setting for a calculation with greater than one payment (period) per year, divide the annual interest rate by the appropriate number of periods per year. For example, monthly payments with an annual interest rate of 6% compounded monthly (12 periods) is entered as 6 ÷ 12 = 0.50 I/YR. *** Note: Whenever money leaves your hands, there should be a negative sign associated with the entry. Whenever the money comes back to you, the amount should be positive.
N (number of periods): Calc Def:
When using the 1 P/YR setting for a calculation with greater than one payment (period) per year, multiply the appropriate factor by the number of years. For example, monthly payments (12 periods) for 10 years is entered as 10 × 12 = 120, N.
MODEUL 7 TEST TIP
Whenever you are presented with a problem relating to the supply and demand or price and quantity relationship, you should immediately draw a freehand version of Figure 7.1. A seemingly complex problem can be made relatively simple if this approach is used. Price increases as you go up the price axis (y-axis), and quantity increases as you go to the right on the quantity axis (x-ax
Inflation-Adjusted Rate of Return
[(1 + after tax return) / (1 + inflation rate) - 1] x 100 ** TEST TIP When using the inflation-adjusted rate of return formula, make sure to use the education inflation rate as the denominator, not the general inflation rate.
THE AVALANCHE TECHNIQUE
prioritizes high-interest debt to save money, but it may take longer to get the first debt eliminated. When the highest-interest debt is eliminated, your client focuses on eliminating the debt with the next-highest interest rate, and so on, until all of his debt is paid off.
MORTGAGOR VS MORTGAGEE
With a mortgage, the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of the mortgage.
What does FINRA do?
With the approval of the SEC, FINRA combines the regulatory functions of the NASD and the regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE). FINRA develops rules and regulations (called FINRA Conduct Rules), conducts regulatory reviews of members' business activities, disciplines violators, and designs, operates, and regulates securities markets and services to benefit and protect the investor.
Are Federally chartered S&Ls are regulated by the FDIC?
YES
CAN ARMs allow for negative amortization to occur?
YES, This is the case when the agreed-upon monthly payment is less than the accruing interest charges and unpaid interest is added to the mortgage balance, increasing the debt.
PROFESSOR'S NOTE: REVERSE MORTGAGES
You should note that if an older homeowner with a reverse mortgage enters a nursing home, ownership of the residence is not a barrier to Medicaid eligibility. However, once the borrower has been out of the home for 12 months and the home is sold to satisfy the obligation, the remaining cash proceeds are not protected, and this may cause a loss of Medicaid eligibility.
Following is the equation for the inflation-adjusted interest rate:
[ 1 + Rate of Return ] ____________________ -1 ] X 100 [ 1 + Rate Of Inflation ]
The SEC requires mutual funds to have a ____?
a CCO
What must all new issues must be accompanied by?
a PROSPECTUS!
Broker-Dealer Exceptions: Bundles Fees
a broker or dealer that receives a fee based on a percentage of assets that compensates the broker or dealer for both advisory and brokerage services receives special compensation.
What is a BUDGET?
a budget is like a road map, which increases the chances of reaching a destination. Similarly, a budget helps clients actively manage their money so they can achieve their financial goals. A budget should consider the client's financial goals and serve as a control document for future cash flows.
Asset Accumulation Phase
a client is usually in this phase FROM 20's until approximately age 45 or later if the client's children are not yet independent. During this phase, debt is usually high, and cash flow and net worth are generally high
Conversation or protection phase
a client is usually in this phase from approximately 45-60 or immediately preceding the client's planned retirement date. Generally, cash flow and net worth are increasing, and debt is decreasing
Distribution or gifting phase
a client is usually in this phase from approximately age 60, or the planned retirement date, until the date of death. Typically, net worth and cash flow are higher than in previous years, and debt is low
Behavioral Finance
a field of study which 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
FIXED-RATE LOAN
a loan with an interest rate that remains constant until paid in full. Although initial interest rates are higher than those of variable (adjustable) rate loans (see next), fixed-rate loans offer more security because the underlying interest rates will not increase considerably during the term of the loan.
Many planners use __________ to capture the difference between inflows and outflows.
a net cash flow (surplus or deficit)
A SERIAL PAYMENT IS...
a payment that increases at a constant rate (usually the annual rate of inflation) to protect the client's future purchasing power.
Insider trading is illegal when...?
a person has material, nonpublic information and trades on that information.
financial planning practitioner
a person who engages in financial planning using the financial planning process when working with a client
What is National Association of Securities Dealers (NASD)?
a self-regulatory organization of OTC securities dealers. ** The NASD is now part of FINRA, a larger securities industry regulator.
Six months of expenses should be set aside if your client is
a single wage earner, or married and only one spouse is gainfully employed
Phishing
a technique to gain personal information for the purpose of identity theft, usually by means of fraudulent e-mail *or posing as a financial institution or company and sending spam over the internet to entice an individual to provide personal information.
The decision to purchase or lease an automobile is primarily...
a time value of money analysis that takes into account the greater up-front cost of purchasing the automobile rather than leasing and investing any money saved. Still, one of the downsides of leasing an automobile is that it generally costs more in total dollars than buying it for cash or taking out an automobile loan.
Fiscal policy can be either_______ OR _________
expansionary or contractionary:
Fair and Accurate Credit Transaction Act of 2003 (FACTA)
added new sections to the federal FCRA that gives consumers greater protection against the growing crime of identity theft. Under FACTA, consumers can obtain a free credit report every 12 months from each of the three national credit reporting agencies—Equifax, TransUnion, and Experian. FACTA also requires that consumer information be disposed of in a secure manner. Under the act, individuals can place alerts on their credit histories if identity theft is suspected or if deploying overseas in the military. The act also requires the secure disposal of consumer information.
National Credit Union Share Insurance Fund (NCUSIF)
an agency of the federal government, regulates credit unions unless the institution is chartered by a state where separate regulation is provided. NCUSIF is backed by the full faith and credit of the U.S. government. However, no federal tax dollars have been deposited into the fund. The NCUSIF is approximately 1.30% of federally insured credit union deposits.
State law exemptions generally include:
an exemption for one's homestead, some limited amount of personal property, pension and retirement plan rights (ERISA plans), the existing cash value of any life insurance policies, the proceeds of any annuity contracts, disability income benefits, and property that is held as tenants by the entirety (see 106 Estate Planning for more details).
ARBITRATION
an impartial person or panel hears the issues as presented by both parties, studies the evidence, and then decides how the issues should be resolved. Arbitration is final and binding, subject to review by a court only on a very limited basis.
perception
an individual's personal awareness of things, people, events or ideas
The Investment Advisors Act of 1940 defines an Investment Adviser as...?
any person who, for compensation, engages in the business of advising others, either directly or through publications or writing, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
Stafford loans definition:
are a common type of educational loan. Both direct subsidized and direct unsubsidized loans are offered through the Stafford loan program. Only undergraduates qualify for subsidized Stafford loans. If a student qualifies for a loan based on financial need, the loan generally will be subsidized. The subsidy takes the form of the government paying the interest due while the student is in school and during the six months following graduation. Unsubsidized loans have interest due within 60 days of disbursement of the money. A student may defer payments on the loan, but the interest usually continues to accrue and will increase the total amount payable when repayment begins. While in school, the student may pay interest only. Any student who is enrolled at least half time is eligible to apply for Stafford loans (part-time students are not eligible). There are limits as to how much may be borrowed each year—the cost of the student's education less other loans or grants is set as an alternative maximum to specific dollar limits published by the government.
BELIEFS
are a type of attitude because they reveal the understanding of some aspect of a person's life.
In the case of a sole proprietorship...
both business assets and liabilities should be shown separately from personal assets. Business assets could be itemized on the personal statement, or another statement for the business could be prepared and the net (asset or liability) be carried over to the personal statement. Partnership interests and ownership of stock in a corporation can be shown under the invested assets category. Another important note is that, if a businessowner personally signs for a business liability, it is a contingent liability on the businessowner's personal financial statement.
The housing cost ratio and total debt ratio are...
calculated as a percentage of the client's monthly gross (before-tax) income.
According to the Code and Standards, RELEVANT ELEMENTS can include
developing client goals, managing assets and liabilities, managing cash flow, identifying and managing risks, identifying and managing the financial effect of health considerations, providing for educational needs, achieving financial security, preserving or increasing wealth, identifying tax considerations, preparing for retirement, pursuing philanthropic interests, and addressing estate and legacy matters.
Skimming
double-swiping a credit card in a legitimate terminal or covertly swiping a credit card in a small, hidden, handheld card reader that records credit card data for later use **involve the stealing of credit or debit card information by using a special storage device when processing these types of cards.
AFFINITY BIAS
elieve the outcomes will represent their interests and values. This bias can lead to irrational decisions because investors perceive a product or investment opportunity to be a reflection of themselves. Ethnic, religious, or alumni affiliations can be the source of affinity bias.
Commodity Futures Modernization Act of 2000
essentially exempted derivatives from regulation.
Home equity loans and lines of credit are
essentially second mortgages that use the current equity in the homeowner's primary residence to provide money for home improvements and other purposes.
Representativeness detection starts with
gaining a better understanding of the laws of probability and statistical analysis. One helpful question that might detect this bias is assessing the probability that a given investment is properly categorized in a certain group of ideas and not in a different group. By thinking in probabilities, it is more likely that risk will be considered and sufficient diversification will occur
OPEN-END (AKA "FINANCE" OR "EQUITY" LEASE)
generally has a lower monthly payment than a closed-end lease but, at the end of the lease, the lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated. This type of lease is also used by consumers interested in an automobile lease.
INFLOWS INCLUDE
gross salaries and wages, interest and dividend income, rental income, tax refunds, and other amounts received by the client.
LEADING RESPONSES
guide clients to give more details, making a meeting of the minds more likely.
Fixed-rate mortgages
have a level interest rate for the term of the loan and a fixed payment amortization schedule.
financial counseling
helping clients change poor financial behavior through education and guidance
The most significant disadvantages of using credit cards are the ______ associated with carrying a balance and transaction fees.
high interest rates
MIRRORING
imitating clients' gestures and physical positions or by using a similar verbal style.
When using the three-step education funding formula, remember to.....?
inflate, adjust, invest. Each of these terms correspond to the I/YR value to apply in a given step.
What Caused the Creation of FINRA?
institutions within the securities industry sought to establish a higher level of self-regulation. Their theory was that if they did not do it for themselves, the heavy hand of government would.
INSTALLATION LOAN
is a loan for which the client borrows a single amount of money and repays the balance with interest at stated intervals. Most loans are installment loans.
SINGLE PAYMENT (BRIDGE) LOAN
is a loan that provides short-term, temporary financing that is repaid with interest in one lump sum at the end of the term. These types of loans are often used to provide funds for a time period between two transactions (e.g., the purchase of one house and the subsequent sale of anothe
What is Standards of Conduct (Standards)?
is a section of the Code and Standards that articulates professional duties that CFP® professionals must uphold.
net-investment-assets-to-net-worth ratio
it is useful to show how well a client is advancing toward his capital accumulation goals. An individual should have a ratio of at least 50%, and the percentage should get higher as retirement approaches. Younger individuals will most likely have a ratio of 20% or less because they have not had the time to build an investment portfolio. A client with a statement of financial position showing that this ratio is only 18% indicates that he is not progressing well in his capital accumulation goal. The ratio is calculated with the following equation. net investment assets net-investment-assets-to net-worth-ratio = __________________ net worth
If the Fed wants to contract economic activity:
it will sell government securities from its existing inventory, thereby decreasing the money supply, driving up overall interest rates, and reducing prices.
Overconfidence
leads clients to believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they are
Overconfidence
leads clients to believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they are. They take credit for any financial decisions that have positive results.
Confirmation bias
occurs when individuals look for new information or distort new information to support an existing view. Clients who get involved with the portfolio process by researching some of their portfolio holdings may become overly attached to some holdings and only bring up information favorable to the holding.
Among the three monetary policy tools, the most important and most frequently practiced is __________ carried out by the Fed.
open-market operations
The CFP Board Procedural Rules
outline processes and policies pertaining to disciplinary and appeals rules. Overall, these combined processes enable the CFP Board to provide enforcement in circumstances involving a CFP® professional's wrongdoing(s).
Consumer Credit Protection Act (Truth in Lending)
passed in 1968 (and substantially updated in 1996). The purpose of this act was to have lenders make certain uniform disclosures, enabling the consumer to evaluate credit terms. One specific provision was the establishment of a standard method of calculating and reporting interest, which is called the annual percentage rate (APR).
A GRADUATED PAYMENT MORTGAGEmay be appropriate for
people who anticipate increases in income with some certainty, enabling them to afford a higher payment in the future than they can currently afford.
Consumer Credit Reporting Reform Act
places the burden of proof for accurate credit information on the credit reporting agency
Equal Credit Opportunity Act (ECOA)
prohibits credit discrimination on the basis of - race, color, religion, national origin, gender, marital status, age, or sexual orientation (provided the applicant has the capacity to contract); - the fact that all or part of the applicant's income derives from a public assistance program; or - the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.
Duty of care
requires the fiduciary to have the competency to give fiduciary advice. This requires a certain level of knowledge and skill to know what is in the best interests of someone setting up a retirement plan or in the best interests of a retirement plan participant.
CASH FLOW STATEMENT
reveals the client's cash receipts and disbursements over a specific period of time—monthly, quarterly, and often over one year. Also known as the statement of cash flows, it summarizes the inflows and outflows of cash and reveals a client's pattern of spending, saving, and investing.
Fair Credit Billing Act (FCBA)
sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments. ** requires consumers to notify the creditor in writing of any billing errors within 60 days of the date they receive the billing statement. Creditors then have 30 days to respond to the consumer with respect to the possible billing error and 90 days to resolve the complaint.
Single payment loan
short-term, temporary financing, repaid with interest in one lump sum at end of term
OUTFLOWS
should be divided into savings and investments, fixed outflows, and variable outflows.
Fair Debt Collection Practices Act (FDCPA)
specifies what a collection source may and may not do when pursuing payment of past due accounts. prohibits debt collectors from engaging in certain practices, such as contacting a debtor at his place of employment if the employer objects, harassing or intimidating the debtor, or using false and misleading practices. A state court may issue an order for garnishment of a portion of a debtor's wages in order to satisfy a legal judgment that was obtained by a creditor
What is one of the easiest time value of money concepts to understand?
the FV of a single amount or the future value of a dollar. *** The single amount is the PV lump-sum amount. The FV of that sum is the value to which it grows over a given period at an assumed or actual rate of return.
Professor's Note: Remember, when solving for a level payment...
the FV should be an inflation-adjusted amount. However, when solving for a serial payment, you will be taking inflation into account when you calculate the PMT and adjusting it each year for inflation. When calculating a serial payment, find the desired amount in today's dollars and enter it as an FV.
The SEC also oversees key participants in the securities industry, including
stock exchanges, broker-dealers, investment advisers, mutual funds, and public utility holding companies.
For the CFP® Exam, you should focus on the debts and obligations that are not generally dischargeable. The most notable of these are:
student and government loans, child support and alimony obligations, and recent federal income taxes due.
There are also difficult-to-categorize assets,
such as life insurance and personal residences. The cash surrender value of life insurance policies creates a problem.
NOTE ON VARIABLE OUTFLOWS:
taxes and FICA are sometimes listed as variable outflows on the cash flow statements. The ability to affect income taxes through various investment options and income planning is the rationale for this position. Further, if a client loses his job or is disabled, both the income and the taxes would be reduced.
Affinity Bias
tendency to favor things that can identified with emotionally bc they are similar to usex./ ethnic, religious, or alumni affiliations
The Advisers Act was a direct consequence of
the 1929 stock market crash
The DEC's decision regarding a petition for consideration may be appealed to t
the Appeals Committee of the Board of Directors of the CFP Board of Directors
CFP® certificants against whom allegations of Code and Standards violations and/or noncompliance are brought are subject to potential action from
the CFP Board's Disciplinary and Ethics Commission (DEC).
The two most impactful CREDIT-PROTECTION (consumer) acts are:
the Consumer Credit Protection Act and the Fair Credit Reporting Act (FCRA).
EDUCATION TAX CREDITS: Lifetime Learning Credit
the Lifetime Learning Credit may be claimed for an unlimited number of years while the student is pursuing their education. Furthermore, the Lifetime Learning Credit neither requires enrollment in a degree program, nor does it necessitate at least half-time enrollment. The amount of Lifetime Learning Credit permitted is 20% of the first $10,000 of qualified tuition expenses paid by the taxpayer for any year in which the American Opportunity Tax Credit is not claimed for the same student. This results in a maximum nonrefundable credit of $2,000 per return or per family. The Lifetime Learning Credit is available per eligible family.
Adviser Registration: Doing Business Test
the SEC takes the position that any individual who provides financial planning services, including but not limited to investment advisory services for compensation, is in the business of providing investment advice. ** except if incidental to non-investment-advisory business AND no compensation is received. *** However, just a simple advertisement can trigger the need to be registered under the Investment Advisers Act of 1940.
Chapter 13 bankruptcy is sometimes called.....?
the WAGE-EARNER PLAN
Real life applications of the serial payment approach include
the calculation of retirement needs and funding a child's education.
Serial payments differ from fixed annuity payments (both ordinary annuities and annuity due payments) because
the payments themselves are increasing at a constant rate. The result is that the initial serial payment will be less than that of a fixed annuity, but the last serial payment will be more than that of the fixed annuity.
PARTIES TO A LEASE
the person or business that owns the asset and leases it to another is called the lessor. The person who leases, or rents, the asset is called the lessee.
FAIR MARKET VALUE
the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller.
Financial planning is
the process of planning for financial independence.
Cost of attendance (COA) includes...?
the school's tuition and fees, as well as room and board, books, and other expenses. Most schools publish their cost of attendance on their websites and elsewhere.
Expected family contribution (EFC) is based on....?
the student's and family's income and assets, such as bank and investment accounts.
DISCOUNTING (PV)
the value today of a single amount that will be received in the future when discounted for a given number of periods at a given interest rate. * This is known in time value of money terms as the PV of a single amount or the PV of a dollar
The key characteristics of mortgage loans include:
their maturity, the determination of interest charges, how the loan principal is amortized, the terms under which prepayments of loan principal are allowed, and the rights of the lender in the event of default by the borrower.
FINRA regulates...
those involved in the sale of securities
Additional EFC considerations to review and discuss with clients include:
treatment of assets owned by relatives (grandparents, aunts, cousins), on which the student is a beneficiary. These assets are included at a rate of 0% for purposes of the EFC calculation when determining financial aid eligibility. While that seems advantageous at first glance, distributions for college from relative-owned accounts reduce future financial aid eligibility by 50% of the distribution amount (two years following distribution). As a result, proper timing of relative-owned account distributions is of the highest importance to optimize financial aid eligibility. Due to the two-year FAFSA lookback for income and assets for financial aid consideration, relative-owned accounts should be distributed later in college (i.e., junior and senior year). This allows the account to remain outside of the EFC calculation, and the distributions will not impact future eligibility in undergraduate studies.
Beliefs
type of attitude, reveal the understanding of some aspect of a person's life
Mastering interpersonal communication skills involves
understanding differences when communicating across generations, cultures, and genders, and will ensure that the listener understands and responds effectively to the communicator.
What you are trying to do with elasticity is determine how many...
units of quantity are changed for every unit of price change. Complementary goods are related to each other and the demand for one will impact the other (e.g., increasing demand for peanut butter subsequently increases the demand for jelly). Product substitutes serve a similar purpose, so if the price rises on one, another, similar product can serve as a substitute (e.g., the price of pork rises, so chicken is then purchased as a substitute).
Consequences and implications of conservatism may include clients who are
unwilling or slow to update a view and, therefore, hold an investment too long; or hold an investment too long to avoid the mental effort or stress of updating a view
Glass-Steagall Act of 1933
was an emergency response to the collapse of thousands of banks during the Great Depression. It prohibited financial institutions from consolidating and offering any combination of traditional commercial banking, investment banking (brokerage firms), and insurance.
Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act)
was enacted to establish fair practices and to enable consumers to better understand their credit transactions.
THE 4 COMPONENTS OF GDP
The four components are Consumption, Investment, Government spending, and Net exports (CIGNE).
EDUCATION TAX CREDITS AND EMPLOYER ASSISTANCE: There are two major credits and one deduction available for higher education costs. The two credits are...?
(1) the American Opportunity Tax Credit and (2) the Lifetime Learning Credit.
Settlement Offer
"CFP Board Counsel and Respondent may agree on a Settlement Offer, including a proposed Consent Order, that would resolve an investigation, Complaint, or Petition. If either CFP Board Counsel or Respondent does not agree to a Settlement Offer, the investigation will continue or the matter will proceed to hearing."
Roadmap to the Code of Ethics & Standards of Conduct pamphlet
"The determination of whether Financial Advice has been provided is an objective rather than subjective inquiry." In other words, the more customized a planner's communications are to a client's individual situation, the greater the likelihood that Financial Advice is being provided.
The Investment Advisors Act of 1940 wrote into statutory law the fiduciary duty owed by investment advisors to their clients. The act defines an investment advisor as
"any person who, for compensation, engages in the business of advising others, either directly or through publications or writing, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities."
FEDERAL GRANTS
* Federal grants are gifts by the federal government to a student to be applied toward education funding. * The student is not required to pay back the government-provided grants. *Like loans, grants are either disbursed directly to the student by the federal government or by the institution (campus-based aid).
Assets may be separated into the three major categories:
(1) cash and cash equivalents, (2) invested assets, and (3) personal use assets.
Financial planners generally use two basic personal financial statements:
(1) the statement of financial position and (2) the cash flow statement. (See Figure 3.1 and Figure 3.2 in this section for examples.)
EFC Formula
([22%-47% parent income + 5%-5.64% parent assets] + [50% student Income + 20% student assets]) = EFC
Serial Payment (re Education Savings)
(a payment that will increase by the inflation rate each year)
Stafford loans are also known as...?
(also known as William D. Ford Direct Stafford loans)
FICO SCORE
(named after Fair Isaac Corporation, the largest and best-known provider of credit scores), is determined by an individual's credit report information
PELL GRANTS
* Pell Grants are available to undergraduate students only and are distributed on the basis of substantial financial need. * All students, including part-time students (students who are attending school less than half time), are eligible for Pell Grants. * The maximum amount available may change year by year but will seldom (if ever) be enough to completely pay tuition expenses (maximum for the 2021-2022 award year is $6,495). * Part-time students may be eligible for reduced grants.
Federal Supplemental Educational Opportunity Grants (FSEOGs)
* are funded by the federal government but are administered by individual schools. * FSEOGs are available to undergraduate students only and are need-based. * These grants may be available to part-time students as well as full-time students. * Awards are limited based on the amount available (current amounts range from $100 to $4,000). * Pell Grant recipients are given highest priority in receiving FSEOGs.
A split-interest gift
- is any gift in which a portion is assigned to charity and a portion benefits the donor or his/her designee. Charitable gift annuities, pooled income funds, and charitable remainder trusts are all varieties of split-interest gifts.
Key focus areas for the financial planner concerning the Statement of Financial Position
-Assets are always presented at fair market value (FMV).-The Net Worth of the client on a given date is listed.-The respective titling of assets and liabilities is shown on a properly prepared statement.-The footnotes shown at the bottom of the statement of financial position are critical to the financial planner in properly understanding the clients current financial status.-Usually reflects the client's current financial status as of December 31 of any calendar year.-Net Worth=Assets-Liabilities
Credit unions are...
...cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit. Similar to bank loans, loans from credit unions are permitted for a number of purposes, including some commercial loans. Earnings from loan interest and investments are allocated to the members in the form of dividends. Each credit union member may vote to elect the board of directors that is responsible for setting credit union guidelines and providing leadership. Like bank deposits, deposits in a credit union are insured up to $250,000 per qualifying account.
Open-ended questions...
...will also facilitate effective communication between clients and planners as goals and expectations are developed.
Investment Adviser Registration
1.) All applications for registration as an adviser with the SEC must be submitted electronically through an internet-based filing system called the Investment Adviser Registration Depository (IARD). 2.) Within 45 days, the SEC must grant registration or institute an administrative proceeding to determine whether registration should be denied. 3.) The adviser pays a filing fee 4.) After registration as an RIA, the adviser submits a Form ADV Part I schedule annually, keeping the SEC informed of any investment advising activities.
When does a borrower become delinquent on a student loan?
A borrower becomes delinquent on a student loan the first day after missing a payment. After the borrower is more than 90 days delinquent on a student loan, the loan servicer may report this delinquency to the major credit bureaus, which, in turn, could negatively affect the borrower's credit score.
Broker-Dealer Exception to the Investment Advisers Act of 1940
A broker or dealer registered with the SEC under the Securities Exchange Act of 1934 (the Exchange Act) is excluded from the Advisers Act if the advice given is solely incidental to the conduct of its business as a broker or dealer and it does not receive any special compensation for providing investment advice. The analysis is done separately for each account.
Budget
A budget should consider the client's financial goals and serve as a control document for future cash flows.
WHAT are the two primary financial statements used to evaluate an individual client's financial situations.
A cash flow statement and the statement of financial position
What is the most widely used type of long-term installment loan.
A home mortgage
FISCAL POLICY: Expansionary policy
An expansionary fiscal policy often involves increasing government spending or by reducing taxes for individuals and/or businesses.
Regulation Z requires several disclosures, what are they?
APR When payments begin Charges for late payments Prepayment information Amount financed Right of rescission
A client who wants lower initial monthly payments and does not anticipate remaining in the home for a long time may want to consider a/an ______LOAN
ARM LOAN
At the end of the petition process, the DEC reviews the case and issues the final order. The DEC may do any of the following with the Hearing Panel's findings and recommendations:
Accept Reject Modify
If these payments are equal and regular, this series of savings deposits or payments is called (in time value of money language), it is called ...?
An ANNUITY
If each of these payments is made at the beginning of each period(e.g., as with lease payments), the series of payments is known as...
An ANNUITY DUE
if each of these payments is made at the end of each period (e.g., as with mortgage payments), the series is known as
An ORDINARY ANNUITY
Who would be required to register with both the SEC (or state depending upon the amount of AUM) and FINRA?
An adviser receiving commissions from both securities sales and fees for investment advice
IRC SECTION 127
An employer may also provide up to $5,250 of non-job-related educational assistance to an employee during any one year as a tax-free employee benefit. ** This benefit may be granted for either undergraduate or graduate study. However, the benefit is limited to the lesser of the amount of qualifying educational expenses (defined as tuition, fees, books, supplies, or equipment) or $5,250 in any given year.
IRC Section 162
An employer may provide an unlimited amount of educational assistance to an employee so long as this assistance is job related.
EXAMPLE: FV of an annuity dueAssume the same facts as in the ordinary annuity example, but now Hector invests $2,000 at the beginning of each year. How much is the fund worth now?
Answer: Hector now has $100,318 in his mutual fund, with keystrokes on the HP10bII/HP10bII+ as follows: BEG mode (Note: To shift into BEG mode on your calculator, enter DOWNSHIFT, BEG/END [MAR key].) DOWNSHIFT, C ALL 2,000, +/−, PMT 10, I/YR 18, N Solve for FV = 100,318.1809, or $100,318
EXAMPLE: PV of a single amount Kali needs a total of $100,000 in 10 years to pay for four years of college for her granddaughter. If she can earn 7.5% annually after tax on her growth mutual fund set aside for this purpose, what single amount must Kali invest today?
Answer: Kali needs to invest $48,519, with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 100,000, FV 10, N 7.5, I/YR Solve for PV = −48,519.3928, or $48,519 (Note: The HP10bII/ HP10bII+ calculator will return a negative number in this case. The negative sign displayed before the PV amount indicates that this investment is a cash outflow to Kali.)
EXAMPLE 1: Auto loan amortization calculationJack is buying a new car for $30,000 with a down payment of $2,000, and he is financing the balance of $28,000 with a five-year, 3.25% loan. What is Jack's monthly payment, and how much interest will he pay over the life of the loan?
Answer: Make sure the calculator is in the END mode, 1 P/YR, C ALL. 28,000, PV 3.25 ÷ 12 = 0.2708, I/YR 5 × 12 = 60, N Solve for PMT = −506.2401, or $506.24 1, INPUT, 60 DOWNSHIFT, AMORT = −28,000.0023 principal paid = −2,374.4037 interest paid = −0.0023 remaining balance (off by 0.0023 due to rounding)
EXAMPLE: FV calculation An investor makes an initial deposit of $20,000 into a mutual fund. Eachsubsequent year, he deposits an additional $2,500 into the fund. What will be the value of the account in eight years if the fund earns 9% annually?
As pointed out previously, the initial deposit is treated as a single sum, while the $2,500 annual payment stream is treated as an annuity, with the first payment being made one year from today. (Cash inflows for this time line and the time lines that follow are shown above the line, whereas cash outflows are shown below the line.) 1N = 1 Year ? 0 1 2 3 4 5 6 $20,000 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 7 8 $2,500 $2,500 However, the financial calculator is capable of accommodating both the initial deposit and the subsequent stream of payments in one calculation. Keystrokes are shown as follows. Make sure the calculator is in the END mode, 1 P/YR, C ALL. 8, N 9, I/YR 20,000, +/−, PV 2,500, +/−, PMT Solve for FV = $67,422.4373, or $67,422.44 The account value after eight years would be $67,422.44.
VALUES
Attitudes and beliefs for which a person feels strongly are considered values and represent what a person believes to be right.
AUDITORY LEARNING STYLES
Auditory learners express themselves through words and often enjoy music and conversation.
MODULE 7 KEY TERMS
Bankruptcy Act of 2005 business cycle Chapter 7 bankruptcy Chapter 11 bankruptcy Chapter 13 bankruptcy coincident indicators Consumer Credit Protection Act Consumer Credit Reporting Reform Act Consumer Price Index (CPI) contractionary policy Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) deflation demand depression discount rate disinflation economics elastic Equal Credit Opportunity Act equilibrium expansionary policy Fair and Accurate Credit Transaction Act of 2003 (FACTA) Fair Credit Billing Act Fair Debt Collection Practices Act federal funds rate fiscal policy gross domestic product (GDP) gross national product (GNP) inelastic inflation lagging or confirming indicators leading indicators macroeconomics microeconomics monetary policy phishing price elasticity prime rate Privacy Act of 1974 Producer Price Index (PPI) recession skimming stagflation supply
To be eligible to receive federal student aid, a student must meet the following requirements:
Be a citizen or eligible noncitizen of the United States Have a valid Social Security number Have a high school diploma or a General Education Development (GED) certificate, or have completed homeschooling Be enrolled in an eligible program as a regular student seeking a degree or certificate Maintain satisfactory academic progress Not owe a refund on a federal student grant or be in default on a federal student loan Register (or already be registered) with the Selective Service System (if the student is a male and not currently on active duty in the U.S. Armed Forces) Not have a conviction for the possession or sale of illegal drugs for an offense that occurred while receiving federal student aid (such as grants, work study, or loans) - Students who have such a conviction must complete the Student Aid Eligibility Worksheet to determine their eligibility for aid.
________ of the Federal Bankruptcy Code permits a debtor to claim either the federal exemptions or the exemptions that are available under state law?
CHAPTER 7
An important liquidity ratio is the
CURRENT RATIO CURRENT ASSETS/ CURRENT (SHORT-TERM) LIABILITIES
ASSETS NOT CONSIDERED TO BE "PROPERTY" IN BANKRUPTSY FILING:
Certain retirement income assets, such as those from a qualified pension, individual retirement account, Roth IRA, profit-sharing, stock bonus plan, annuity, deferred compensation plan for state and local governments and tax-exempt organizations, and trusts, may not have to be included as property in the bankruptcy filing (i.e., the individual should be able to retain such assets). However, retirement plan assets in excess of $1 million may have to be included in the filing. ** Additionally, funds held in education savings accounts may be retained (dollar limits apply based on when the contributions were made). A $5,000 limit per beneficiary may be applied for deposits made between one and two years prior to filing for bankruptcy.
The Dodd-Frank-directed study results:
Dodd-Frank also directed the SEC to undertake a study and provided it with discretionary authority to adopt a fiduciary duty rule that would cover both broker-dealers and investment advisers. This study was released in January 2011, and one of its key recommendations was to have a uniform fiduciary standard.
ADVANTAGES that clients should consider when deciding whether to borrow from a retirement plan.
Ease of borrowing. Generally, loans can be made from retirement plans, if allowed, for any reason. Credit checks are not usually needed. Lower interest rates. Many retirement plan loan interest rates are relatively low compared to the rates of other lenders. Simplicity of repayment. Most often, loan payments are made through payroll deduction. Clients repay the loan interest and principal into their plan accounts. No effect on credit rating. Because retirement plan loan activity is not reported to credit rating agencies, there is no impact on clients' credit ratings.
ENDOWMENT BIAS
Endowment bias occurs when an asset is felt to be special and more valuable simply because it is already owned. In other words, once individuals own assets, they irrationally overvalue them, regardless of the assets' actual value.
Security Investor Protection Act of 1970
Established the Securities Investor Protection Corporation (SIPC) Insures customers' accounts up to $500,000 in securities and cash, with a limit of $250,000 of cash coverage (in the event of the failure of a brokerage firm)
The following conduct is unacceptable and will always bar an individual from becoming a certified CFP:
Felony conviction for theft, embezzlement or other financially-based crimes. Felony conviction for tax fraud or other tax-related crimes. Revocation of a financial (e.g. registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) professional license, unless the revocation is administrative in nature, i.e. the result of the individual determining not to renew the license by not paying the required fees. Felony conviction for any degree of murder or rape. Felony conviction for any other violent crime within the last five years.
Who Must Register as an Investment Adviser
The Investment Advisers Act of 1940 provides three criteria for adviser registration, all of which must be met (remember ABC): Providing advice or issuing reports or analysis regarding securities Being in the business of providing such services Being compensated for such services
Rejection of Proposed Consent Order
If the DEC rejects the proposed Consent Order and does not propose a Counteroffer, CFP Board Counsel will continue the investigation or the matter will proceed to hearing.
Calculating for Level and Serial Payments
If the goal is to use a level or periodic payment to fund the future need (rather than the lump sum identified previously in Step 3), solve for PMT instead of PV. Using the end value in Step 2, the keystrokes to determine a level payment for Step 3 are as follows (END mode; ordinary annuity): Keystrokes—Step 3 (level payment): 93,232.2076, FV 15, N 8, I/YR Solve for PMT = -3,433.6998, or $3,433.70 ** The only difference between calculating a lump sum and a level payment for Step 3 is solving for PMT rather than PV. Note that the result is a negative number. This is due to the fact that a periodic payment into an education fund is a cash outflow from the perspective of the parents, relatives, or friends making the contribution.
Allowance to file Chapter 7
If the individual's income over the last six months is above the state median, Chapter 7 probably will not be an option. If the individual can pay at least $100 a month to creditors, and if it seems possible for repayments to reach $10,000 over a five-year period, the judge will probably not allow a Chapter 7 filing
EXAMPLE: Calculation of a serial payment Assume Carly wants to save $50,000 (in today's dollars) for her son's college expenses in five years. Carly is comfortable using an inflation rate of 4% and an investment rate of return of 8%.
If the required payments are made at the end of each year, she needs to save $9,630.17 in the first year, calculated as follows: END mode DOWNSHIFT, C ALL 50,000 FV 5 N [(1.08 ÷ 1.04) − 1] × 100 = 3.8462, I/YR Solve for PMT = −9,259.7823, or $9,259.78 Because the payments are made at the end of each year, the calculated payment of $9,259.78 must be inflated by 4%. Therefore, to derive the end of the first year payment, multiply $9,259.78 by 1 + the inflation rate, or 1.04. This results in an end-of-year payment of $9,630.17. All five payments are as follows: $9,259.78 × 1.04 = $9,630.17 $9,630.17 × 1.04 = $10,015.38 $10,015.38 × 1.04 = $10,415.99 $10,415.99 × 1.04 = $10,832.63 $10,832.63 × 1.04 = $11,265.94
UNIFORM PRUDENT INVESTMENT ACT (UPIA)
In 1994, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Prudent Investor Act (UPIA). It has since been widely adopted by individual state legislatures. This act supersedes and modifies the prior common law rule in significant ways, primarily by placing focus on the total return of a portfolio rather than individual investment choices.
Dodd-Frank Wall Street Reform and Consumer Protection Act
In 2010, changed the original Advisers Act thresholds for registration with the SEC.
PHYSICAL MIRRORING VS VERBAL MIRRORING
In physical mirroring, the financial planner copies the clients' body language. In verbal mirroring, the financial planner imitates the clients' word use, tone of voice, and communication method.
PURPOSE OF BACK-END RATIO
One purpose of this benchmark is to assess a loan applicant's ability to assume additional debt. However, this benchmark may also be useful for financial planners in assessing if, given the client's resources, current debt appears to be excessive.
CONSUMER DEBT RATIO
One of the most common debt management ratios is the consumer debt ratio. This is the ratio of monthly consumer debt payments to monthly net income. Net income is defined as gross income less taxes. monthly consumer debt payments consumer debt ratio = _____________________________ monthly net income
Outcome Bias
Outcome bias is the tendency for individuals to take a course of action based on the outcomes of prior events. An investor may choose a particular stock because that stock had superior performance over the past three years. However, this same investor would be ignoring the current conditions that may be applicable to the stock's performance in the future.
EFC Note
Overall, a higher percentage of assets and income included increases the EFC and reduces the available financial aid. Parental assets and income are assigned a lower weighting in the EFC calculation than are student assets and income. Therefore, carefully consider the titling of assets when saving for education expenses. For example, custodial accounts are considered assets of the child, whereas parent-owned or dependent child-owned Section 529 plan assets are considered assets of the parent.
Consequences and implications of hindsight bias may include individuals who do the following:
Overestimate the rate at which they correctly predicted events that could reinforce an emotional overconfidence bias, discussed in the reading in this module titled Emotional Biases. Become overly critical of the performance of others. For example, they might criticize the stock selections of an analyst whose recommendations underperformed the market when the recommendation
How PLUS Loans Work
PLUS is an acronym for Parent Loan for Undergraduate Students. (There is also a grad PLUS program for graduate and professional students, borrowing on their own.)1 The parent PLUS program allows parents to borrow money for dependent students to pay any costs not already covered by the student's financial aid, such as Pell Grants, student loans, and paid work-study jobs. PLUS loans have fixed interest rates for the life of the loan. They are typically repaid over 10 years, although there is also an extended payment plan that can lengthen the term up to 25 years.2 Payments and interest on student loans from federal agencies were suspended in 2020, resuming early 2022.3. Parent PLUS loans are the financial responsibility of the parent rather than the student. They can't be transferred to the student, even if the student has the means to pay them.
MONETARY POLICY: PARTIES AND TOOLS AVAILABLE:
Responsible party: ■ Federal Reserve Board (Fed) Authority of responsible party: ■ Fed independently makes and implements decisions Tools available to implement policy changes: ■ Changes reserves required for banks ■ Changes the discount rate that banks pay for short-term loans from the Fed ■ Conducts open-market operations
ADDITIONAL NOTES: REVERSE MORTGAGE
Reverse mortgages do not use escrow accounts to pay homeowners/flood insurance and property taxes. The owner/borrower is responsible for directly paying those expenses. Borrowers must also remain current on any homeowners association fees and pay expenses related to maintaining the property. Failure to pay for these expenses may result in the outstanding mortgage becoming due in full.
Emergency Fund Planning
Rule of thumb for the first question is 3 to 6 monthsworth of fixed and variable monthly expenses
Licensing exams and the types of securities each license authorizes the individual to sell (SERIES) include:
SERIES 6: This entitles the holder to sell all open-end investment companies (mutual funds), variable annuities, variable life insurance, and initially offered (not secondary) unit investment trusts. Series 7. This is the broadest license and entitles the holder to sell any security, including individual stocks and exchange-traded funds. Series 24. Any person actively engaged in managing a member's securities or investment banking business (e.g., supervising, soliciting, and conducting business) or in training persons associated with the member must qualify by examination and register with FINRA as a general securities principal. A Series 7 or Series 62 qualification is a prerequisite for this license. Series 63. This is the Uniform Securities Agent State Law Examination. State securities laws require individuals to pass a qualification exam to sell securities within their states. Almost all states require individuals to pass the Series 63 exam as a condition of state registration. Series 65. This entitles the holder to provide investment advice to clients within the holder's primary state of residence. Note that the CFP Board has entered into a reciprocity agreement with many state securities departments permitting a waiver of this examination if the individual is a CFP® certificant. Series 66. This is the Uniform Combined State Law Examination, which combines the Series 63 license requirements with the Series 65 license requirements. An individual who holds this license may provide investment advice (and sell securities) to any client in any state. Series 66 candidates must pass the Series 7 exam before they can qualify to register for their Series 66 exam.
SELF-CONTROL BIAS
Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals.
Advisers Act thresholds for registration with the SEC
Small advisers. Those with less than $25 million of assets under management (AUM) are regulated by one or more states unless the state in which the adviser has its principal office and place of business has not enacted a statute regulating advisers. Midsized advisers. Those with between $25 million and $100 million of AUM are regulated by one or more states if the adviser is registered with the state where it has its principal office and place of business and the adviser is subject to examination by that state authority. Large advisers. Those with more than $100 million of AUM must register with the SEC (unless an exemption is available), and state adviser laws are preempted for these advisers. (Note that special transitional rules apply to advisers whose AUM fluctuates between $90 and $110 million.)
Insider Trading and Securities Fund Enforcement Act of 1988
Specified what constitutes the insider trading of securities and stiffened the penalties for engaging in such trading
STATUS-QUO BIAS
Status quo bias occurs when comfort with an existing situation leads to anunwillingness to make changes, even though the change is likely beneficial.
TEST TIP: prepaid tuition plans and college savings plans.
TEST TIP Make sure you understand the major differences between prepaid tuition plans and college savings plans.
Coordination Rules: TEST TIP
TEST TIP Pay careful attention to the coordination rules. Focus on understanding how to use each option and under which circumstances they may or may not coordinate with other options.
TEST TIP: GIFT TAX RULES PERTAINING TO 529 PLANS
TEST TIP Pay careful attention to the gift tax rules pertaining to Section 529 plans. In addition, understand how these plans could be used as an effective estate-planning tool.
TEST TIP: LEADING INDICATORS
TEST TIP Remember that stocks are a leading indicator, which means that staying out of the market and waiting for things to get better before getting back into the market will not work. Once things look better, the market will have already moved higher. The CFP Board looks for stocks to be long-term investments (commitment of 5 to 10 years or longer) and not to be actively traded based on economic indicators, especially leading indicators.
TEST TIP: PARTIES INVOLVED IN FISCAL POLICY:
TEST TIP To identify the parties involved in establishing fiscal policy, remember the term fisCAl. The capitalized C is for Congress, and the capitalized A is for Administration.
TEST TIP: PRICE (P) AND QUANTITY (Q)
TEST TIP To keep straight that price (P) is on the vertical y-axis, and quantity (Q) is on the horizontal x-axis, just "remember to mind your Ps and Qs."
The Fed greatly influences (or indirectly controls) two other interest rates, WHICH ARE....?
THE FEDERAL FUNDS RATE & THE PRIME RATE
The primary federal regulatory authority is...
THE SEC
Savings and Loan Associations are also known as...
THRIFT INSTITUTIONS
The ________ is probably the most important factor (besides risk tolerance) to consider when deciding what securities to invest in, how much to invest, and when to invest.
TIME HORIZON
MONETARY POLICY'S 3 MAJOR TOOLS:
The Fed uses three major tools to enact monetary policy. They are reserve requirements; discount rate; and open-market operations.
What does PPI Measure?
The PPI program measures the average change over time in the selling prices received by domestic producers for their output.
Practice Standards for the Financial Planning Process
The Practice Standards are statements describing the elements of the financial planning process. The Practice Standards are used by CFP Board's DEC and Appeals Committee to evaluate a CFP® professional's conduct to determine if the Code and Standards have been violated, based on the Procedural Rules established by CFP Board.
Application of the Practice Standards for the Financial Planning Process
The Practice Standards must be adhered to in instances where the CFP® professional agrees to provide or provides Financial Planning, the CFP® professional agrees to provide or provides Financial Advice that requires integration of relevant elements to act in the client's best interests, or the client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning.
Broker-Dealer Exceptions: Separate or Identifiable Charge
The SEC has determined that a broker-dealer charges special compensation when it charges its customer a separate fee for investment advice or when it charges its customers different commission rates, one with advice and one without, because the difference represents a clearly definable charge for investment advice.
Which law makes it generally unlawful to extend credit to any director or executive officer?
The Sarbanes-Oxley Act of 2002 (also known as Sox)
Which act also gave the Federal Reserve Board of Governors responsibility for setting margin requirements when buying securities?
The Securities Act of 1934
Which of the following expenses are qualified for a Coverdell Education Savings Account (CESA)? 1 ) K-12 tuition 2 ) Books 3 ) Fees 4 ) Supplies A)I and II B)I, II, III, and IV C)III and IV D)II and IV
The answer is I, II, III, and IV. All of these are qualified expenses for a CE
In determining a client's psychological ability to deal with uncertain outcomes, which of the following refers to a client's assessment of the magnitude of the risks being traded off? A) Risk capacity B) Emotional intelligence C) Risk tolerance D) Risk perception
The answer is risk perception. A client's assessment of the magnitude of the risks being traded off is known as risk perception. Risk tolerance refers to the trade-offs clients are willing to make between potential risks and rewards. Risk capacity is the degree to which a client's financial resources can cushion risks. 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.
If any information contained in the report is in error, how long do they have to request that the corrected report be sent by the credit bureau?
The consumer may request that the corrected report be sent by the credit bureau to any potential creditors who received an erroneous report in the past six months. A consumer may also request that a corrected report be sent to any potential employer who received the erroneous report in the past two years.
The Code and Standards introduces several new requirements.
The cornerstone is the obligation to act as a fiduciary, and therefore, act in the best interests of the client at all times when providing financial advice. This is a significant change from the prior standard, which required a CFP® professional to act as a fiduciary when providing financial planning.
EDUCATION NEEDS ANALYSIS
The cost of a college education is rising faster than the rate of inflation. According to the annual Trends in College Pricing 2019, issued by the College Board, average inflation in college costs over the past decade is 2.2%. Over the same period, inflation has averaged 1.79%. **About three-quarters of full-time students receive some form of aid. Average tuition and fees ranged from $10,440 per year at public universities to $36,880 per year at private universities. Tuition and fees constitute about 40% of the total budget for in-state students living on campus and about 20% for those who pay for off-campus housing.
Current income trust [2503(b)]
The current income trust must have its income paid out at least annually to the beneficiary with no discretion left to the trustee to accumulate income. This typically presents problems in avoiding the kiddie tax; however, it has a substantial offsetting advantage to many grantors (the persons putting the money in the trusts). The trust property, or principal, need not be distributed to the child at any specified age. With this type of trust, it is important to choose investments that increase in value but do not pay income while the child is young. Without this approach, all of the income earned in the trust will be paid to the child and the fund will not grow.
Net Present Value (NPV)
The difference between the total PV of the cash flows and the amount of the initial outlay (cost or investment).
EXAMPLE: FV of an ordinary annuity Hector has been investing $2,000 at the end of each year for the past 18 years in a growth mutual fund. How much is the fund worth now assuming he has earned 10% compounded annually on his investment?
The fund is worth $91,198, with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 2,000, +/-, PMT (Note: This is a cash outflow from the client; therefore, enter it as a negative amount.) 10, I/YR 18, N Solve for FV = 91,198.3463, or $91,198
Disciplinary and Ethics Commission (DEC).
The hearing panel submits its findings for review to the DEC for review consideration. The DEC is "composed primarily of CFP® professionals, has the authority to enter a final order that finds facts, determines whether a violation has occurred and, where appropriate, imposes discipline.
DOL Fiduciary Standard
The highest standard, which is a fiduciary standard, was administered by the U.S. Department of Labor (DOL) and applied to advice given to qualified retirement accounts such as defined benefit and defined contribution plans. Anticipating a scenario in which the potential exists for 50 separate versions of state-based fiduciary rules, the National Association of Insurance Commissioners (NAIC) has been developing model legislation that would protect consumers and expand the application of fiduciary standards to life insurance sales.
SERIES 66:
This is the Uniform Combined State Law Examination, which combines the Series 63 license requirements with the Series 65 license requirements. An individual who holds this license may provide investment advice (and sell securities) to any client in any state. Series 66 candidates must pass the Series 7 exam before they can qualify to register for their Series 66 exam.
Student Loan Interest Deduction
This deduction is allowed to the student or parent (if it is a PLUS loan) for interest paid on loans incurred solely to pay qualified higher education expenses at an eligible educational institution. Specifically, the interest paid by individuals during the tax year on any qualified education loan is deductible as an adjustment to reach AGI (an above-the-line deduction), up to a maximum of $2,500 per year. Like the education credits just discussed, phaseout limitations also apply to the deduction for student loan interest. In 2021, the allowable deduction is phased out as follows: Married filing jointly taxpayers: $140,000-$170,000 of modified AGI Single taxpayers: $70,000-$85,000 of modified AGI Borrowers are allowed to deduct interest over the term of their loan obligation.
What are DEALERS or aka PRINCIPALS?
They buy and sell securities for their own accounts, often called position trading. When selling from their inventories, dealers charge their clients markups rather than commissions.
Liabilities can be listed in several different ways.
They could be listed in descending order based on the account balance, to reflect either the order in which payments are due or in the order of shorter-term to longer-term obligations.
Individuals with a strong self-attribution bias are often difficult to work with as clients.
They often would not acknowledge the help and good advice that an advisor has provided; rather, they would think that they "would have done it anyway." However, for any perceived bad advice, they would lay the blame for it squarely on the shoulders of the advisor.
Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010
This act is considered the most comprehensive financial regulatory reforms since the Great Depression
Office of the Comptroller of the Currency (OCC)
This agency charters, supervises, and regulates national banks and federal branches of foreign banks located in the United States.
USING STATEMENT OF FINANCIAL POSITION
This can be accomplished by either (1) increasing the savings and investments or (2) miscellaneous expense line items.
PV (present value): Calc Def:
This is usually a negative input on your calculator when you are solving for a future value, or when a future value is also an entry in the problem. This is only calculator logic—so that the calculator knows the number is a present and not a future value—and otherwise has no financial relevance in deriving the correct answer.
FV (future value): Calc Def:
This is usually a positive input on your calculator.
SELECTIVE PERCEPTION
This is when individuals only register information that appears to affirm an already chosen decision. This ties into rationalization or confirmation bias, covered previously.
Calculator KeyStrokes for PMT
This may be either a negative or positive input depending on nature of the cash flow payment. If PMT is cash outflow, enter as a NEGATIVE, if PMT is cash inflow positive
PMT (payment): Calc Def:
This may be either a negative or positive input depending on the nature of the cash flow payment from the perspective of the client. *** IF payment is a cash outflow, enter as a negative; if the payment is a cash inflow, enter as a positive.
EXAMPLE: I/YR calculationSix years ago Theo invested $5,000 in a mutual fund. He made additional investments of $300 at the end of each year. Yesterday, Theo redeemed all fund shares and received $8,500. What was the rate of return on his investment?
This problem is illustrated in the time line that follows. 1N = 1 Year 0 $5,000 1 $300 2 $300 3 $300 4 $300 5 $300 Make sure the calculator is in the END mode, 1 P/YR. 5,000, +/−, PV 8,500, FV 300, +/−, PMT 6, N Solve for I/YR = 4.4378, or 4.44% The rate of return has been 4.44% annually.
EXAMPLE: Compounding periods calculation—annual compounding Felix wants to save $125,000 to achieve a future goal. He has $26,000 to invest currently and can invest $10,000 at the end of each year toward his goal. If the investment vehicle selected earns 10% annually, how many years will it take to achieve Felix's goal?
This problem is illustrated on the following time line. 1N = 1 Year 0 $26,000 1 $10,000 2 $10,000 3 $10,000 Make sure the calculator is in the END mode, 1 P/YR, C ALL. 10, I/YR 26,000, +/−, PV 10,000, +/−, PMT 125,000, FV Solve for N = 6.0835, or 6.08 It will take just over six years (6.08 years) for the client to achieve his goal.
Professionalism (Standard A.7)
This requires CFP® professionals to treat others with dignity, courtesy, and respect. The duty to act with professionalism applies to clients, prospective clients, fellow professionals, and others.
Fair Credit Reporting Act (FCRA)
U.S act that protects privacy of background information and ensures that information supplied is accurate. **was enacted in 1971 and has received several updates over time. One major right established under this act involves access to information. Consumers who have been denied credit must be notified about which credit reporting agency provided information to the potential creditor. The consumer then has a period of 30 days to request a free copy of their credit file information. Whenever adverse information is entered into an individual's credit file, it may be maintained for seven years, and bankruptcy information may be retained for up to 10 years. *** It is also important for clients to know that they have the right to challenge credit card charges, and companies must suspend the charge during the investigation.
TEST TIP: ASSETS/LIABILITIES
You should understand how assets, liabilities, and net worth are related because the CFP® exam will likely test your understanding of this interrelationship. For example, an exam question may ask how much the principal amount of a client's existing liabilities (typically, the client's mortgage obligation) is reduced, given a corresponding change in assets and net worth.
The Code and Standards defines Financial Advice as
a communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to — the development or implementation of a Financial Plan; — the value of or the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets; — investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters; or — the selection and retention of other persons to provide financial or Professional Services to the Client; or the exercise of discretionary authority over the Financial Assets of a Client.
What is a PROSPECUS and what does it include?
a detailed summary of the registration statement. The prospectus usually includes the following: A list of directors and offices, their stock holdings, stock options, and salaries A description of the company's properties and business A description of the securities being offered for sale Financial statements certified by independent accountants The underwriters The purpose and use of the funds to be received from the offering Any other reasonable information investors need before buying the securities A general antifraud provision that prohibits deceit, misrepresentation, and other fraud in the sales of securities
CURRENT RATIO & SHORT-TERM DEBT
a higher current ratio is preferable, and a ratio of greater than 1.0 indicates that the client can pay off existing, short-term liabilities with readily available, liquid assets such as cash.
SECURED LOAN
a loan for which the creditor maintains a security interest in property, such as personal property, which serves as collateral for the debt. If the debtor falls behind on secured debt payments, the lender can repossess the property that secures the debt.
INVESTMENT BANK
a securities broker-dealer that underwrites new issues.
RESPONDENT PETITION: A respondent's petition must not proceed unless the Respondent has...?
a. completed the suspension; b. provided a properly-completed CFP Board Ethics Disclosure Questionnaire; c. provided a written certification that Respondent has read, understands, and will comply with the Code and Standards; d. paid the reinstatement fee and any outstanding costs owed to CFP Board; and e. otherwise satisfied CFP Board's certification requirements. As previously noted, "the Hearing Panel must recommend whether a Petition for Reinstatement should be granted, denied, or denied with a right to re-apply for a period not to exceed five years. The Hearing Panel's recommendation must include factual findings, any mitigating or aggravating factors, and any Anonymous Case Histories that the Hearing Panel found relevant."
The Procedural Rules set deadlines for a Respondent and the CFP Board to deliver and file documents. When the Procedural Rules state a time in calendar days...?
a. exclude the day of the event that triggers the period; b. count every day, including intervening Saturdays, Sundays, and federal legal holidays; and c. include the last day of the period, but, if the last day is a Saturday, Sunday, or federal legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or federal legal holiday.
MODULE 2 KEY TERMS
active listening affinity bias anchoring attitudes auditory learning style behavioral finance beliefs body language closed-ended questions cognitive dissonance cognitive errors confirmation bias conservatism bias context emotional biases emotional intelligence endowment bias framing bias herding hindsight bias illusion of control bias interpersonal communication judgment kinesthetic learning style leading responses loss aversion theory mental accounting mirroring money illusion money jar mentality open-ended questions outcome bias overconfidence perception physical mirroring pitch psychological profiles recency bias regret aversion bias representativeness risk capacity risk perception risk tolerance self-attribution bias self-control bias status quo bias tone values verbal mirroring visual learning style
What does the Gramm-Leach-Bliley Act of 1999 do?
addresses the manners in which financial institutions manage the private information of individuals.
Duty to Disclose
all material facts and all conflicts of interest is dealt with extensively in government regulation and professional codes of conduct.
gross domestic product (GDP)
is the total monetary value of all goods and services produced within the domestic United States over the course of a given year, including income generated domestically by a foreign firm (e.g., Toyota Motor Corp.).
FIXED (EQUAL) PAYMENTS ARE...
are just that—unchanging over the entire period
FIXED OUTFLOWS
are relatively predictable and recurring expenses over which the client does not have much control. Typical fixed outflows include note payments, mortgage payments, and insurance premiums.
Long-term liabilities
are those due more than one year from the statement date.
Current (short-term) liabilities are
are those due within one year from the statement date, such as a promissory note
CONVENTIONAL (AKA "CONFORMING") LOANS:
are those made by commercial lenders in the private sector. These may also be called conforming loans, because they conform to Fannie Mae and Freddie Mac dollar limit requirements. For example, in 2019, a single-family home might have a conforming loan limit of $484,350 (amounts are higher in Alaska, Hawaii, and other areas).
VARIABLE OUTFLOWS
are those over which the client can exercise some degree of control, such as expenditures for food, transportation, clothes, and entertainment.
Coincident indicators
are those that occur simultaneously during the business cycle and confirm the stage that the economy is currently experiencing. Examples of coincident indicators are: - industrial production, - level of personal income, and - amount of corporate profits.
Leading indicators
are those that tend to precede actual economic change. Examples of leading indicators are - housing starts, - new claims for unemployment, - bond yields (spread between 10-year Treasury bonds and federal funds), - indexes of stock prices, - orders for durable goods, and - changes in investor sentiment.
Lagging or confirming indicators
are those that usually change after the economy has passed through one business cycle and allow confirmation of a previous economic environment. Examples of lagging indicators are - prime interest rates, - changes in CPI, particularly for services, - amount of business and consumer loans outstanding, and - average duration of unemployment.
Federal student loan interest rates
are tied to financial markets. Each spring, interest rates are determined for new loans being made for the upcoming award year, which runs July 1 to the next June 30. Each loan will have a fixed interest rate for the life of the loan.
DEFINE: Integration Factors
are variables that weigh in determining whether Financial Advice requires Financial Planning.
The statement of financial position IS ALSO REFERRED TO AS...
as a snapshot of the client's financial circumstances due to the frozen-in-time nature of this statement.
Consequences and implications of representativeness may include market participants who
attach too much importance to new pieces of information and have excessive turnover; or make decisions based on simple rules of thumb and classification without thorough and more difficult analysis, attaching either too much or too little importance to new information.
What did the Investment COMPANY Act of 1940 do?
authorized the SEC to regulate certain financial products, most notably open-end investment companies, or mutual funds. The act also gave the SEC regulatory authority regarding the sale of variable products, such as variable annuities, as well as the separate accounts within any variable product.
A BALLOON MORTGAGE may be appropriate for...
borrowers who plan to sell their homes before the fixed payment period is over. Again, this is a calculated risk that could have severe consequences.
Which one of the following generally is used to determine the amount of emergency funds required? A) Types of assets held (regardless of income-producing capabilities) Failed B) Net income Failed C) Number of sources of income Achieved D) Gross income
c: The answer is number of sources of income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed. If income comes from several different sources, the amount of emergency funds required is lower than if all income is from one person's earnings. Possession of substantial income-producing assets could affect the amount of emergency funds a client requires. However, this is generally not the situation. Income from the assets would have a direct effect on the recommended level of emergency funds, but the assets themselves would not. The emergency fund amount is a function of expenses, not income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed.
Many financial planners find that
calendar-year statements are most useful, primarily because this is what most clients use for their tax records. However, financial statements, and even projected budgets, can be prepared for any period or date.
CASH FLOW STATEMENT
cash flow statement, show a monthly, quarterly, annual, or other time period. From month to month or year to year, values within the statement can change significantly as new snapshots are taken.
The CFP Board's Fitness Standards
character and fitness standards for individuals seeking to obtain CFP® certification—became effective on January 1, 2007, and were updated in 2012.
When a charitable remainder interest is given to a qualified charity, a gift tax charitable deduction is allowable for the value of the remainder interest if the transfer is made to a:
charitable remainder annuity trust (CRAT).charitable remainder unitrust (CRUT)pooled-income fund.
LQUID ASSETS TYPICALLY INCLUDE:
checking accounts, savings accounts, money market deposit accounts, money market mutual fund accounts, and time deposits (e.g., CDs) that are close to maturity (90 days or less).
The most important function of personal financial statements is
clear, accurate, and comprehensive communication of information during the financial planning process.
The Investment Advisers Act of 1940 (the Advisers Act)
clearly established the fiduciary standard for RIAs who were deemed to be providing investment advice to clients. *** The act made a distinction between trying to sell products and providing advice, which requires acting in the best interests of the client.
Installment loan
client borrows single amount of money and repays principal with interest at stated intervals
AUTO LOANS
clients should use available savings or other funds to purchase a vehicle rather than finance the purchase whenever possible.
visual
clients with this learning style respond better to graphs, charts, pictures, and reading information - will express themselves through facial expressions and often have interests in such things as movies and spectator sports
Additional sources of financial aid, other than the U.S. Department of Education, include:
college, nonprofits, the state government, and private organizations.
The Securities Act of 1934
created the SEC, extends regulations to existing securities. This act forbids market manipulation, deception, misrepresentation of facts, and fraudulent practices. The SEC was given enforcement powers for this act, which aimed to regulate securities transactions on both organized exchanges and in over-the-counter (OTC) markets. The act requires most broker-dealers, transfer agents, and clearing agencies, as well as the nation's securities self-regulatory organizations (SROs)—including all securities exchanges—to register with the SEC.
An amortization schedule
details the portion of each payment allocated to interest and principal.
Regret-Aversion Bias
do nothing out of excess fear that actions could be wrongImpact: stay in low-risk investments. Portfolio with limited upside potential. Stay in familiar investments or "follow the herd."Mitigation: Education is primary mitigation tool
Regret aversion might be mitigated through...
effective communication on the benefits of diversification, the tradeoff of risk/return, and the consequences of not meeting critical long-term investment goals.
financial planning engagement
exists when a CFP certificant and a client have an "oral or written agreement, arrangement, or understanding" that personal financial planning services will be provided
VETERANS ADMINISTRATION (VA) LOANS
feature the same federal guarantee of repayment as that for FHA mortgages, but VA mortgages are for service members and veterans of the U.S. armed services, their spouses, and other eligible beneficiaries. An even more favorable attribute of the VA mortgage is that, in certain cases, no initial down payment is required; in other words, the entire purchase price can be borrowed. In addition, no mortgage insurance is required.
Federal law exemptions include:
federal Civil Service retirement benefits, railroad pensions, and veterans' benefits.
CLOSED-END LEASE (AKA "FIXED-COST" LEASE)
is one in which the lessee agrees to pay a stated monthly fee for the use of the asset for a specified time period. In long-term leases, the payment may be automatically adjusted for inflation during the life of the loan. At the end of the lease period, the lessee can walk away from the asset.
FOOT NOTES
footnotes should indicate that the full amount may not be available. (RE: STATEMENT OF FINANCIAL POSITION)
The THREE means of financing a child's college education have been...?
from the current income of parents or relatives; with student loans, grants, or scholarships; or from a parent's or relative's personal savings.
The accumulation of funds needed to meet a future financial goal is referred to as the
future value of an annuity.
REVERSE MORTGAGE
he lender pays the homeowner a stream of income secured by a considerable amount of equity in the home. The lender makes payments to the homeowner on the basis of the fair market value of the home and the age of the borrower at the time the loan is made. Loans are available to borrowers who are age 62 or older with a residence that is largely free from indebtedness homeowner retains title to the home but incurs an increasing amount of debt with each payment from the lender. Once the homeowner no longer occupies the property (e.g., at death or going into a nursing home), the debt must be repaid to the lender, usually by selling the home.
Clients should use caution when considering a graduated payment mortgage because of several disadvantages, including
higher payments during the second period of the loan than if the loan had been a standard fixed rate, higher interest costs, and negative equity accumulation in the early years of the loan because the payments during that period typically are not sufficient to pay the interest due (often called negative, or reverse, amortization, because the amount of the loan is increasing).
Consequences and implications of status quo bias may include:
holding portfolios with inappropriate risk, and not considering other better investment options.
When must Part 2A of Form ADV or the brochure be given to customers?
in advance or no later than the time of entering into a contract if rescission is permitted within a specifically allotted time
HOUSING COSTS
include rent or an individual's monthly mortgage payment (principal and interest payments on the mortgage, property taxes, homeowners insurance premium [PITI]), as well as association fees—should not exceed 28% of gross monthly income. This is also known as the front-end ratio. housing cost ratio = MONTHLY HOUSING COSTS / monthly gross income
EMOTIONAL INTELLIGENCE
includes the ability to recognize emotional expressions in themselves and their clients, as well as selecting socially appropriate responses to the circumstances and their clients' emotions.
PERSONAL USE ASSETS
includes the client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings, clothes, jewelry, and similar assets.
JUDGEMENT
involves making conclusions about what has been perceived.
INVESTING
involves your clients using their money, or capital, to purchase an asset that offers the probability of generating an acceptable rate of return over time, providing potential for earnings while assuming more volatility. True investments are backed by a margin of safety, often in the form of assets or owner earnings.
Chief Compliance Officer (CCO)
is a corporate official in charge of overseeing and managing compliance issues within an organization, ensuring, for example, that a company is complying with regulatory requirements and that the company and its employees are complying with internal policies and procedures. ** The Sarbanes-Oxley Act of 2002 has precipitated the employment of chief compliance officers
A BALLOON MORTGAGE
is a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage. However, payments are made only for a short duration—frequently five or seven years—and then the borrower is required to pay off the remainder of the mortgage in a lump sum. The payments with some loans may be limited to interest only. The interest rate on a balloon mortgage is usually favorable over a typical 30-year mortgage due to the shorter time frame for repayment and the smaller risk to the lender of a variance in the prevailing interest rates.
pro forma cash flow statement
is a planning tool that projects the anticipated inflows and outflows for a future period. It can be prepared on a monthly, quarterly, or yearly basis. The statement projections are based on established patterns of inflows and outflows, on the client's goals for the designated period, and on the effects of either implementing or not implementing the recommended financial plan.
Hindsight bias
is a selective memory of past events, actions, or what was known in the past. Clients have a tendency to remember their correct views and forget the errors. They also overestimate what could have been known.
Expected Family Contribution (EFC)
is an index number that colleges use to determine the amount of family-paid annual college costs. Ultimately, the EFC is subtracted from the total annual cost of attendance to determine the amount of financial aid that students will receive. The term is used on the Free Application for Federal Student Aid (FAFSA), which is an application that students file for federal student aid.
MEDIATION is...
is an informal, voluntary, and nonbinding approach to dispute resolution in which the mediator tries to guide the parties to resolve the dispute rather than having the mediator impose their solution.
EMERGENCY FUND
is cash or cash equivalents set aside to offset the expenses of unexpected events, such as a job loss, a medical crisis, or major home repairs.
INFLATION
is defined as a rise in the average level of prices of goods and services.
McCarran-Ferguson Act of 1945
is federal legislation that asserts that unless federal law specifically provides otherwise, insurance is to be regulated at the state level. States are required to implement and execute this regulation adequately
INNFLATION-ADJUSTED INTEREST RATE
is not simply the difference between the inflation rate and the rate of return. The appropriate method to calculate the interest rate when simultaneously compounding a payment is based on discounting an inflation rate based on a return. I
A GRADUATED PAYMENT MORTGAGE
is payable over a long time period, such as 30 years, and has a fixed interest rate. The payments are lower for the first few years of mortgage repayment (although they sometimes increase annually), then they adjust to a higher fixed payment that continues for the remainder of the loan.
Microeconomics
is the study of how individuals and companies make decisions to allocate scarce resources, which helps in understanding how individuals and companies prioritize their wants.
Economics
is the study of production, distribution, and consumption, or the study of choices in the presence of scarce resources, divided into two broad areas: microeconomics and macroeconomics.
Self-enhancing bias
is the tendency to claim an irrational degree of credit for successes.
Representativeness
is the tendency, when considering choices when making a decision, to recall a past experience similar to the present decision-making situation and assume one is like the other.
The SEC's mission is...
is to protect investors and maintain integrity in the securities markets by interpreting federal securities laws, amending existing rules, proposing new rules, and serving as an enforcement authority against individuals and companies that violate securities laws.
Define Thrift Institutions
it is a financial institution that obtains the majority of its funds from the savings of the public. The term can include several cooperative banking models; Savings and loan association. Mutual savings bank. Credit union.
WHEN COMPUTING BACK-END RATIO:
it is important to use the minimum required debt payment versus the amount your client may actually be paying.
EDUCATION TAX CREDITS: American Opportunity Tax Credit
it is intended to help families pay for postsecondary education for their children. This credit is extended to the first four years of postsecondary education. In 2021, the American Opportunity Tax Credit reduces a family's tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified postsecondary expenses and 25% of the next $2,000 of qualified expenses incurred for the first four years of postsecondary education. Therefore, a maximum credit of $2,500 is allowed. Qualified expenses include tuition, fees, and course materials (e.g., books, equipment); room and board are excluded.
whenever you are solving for the future value (FV) of an annuity, the_______key must be used.
payment (PMT) *** In addition, you will need to determine whether the payment is made at the beginning or at the end of each period.
Once a Consent Order is established...?
the DEC must enter the proposed Consent Order, reject the proposed Consent Order with no Counteroffer, or reject the proposed Consent Order and propose a Counteroffer.
Emotional Intelligence (EI)
the ability to detect and to manage emotional cues and information in themselves and in their clients as well as selecting socially appropriate responses to the circumstances and their clients emotions.
In evaluating consumer debt, you should consider...
the amount of debt and total costs to your client, the consumer. The costs to consider include the interest payable, initiation fees, and any bargaining power forgone as a result of using credit rather than cash.
Risk capacity
the degree to which a client's financial resources can cushion risks
Net worth is
the difference between assets and liabilities.
The Fed only directly controls one interest rate, WHICH IS....?
the discount rate (the rate at which banks can borrow from any of the Federal Reserve Banks). **When the Fed raises the discount rate, it increases the cost of borrowing and discourages member banks from borrowing funds, resulting in a contraction of the money supply. The Fed will lower the discount rate when it wants to increase the money supply. When banks are able to borrow funds at lower rates and lend more money, they increase the supply of money in circulation and this stimulates demand.
To act in the best interests of the client, there are various duties that a fiduciary owes to their client regardless of their specialization within the financial services industry. Those duties are
the duty of loyalty, the duty of care, the duty to disclose, the duty to diagnose, the duty to consult, and the duty to keep current.
Duty to Consult
the duty to consult with others who have specialized knowledge of the issue (in this case, retirement plans).
Once the client-planner relationship has been established,
the financial planner gathers the client's data and helps identify goals and expectations.
INTEREST-ONLY MORTGAGE
the homeowner tries to keep the mortgage payment at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds. interest-only mortgages should be executed only by relatively risk-aggressive homeowners.
NOTE: As an individual identifies a future goal (such as retirement funding),
the implementation of a systematic savings program is required to meet this goal.
VARIABLE (ADJUSTABLE) RATE LOAN
the interest rate adjusts at various intervals throughout loan term; thus, they are riskier. The initial interest rate on these types of loans is typically lower than those of fixed-rate loans.
Adjustable-Rate Mortgages (ARMs)
the interest rate and payment may change every month, quarter, year, three years, or five years. Interest rate changes are usually tied to a specific index such as the one-year London Interbank Offered Rate (LIBOR). Many ARMs have a cap that limits the amount by which the interest rate and, accordingly, the monthly payment can change.
Define: "Contextual Variables"
these include, age, marital status, number of children and grandchildren, net worth, special circumstances, and income levels.
LEASE PAYMENT
this is based on the amortized cost of the initial price of the asset minus the residual value expected at the end of the lease. In a simplified example, assume a client leases a $26,000 car for four years. At the end of four years, the expected residual value of the car will be $16,000. The lease payment is based on paying for the $10,000 net value plus interest.
Consequences and implications of illusion of control may lead clients to
trade more than is appropriate because they mistakenly believe they can control the outcome of a trade or are overconfident in their analysis, neglect to take advantage of an investment opportunity due to their beliefs that they have greater control over less suitable investments, or fail to adequately diversify
DISINFLATION
when prices are still rising (but at a declining rate), disinflation exists
The likelihood that clients will complete the financial planning process is often dependent on
whether the information is gathered, goals are developed, and recommendations are made in a way that complements the clients' learning style
HERDING
which is when investors trade in the same direction or in the same securities, and possibly even trade contrary to the information they have available. Herding sometimes makes investors feel more comfortable because they are trading with the consensus of a group. In the context of herding, the recent data or trend becomes the investor's forecast.
What did the Investment Advisers Act of 1940 do?
wrote into law the fiduciary duty owed by investment advisers to their clients.
PROFESSOR'S NOTE If a checking account is used for emergency funds
your client should exclude from the emergency fund an amount equal to one month's expenses. This will ensure that regular nonemergency expenses are being paid from the checking account each month.
To identify hindsight bias, ask questions such as,
"Does my client really remember what he predicted and recommended?" Individuals should maintain and review complete records to determine past errors as well as successes. They should remember that there will be periods
Teacher Education Assistance for College and Higher Education (TEACH) Grant Program:
* As part of the College Cost Reduction and Access Act of 2007, Congress created the Teacher Education Assistance for College and Higher Education (TEACH) Grant Program, which provides grants of up to $4,000 per year to students who agree to serve as a full-time teacher in a high-need field in a public or private elementary or secondary school that serves low-income students. * Failure to complete this service obligation will result in a conversion of all amounts received to a federal direct unsubsidized Stafford loan. * Students enrolled less than full-time will have grant amounts reduced. Additional requirements apply.
Custodial Accounts:
* Custodial accounts were a popular way of income shifting and saving for college in a child's name. * The first custodial accounts consisted of those established under the Uniform Gift to Minors Act (UGMA), although in many states, UGMA accounts were then superseded by those established under the Uniform Transfers to Minors Act (UTMA). * Both accounts, however, suffered from a major practical disadvantage: when the child attained the age of majority, either age 18 or 21 depending on state law, the child could gain access to the funds in the account, regardless of whether the funds were used to pay for a college education. * An additional limitation to UGMA and UTMA accounts is portability. * Each account can only be assigned to one child and cannot be transferred to another sibling or family member. * In the event the UGMA or UTMA funds for the student are not needed due to scholarship receipt or less-than-expected cost of attendance, the account cannot be retitled for education costs of another child.
What is a Section 529 plan?
- It is a tax-advantaged program that helps families save money for college expenses incurred when pursuing a degree. - A QTP offers significant income tax benefits, including the ability to make contributions regardless of the contributor's AGI, tax-free earnings growth, and tax-free withdrawals to the extent they are used to pay qualified higher education expenses. - In general, if the child for whom the Section 529 plan was established decides not to attend college, the account balance may be rolled over to any family member as defined in the Treasury Regulations for Section 529. - For distributions after December 31, 2017, qualified education expenses include only tuition at an elementary or secondary public, private, or religious school for a maximum $10,000 tax-free distribution per year. - Any distributions above $10,000 would consist of part earnings and part contributions, the earnings portion would be taxed. - Once the student reaches college, Section 529 accounts can be disbursed, without limits, for qualified college education expenses. - If withdrawals are not used to pay qualified education expenses, the income portion is included in the gross income of the beneficiary and generally subject to a 10% penalty tax. - Contribution limits to the QTP vary from around $100,000 to $250,000 depending on the state in which the program is established. - In the vast majority of cases, the owner of the QTP is the contributor. - Beneficiaries of Section 529 plans do not gain control of the assets at the age of majority as with custodial UGMA or UTMA accounts.
Consumer debt ratio
> Ratio of monthly consumer debt payments to monthlynet incomeNet income = gross income - taxes> Refers to debt other than mortgage indebtedness> Should not exceed 20%
The Standards (Standards of Conduct) consists of six subsections:
1. Duties Owed to Clients 2. Financial Planning and Application 3. Practice Standards for the Financial Planning Process 4. Duties Owed to Firms and Subordinates 5. Duties Owed to CFP Board 6. Prohibition on Circumvention
The registration process for REGISTERED REPRESENTATIVESS with FINRA involves several steps:
1. Pass the Securities Industry Essentials (SIE) exam. Introduced in 2018, the SIE exam is an introductory exam that assesses a candidate's knowledge of basic securities industry concepts, such as types of products and their risks, securities market structures, regulatory agencies and their functions, and prohibited practices. 2. Associate with a broker or dealer. 3. Register with FINRA through the broker or dealer and complete a background and information check using Form U-4. 4. Pass the appropriate FINRA Series licensing exams (explained later in this section). 5. Receive a Central Registration Depository (CRD) number and documentation for the securities licenses held. This CRD documentation provides important background data when an individual registers to sell securities in a state other than their state of residence. 6. As a FINRA licensee, complete annual continuing education requirements through her brokers or dealers. This continuing education is known as the firm element; courses are related to the profession and securities products. A FINRA licensee must also meet additional continuing education requirements, known as the regulatory element, at regular intervals. These courses cover ethics, compliance, and sales practices.
If grounds for discipline have been established, the DEC may impose any of the following forms of sanctions. All disciplinary actions, except private written censure, may be publicly disseminated:
1. Private Censure. A private censure is an unpublished written reproach of Respondent that the DEC delivers to a censured Respondent. 2. Public Censure. A published written reproach of the certificant's behavior. 3. Suspension. A suspension is a period of time in which Respondent remains subject to the Terms and Conditions of Certification and Trademark License but is not Certified or Licensed and is prohibited from using the CFP® certification marks, stating or suggesting that Respondent is a CFP® professional, or holding out to the public as being certified by CFP Board. The DEC may issue a suspension for a specified period, not less than 90 calendar days or greater than five years. 4. Revocation. A permanent revocation of the right to use the CFP® marks—this is a permanent denial of all rights associated with use of the marks. Revocations normally are published. 5. Temporary Bar. A temporary bar is a period of time in which a Respondent who currently is not a CFP® professional is prohibited from applying for or obtaining CFP® certification. 6. Permanent Bar. A permanent bar is a permanent prohibition on the ability of a Respondent who currently is not a CFP® professional to apply for or obtain CFP® certification.
The success of the typical client-planner relationship can be measured in four areas, and each one is enhanced by applying behavioral finance strategies:
1. The planner understands the long-term financial goals of the client. Behavioral finance helps the planner understand the reasons for the client's goals. The client-planner relationship is enhanced because the client feels the planner truly understands the client's needs. 2. The planner maintains a consistent approach with the client. Behavioral finance adds structure and professionalism to the relationship, which helps the planner understand the client before giving investment advice. 3. The planner acts as the client expects. This is the area that can be most enhanced by incorporating behavioral finance into the client-planner relationship. Once the planner thoroughly understands the client and the client's motivations, the planner knows what actions to perform, what information to provide, and the frequency of contact required to keep the client satisfied. 4. Both the client and planner benefit from the relationship. The primary benefit of incorporating behavioral finance into the client-planner relation
The UPIA identifies five fundamental alterations in the former criteria for prudent investing:
1. The standard of prudence is applied to any investment as part of the total portfolio (all assets) rather than to that investment individually. 2. The tradeoff in all investing between risk and return is identified as the fiduciary's central consideration. 3. All categorical restrictions on types of investments have been abrogated; the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and meets the other requirements of prudent investing. 4. The definition of prudent investing integrates the requirements that fiduciaries diversify their investments. 5. Delegation of trust investment and management functions is now permitted, subject to safeguards. The prudent investor rule, which now requires a considerable degree of investment sophistication, puts the individual trustee at a disadvantage and enhances the role of the professional trustee. Individual trustees who are not themselves knowledgeable investors will probably need to secure the advice of a professional investor or trustee to fulfill the fiduciary's investment duties.
Two forms of representativeness follow:
1.) Base rate neglect 2.) Sample-size neglect
Three-Step Education Funding Formula terms:
1.) Inflate 2.) Adjust 3.) Invest
For purposes of determining which phase of the business cycle the economy is currently or likely to be in the future, there are three types of economic indicators. LIST THEM
1.) LEADING INDICATORS 2.) COINCIDENT INDICATORS 3.) LAGGING OR CONFIRMING INDICATORS
The 5 Calculator Keystroke Entries:
1.) PV (present value). 2.) FV (future value). 3.) PMT (payment). 4.) N (number of periods). 5.) I/YR (interest rate or rate of return).
What are the TWO types of Section 529 (QTP) plans?
1.) Prepaid College Tuition Plan 2.) College Savings Plan
The manner in which a fiduciary standard is defined is critical and there are two possible approaches:
1.) Rules-based or 2.) Principle-based.
two primary aspects of cognitive dissonance in decision-making:
1.) SELECTIVE PERCEPTION 2.) SELECTIVE DECISION-MAKING
two primary types of bias:
1.) SELF-ENHANCING BIAS 2.) SELF-PROTECTING BIAS
CASE STUDY APPROACHES: What are two approaches you can use for case studies?
1.) the case facts analysis approach 2.) question review approach.
The acceptable target for the Current Ratio is between...?
1.0 and 2.0.
In order to determine how much money a client will need to pay for college, a three-step calculation process is used. What are the 3 steps?
1st step: current cost of college is inflated to reflect anticipated college costs when the student will be attending. 2nd step, an inflation-adjusted present value of an annuity due is calculated. **By using an inflation-adjusted rate of return (see the following formula), both the rising cost of college expenses and the continued earnings from the investment account are taken into consideration 3rd Step: the result from the second step is discounted back to today's amount. The present value solution reflects the lump sum savings needed today, which will grow to the specific amount needed in the future. Alternatively, the result from Step 2 could be used to determine the annual savings needed to accumulate the required funds. A third option would be to adjust for any current savings and then calculate the annual savings needed to reach the goal.
Provide Information to a Client (Standard A.10)
A CFP® professional must provide accurate information to clients, in an understandable manner and format.
What Is a Pell Grant?
A Pell Grant is a federal subsidy awarded to students for post-secondary education. Pell Grants are awarded on the basis of financial need and, unlike student loans, do not have to be repaid except in rare instances. Pell Grants are awarded based on financial need and, unlike loans, typically don't have to be repaid. Applicants must complete a Free Application for Federal Student Aid (FAFSA) every year in order to qualify. Individual schools determine how much Pell Grant money (if any) to offer each student, up to the federal maximum.
What Was a Perkins Loan?
A Perkins loan was a type of educational financial aid provided through the U.S. government's Perkins Loan Program. The federal program provided low-interest loans to undergraduate and graduate students who demonstrated exceptional financial need. This need was determined both by the educational institution's own guidelines and by the information provided by the student on the Free Application for Federal Student Aid (FAFSA) form used to apply for all government loans. Begun in 1958, the Perkins Loan Program was providing loans to about 500,000 students and 1,400 schools when it expired in September 2017, and final disbursements of funds happened in June 2018.
CASH FLOW STATEMENT VS INCOME STATEMENT
A cash flow statement is not technically the same as an income statement. An income statement is most often used in a business context and focuses on a company's financial performance. Revenue is recognized as income, but may not immediately result in a cash flow (think accrual accounting). Income statements are seldom, if ever, used in a personal financial planning context, except where personally owned businesses are involved.
RISK TOLERANCE
A client's assessment of the magnitude of the risks being traded off is known as risk perception. Risk tolerance refers to the trade-offs clients are willing to make between potential risks and rewards. Risk capacity is the degree to which a client's financial resources can cushion risks. 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.
Items that are NOT Financial Advice include the following:
A communication that, based on its content, context, and presentation, would not reasonably be viewed as a recommendation Responses to directed orders The following, if a reasonable CFP® professional would not view it as Financial Advice: — Marketing materials — General financial education — General financial communications
FISCAL POLICY: Contractionary policy.
A contractionary fiscal policy commonly incorporates decreases to government spending and/or increases to individual and/or business taxes.
Direct Transfers and Custodial Accounts: Direct Transfer
A direct transfer of assets into the child's name is simple, inexpensive, and may avoid taxation of the income at the parent's or donor's presumably higher marginal tax rate. A direct transfer also works well if certain investments are the subject of the gift (e.g., stocks that have significantly appreciated in value). In that case, taxes may be deferred until the child is of college-age.
Before any of the transactions below, Sid had a net worth of $200,000. Took out a $24,000 loan to pay for a European vacation Paid off his student loan of $8,000 using funds from his money market deposit account Purchased an antique car valued at $18,000 for $15,000 with checking account funds What is Sid's net worth after these transactions? A) $179,000 B) $186,000 C) $169,000 D) $173,000
A: The answer is $179,000. Sid's $24,000 loan for travel increases his liabilities and does not affect his assets. Payment of his student loan will reduce debt by $8,000. However, the use of his money market deposit account to pay off the debt will reduce his assets by $8,000. The net effect of this transaction on his net worth is zero. Purchasing the antique car for $15,000 with funds from his checking account decreases assets by $15,000; however, assets are increased by $18,000 (the value of the car) for a net asset increase of $3,000. Therefore, after the transactions, his net worth decreases to $179,000 ($200,000 - $24,000 + $3,000).
AN EXAMPLE OF SELECTIVE DECISION-MAKING
An example of this would be an investor who has purchased an investment that has gone down in price because of bad news, but continues to invest to not "waste" previously invested or sunk funds
EXAMPLE: Solving for I/YR Halia invests $1,000 today with the hope that in five years her investment will be worth $1,500. The investment will compound semiannually. At the end of five years, what will be Halia's I/YR?
Answer: The I/YR is 8.28%, with keystrokes on the HP10bII/HP10bII+ as follows: END mode 2 P/YR DOWNSHIFT, C ALL 1,000, +/-, PV 1,500, FV 5, DOWNSHIFT, N (this is xP/YR, 10 should appear on display) Solve for I/YR = 4.1380 × 2 = 8.2760, or 8.28%
EXAMPLE: PV of an ordinary annuity Nick's grandmother plans on giving him $5,000 at the end of each year for the next five years. Assuming a discount rate of 4%, what is the PV of this sum?
Answer: The PV is $22,259, with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 5,000, +/−, PMT 4, I/YR 5, N Solve for PV = 22,259.1117, or $22,259
EXAMPLE: PV of an annuity due Assume the same facts as the previous example except that Nick'sgrandmother will give him $5,000 at the beginning of each year. What is the PV of this sum?
Answer: The PV is $23,149, with the keystrokes on the HP10bII/HP10bII+ as follows: BEG mode DOWNSHIFT, C ALL 5,000 PMT 4 I/YR 5 N Solve for PV = 23,149.4761, or $23,149
EXAMPLE: Number of years for payments to grow to a stated future value Erica and Tyler would like to accumulate $50,000 for a down payment on a new home. If they are able to save $500 at the end of each month and these funds earn 10% per year, how long will it take for the couple to accumulate the needed $50,000?
Answer: The answer is 6.09 years with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 50,000, FV 500, +/−, PMT 10 ÷ 12 = 0.8333, I/YR Solve for N = 73.0389 months, or 73.03 ÷ 12 = 6.09 years
EXAMPLE: Number of years for a present value to grow to a stated future valueAngela has an IRA with a current balance of $4,000. How long will it take for this account to grow to $20,000 at a 12% annual rate of return?
Answer: The answer is is 14.2 years with keystrokes on the HP10bII/HP10bII+ as follows: END mode DOWNSHIFT, C ALL 4,000, +/−, PV 20,000, FV 12, I/YR Solve for N = 14.2015, or 14.2 years
EXAMPLE 1: PV with annual payments calculation A client would like to accumulate $300,000 for retirement, which will begin in 10 years. She can invest $10,000 at the end of each year toward this goal in an account earning 8% annually. What initial lump-sum deposit, in addition to the payment stream, is required for her to be able to meet this goal?
Answer: This problem is illustrated in the following time line. 1N = 1 Year 0 ? 1 2 3 4 5 6 7 8 9 $300,000 10 $10k $10k $10k $10k $10k $10k $10k $10k $10k $10k Make sure the calculator is in the END mode, 1 P/YR, C ALL. 10, N 8, I/YR 300,000, FV 10,000, +/−, PMT Solve for PV = −71,857.2324, or $71,857.23 The initial deposit required to meet the client's goal is $71,857.23.
EXAMPLE: Periodic payment calculation Shaila wishes to accumulate $90,000 for a future goal in seven years. She can deposit $32,000 today in an account earning 11% annual interest and plans to make an additional payment into the account at the end of each year. What periodic payment will be required at the end of each year to meet Shaila's goal?
Answer: This problem is illustrated on the following time line. 1N = 1 Year 0 $32,000 Page 134 1 ? 2 ? 3 ? 4 ? 5 ? 6 ? $90,000 7 ? Make sure the calculator is in the END mode, 1 P/YR. 11, I/YR 32,000, +/−, PV 90,000, FV 7, N Solve for PMT = −2,408.4856, or $2,408.49 The periodic payment required each year is $2,408.49.
EXAMPLE 1: Calculate an inflation-adjusted interest rate What would the inflation-adjusted interest rate be with a 7% rate of return and a 3% inflation rate?
Answer: _ 1.07 1.03 = 1.038835 (1.038835 − 1) × 100 = 3.88% (rounded) 1.03, INPUT 1.07, DOWNSHIFT, % CHG Solve for I/YR = 3.88%
EXAMPLE: Compounding periods calculation—quarterly compounding Dante wants to save $125,000 to achieve a future goal. He has $26,000 to invest currently and can invest $2,500 at the end of each quarter toward his goal. If the investment vehicle selected earns 10% annually, how many years will it take to achieve Dante's goal?
Answer: Make sure the calculator is in the END mode, 1 P/YR, C ALL. 10 ÷ 4 = 2.50, I/YR 26,000, +/−, PV 2,500, +/−, PMT 125,000, FV Solve for N = 23.4815 This means that it will take 23.4815 compounding periods to reach Dante's goal. To express this in years, divide 23.4815 by 4 (number of compounding periods per year), which equals 5.87 years.
EXAMPLE 2: Auto loan amortization calculationJack's friend Cecil does not have good credit, and he would have to pay 8% for the same loan. How much interest would Cecil pay over the life of the loan?
Answer: Make sure the calculator is in the END mode, 1 P/YR. 28,000, PV 8 ÷ 12 = 0.6667, I/YR 5 × 12 = 60, N Solve for PMT = −567.74390, or $567.74 1, INPUT, 60 DOWNSHIFT, AMORT = −27,999.9967 principal paid = −6,064.3433 interest paid = 0.0033 remaining balance (off by 0.0033 due to rounding) Note that Cecil's bad credit rating will cost him $3,690 more in interest charges than Jack in our previous example ($6,064 − $2,374).
Three questions serve as a check to verify that the client and planner are, in fact, involved in a Financial Planning engagement. Which are...?
Answering "yes" to any of the following questions confirms that Financial Planning is occurring. Has the planner agreed to provide or provided Financial Planning? Does the client have a reasonable basis to believe that the planner will provide or has provided Financial Planning? Does the Financial Advice provided require integration of relevant elements of the client's personal and financial circumstances in order to act in the client's best interests, taking into account the Integration Factors? (Relevant elements and Integration Factors are discussed later.)
Chapter 11 Bankruptcy (Reorganization)
Any individual, business, or corporate debtor who is eligible for Chapter 7 liquidation (except stockbrokers, commodities brokers, and railroads) is also eligible for Chapter 11 bankruptcy (reorganization). A voluntary or involuntary petition may be filed, and the automatic stay and entry or order for relief provisions will apply. The debtor remains in possession and may continue to operate the debtor's business
SERIES 24:
Any person actively engaged in managing a member's securities or investment banking business (e.g., supervising, soliciting, and conducting business) or in training persons associated with the member must qualify by examination and register with FINRA as a general securities principal. A Series 7 or Series 62 qualification is a prerequisite for this license.
EXAMPLE 1: Application of guidelines. James, a CFP® professional, participates in an investment club called Stock Talks. Before the meeting, each club member conducts independent research on the fundamentals of a specific company and presents key conclusions and analysis on the monthly videoconference. General observations on the stock and economy are offered at each meeting. Occasionally, the club members explore planning scenarios in which the presented stock would fulfill a stated need.
Applicable guidelines Code of Ethics Standards of Conduct (that apply at all times) By participating in the Stock Talks club, James is providing general investment-related observations and economic forecasts. Though planning applications are discussed, they are not specific to a client situation. Any provision of services or making available of marketing materials, general financial educational materials, or general financial communications that a reasonable CFP® professional would not view as Financial Advice does not constitute Financial Advice. That is the case in this scenario. Because James is a CFP® professional, he must uphold the principles of the Code of Ethics and specific Standards of Conduct that apply at all times.
EXAMPLE 2: Application of guidelines. Jay, a CFP® professional and co-owner of a boutique RIA, had invested an overwhelming amount of his savings into a highly touted tech stock during an initial public offering (IPO) that proceeded to have record gains. As a result, he was viewed as an expert on stock transactions within his circle of peers. In the company of clients and his close friends, Jay exhibited confidence in his skill to predict stock performance and accurately identify the proper moment to buy or sell. Recently, at a friend's birthday celebration, Jay had a long conversation with a childhood acquaintance. In the discussion, he outlined a specific method for stock purchase based on his acquaintance's expressed goal. Also, Jay offered a recommendation to update his friend's portfolio to a core-satellite strategy and passed along a referral to a colleague, Joanne, to implement an active portfolio management approach on a portion of the childhood acquaintance's portfolio. All of these items were expressed with understanding of the childhood acquaintance's desired goals and a general sense of his financial situation. Jay departed the party without exchanging information with his childhood acquaintance and did not follow up to find out if he proceeded with the ideas presented in their conversation.
Applicable guidelines Code of Ethics Standards of Conduct (that apply at all times) Fiduciary Duty Managing Conflicts of Interest Although Jay discussed strategies with a friend rather than a client, the advisability of investing in, purchasing, holding, or selling financial assets is a key consideration in the determination of Financial Advice. Jay provided a specific strategy for stock selection. In addition, investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters were discussed. In this scenario, Jay recommended a core-satellite strategy.
TEST TIP: FDIC COVERAGE LIMITS PER ACCOUNT
Be aware that deposits maintained in different categories of legal ownership are separately insured. Therefore, an individual may have more than the $250,000 FDIC insurance limit in a single institution. EXAMPLE Sherri has the following assets, some of which are on deposit at a bank: Assets Ownership Savings account (Main Bank) Checking account (Main Bank) Money market mutual fund (Main Bank Securities) Traditional IRA (Main Bank is custodian) Certificate of deposit (Main Bank) Certificate of deposit (Main Bank) Joint with sister Sherri Sherri Sherri Joint with nephew Sherri Balance $300,000 $75,000 $100,000 $275,000 $120,000 $200,000 The amount currently insured by the FDIC for Sherri is $710,000. The same ownership values total $275,000 ($75,000 checking account + $200,000 solely owned CD); however, the maximum FDIC coverage for assets with the same ownership is $250,000. FDIC insurance covers 50% of the joint savings account ($150,000), 50% of the jointly owned CD ($60,000), and the IRA up to the $250,000 limit. The money market mutual fund is excluded. ($250,000 + $150,000 + $60,000 + $250,000 = $710,000)
Maloney Act of 1938
Brought the over-the-counter (OTC) market under the regulation of the SEC and called for self regulation of OTC securities dealers As amended in 1978, provides for the liquidation of hopelessly troubled firms and provides for the reorganization of troubled firms that might be able to survive Extended securities laws to investment companies (mutual funds) Requires registration for and regulates activities of investment advisers Made it clear that insurance was to be regulated at the state level, as long as the states implemented and executed this regulation adequately Established the Securities Investor Protection Corporation (SIPC)
Cognitive Errors
Cognitive errors are often a result of faulty reasoning and typically arise from a lack of understanding of proper statistical analysis techniques, information processing mistakes, faulty reasoning, or memory errors. Such errors can often be corrected or mitigated with better coaching or information.
Section 529 Plans: College Savings Plans
College savings plans may be offered only by states, state-sponsored organizations, and eligible educational institutions. The contribution rules are the same as those for prepaid tuition plans. In this type of plan, tuition is not being prepaid, but, rather, a tax-advantaged savings plan is established from which tax-free distributions are made to pay for qualified education expenses. The investment options offered in college savings plans often include stock mutual funds, bond mutual funds, and money market mutual funds. Some plans offer age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. A significant advantage of the college savings plan over the prepaid tuition plan is that it does not restrict where the child beneficiary may attend college. Rather, the private savings plan permits open enrollment and is available for either out-of-state public university costs or private university costs without any loss of account value. Also, while most prepaid tuition plans are established solely for tuition and mandatory fees, the typical college savings plan may be used for qualified education expenses beyond tuition and mandatory fees. Qualified education expenses may include tuition, fees, books, or supplies required for attendance and room and board (for a student attending at least half time). However, unlike the prepaid tuition plan, funds in the college savings plan are not guaranteed by the sponsoring state, and, if the contributor is unhappy with the performance of the college savings plan, the only real alternative is to roll over the account to a different college savings plan.
Interpersonal communication
communicating one on one
NASDAQ DUTIES: MEMBER regulation (define it)
FINRA performs periodic and cause-based examinations of member firms. It also oversees the financial and operational responsibilities of member firms, such as margin issues, operations, and clearing. It administers a continuing education program containing two elements: (1) a regulatory element that requires registered individuals to pass mandatory examinations and (2) an element that requires broker-dealers to establish a formal training program for employees, through which those employees stay current on subjects relating to their jobs and the products they offer. It also directs and administers preventive compliance initiatives.
NASDAQ DUTIES: Market regulation (define it)
FINRA regulates, oversees, and monitors all trading on the Nasdaq Stock Market, American Stock Exchange, International Securities Exchange, Chicago Commodities Exchange, OTC markets, and corporate bond markets.
Remember that the key to financial statements is...
communication
NET WORTH
Net worth is the residual value after the value of liabilities has been subtracted from asset values. In other words, assets minus liabilities equals net worth. Because assets usually are presented on the left side of the statement and liabilities and net worth on the right side.
disadvantages that clients should consider when deciding whether to borrow from a retirement plan.
No growth of borrowed amount. The loan amount will no longer be part of the client's retirement account and will not benefit from tax-deferred growth. Adverse tax treatment. Loan repayments are made with after-tax dollars, unlike salary deferrals. Clients must pay tax on income used to repay the loan and on distributions from their plans during retirement. Possible adverse effect on retirement savings. Many clients find it difficult to contribute to their retirement plans while repaying the plan loan. If this is the case, amounts available at retirement could be less than expected. Tax issues at separation from service. If a client has an outstanding retirement plan loan when he leaves his employer, the loan balance will likely be due at that time or relatively soon afterward. If repayment cannot be made, income taxes will be due on the outstanding loan amount. In addition, a 10% penalty may also be assessed.
Status Quo Bias
Occurs when comfort with an existing situation leads to an unwillingness to make changes
PROFESSOR'S NOTE: VARIABLES
PROFESSOR'S NOTE In economic analysis, and for answering questions on the CFP® exam, remember that only one variable is changed at a time. All other variables are assumed to be held constant. This is obviously not the case in the real world, where multiple variables undergo constant change. For answering questions, determine the one main variable that is changing and focus on the specific question.
Active Listening
Paying full attention to what their clients are saying and responding by paraphrasing the clients comments.
A 529 plan is also known as....?
Qualified Tuition Program (QTP)
Common abbreviations for property ownership and titling on the statement of financial position are as follows
S1. Individual ownership of the named spouse (or, in a community property state, the spouse's separate property); the name of the S1 spouse appears in the statement of financial position footnotes. S2. Individual ownership of the other named spouse (or, in a community property state, the other spouse's separate property); the name of the S2 spouse appears in the statement of financial position footnotes. JT. Property that is held jointly with rights of survivorship (note that the respective joint tenants are usually, but not always, married spouses; if the joint tenants are nonspouses, it will be reflected as such in the footnotes to the statement). CP. Community property of the spouses. Assets may be titled as tenants in common (TIC) or tenants by the entirety (TE), but these forms of titling are less common. T
Unsecured Lines Of Creid/HELOCs and Emergency Funds
Some financial planners may recommend using an unsecured line of credit or home equity line of credit for emergency fund purposes. The rationale for this strategy is that if a client is approved for a line of credit and later loses his job, he would have funds available for living expenses. However, this should not be the practice as the client is taking on debt (secured by his home) when his income is greatly reduced. For this reason, lines of credit should not be a substitute for available liquid assets in the event of a financial emergency
Interim Suspension.
Specific guidelines must be followed in the event that the Interim Suspension order is issued: Upon receiving an Interim Suspension Order. A "Respondent must submit screenshots of websites, including Respondent's businesses, social media, third party financial advisor listing website profiles that Respondent controls, signage, and, when applicable, copies of Respondent's new interim business cards, letterhead, marketing and promotional materials, as well as anywhere else the CFP® certification marks previously appeared publicly in reference to Respondent or Respondent's services." Following issue of an Interim Suspension Order. A Respondent must deliver to CFP Board Counsel evidence of compliance with the Interim Suspension Order within 10 days. ** "A Respondent subject to an Interim Suspension Order must not use the CFP® certification marks or state or suggest that Respondent is a CFP® professional while the Interim Suspension Order is in effect."
Stagflation
Stagflation is the worst of both worlds, combining high unemployment and high inflation. During the mid-1970s, there was a period of high inflation (which led to money market yields spiking to above 20%) followed by an oil price shock. The price of oil spiked substantially in a short period of time because of an Arab oil embargo. This led to shortages and lines of cars waiting to pump gas at gas stations. At the same time, unemployment was increasing and spending was declining, but the prices of goods (because of the oil price shock) were still rising. Due to the reduction in productive output within a stagflation economy, there are few monetary or fiscal policies that can be implemented to quickly counter its effects. For example, the high interest rates may be offset by a contractionary monetary approach; however, that would remove money supply from the economy at a time where job growth and stimulation to household income are needed
PROFESSOR'S NOTE: BANKS
State-chartered banks are subject to regulation by state banking commissions or departments. Additionally, the FDIC supervises state banks that are not members of the Federal Reserve System.
Which of the following statements regarding credit unions are CORRECT? 1.) Credit unions make loans and accept deposits. 2.) Credit union deposits are insured by the FDIC. 3.) Earnings from investments are allocated to members in the form of credit union stock. 4.) A board of directors, elected by members, is responsible for providing leadership and setting credit union guidelines.
The answer is I and IV. Deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF) up to $250,000 per qualifying account. Earnings from investments are allocated to members in the form of dividends.
Mike and Mona had a baby boy two months ago. They want to invest a lump sum today that will provide for four years of education when he starts college at the age of 18. State College costs $12,000 annually today, and they believe education inflation will remain constant at 6% and that they can receive a 7% return on their investment. What is the amount they would require? A)$47,311 B)$39,598 C)$39,971 D)$41,113
The answer is $39,971. (NOTE: calculations were not rounded between steps. Your answers might vary slightly due to rounding.) Inflate today's college tuition to when child starts college: 18 [N]; 6 [I/YR]; 12,000 [PV] solve for [FV] = 34,252.0698. STEP 2 calculate present value needed at start of school, using inflation-adjusted interest rate: 1.06 [INPUT]; 1.07 [DOWNSHIFT] [%CHG] {0.9433} [I/YR]; 4 [N]; 34,252.0698 [PMT]. Set calculator to BEG mode [DOWNSHIFT] [Beg/End] solve for [PV] = 135,099.5414. STEP 3 take lump sum needed at start of college and calculate the present value needed today. 135,099.5414 [FV]; 18 [N]; 7 [I/YR]; solve for [PV] = 39,971.0794, or $39,971.
Margaret, age 28, has been working full-time for a veterinary clinic and is also taking classes on a part-time basis in pursuit of her master's degree in fine arts. Her employer, Dr. Charles, offers reimbursements for qualified expenses through an Educational Assistance Program. This year, Margaret has incurred the following educational expenses: Tuition: $4,500 Lab coats: $100 Science lab Fee: $100 Enrollment Fees: $500 Books and Supplies: $900 Based on these expenses, identify the amount of reimbursement Margaret can receive under the Educational Assistance Program and exclude from income. A)$5,250 B)$1,500 C)$6,000 D)$5,100
The answer is $5,250. An employer can reimburse an employee's graduate or undergraduate tuition, enrollment fees, books, supplies, and equipment; these benefits are excluded from the employee's income up to $5,250 per year. Margaret's qualifying expenses equal $6,000 ($4,500 + $100 + $500 + $900). The expense for lab coats does not qualify. However, because this exceeds the maximum of $5,250 for qualifying expenses, Margaret can exclude $5,250 only.
All funds within a Coverdell Education Savings Account (CESA) must be used before the student reaches what age to avoid income taxation and a penalty on the earnings of the account when disbursed? A)21 B)25 C)35 D)30
The answer is 30. All funds within a CESA must be used before the student reaches age 30. Any remaining funds will be disbursed to the CESA beneficiary, and the earnings will be subject to income tax and a 10% penalty.
Identify the Fiduciary Duty that corresponds to the following definition "A CFP® professional must avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client's informed consent, and properly manage the conflict." A)Duty to Follow Client Instructions B)Duty of Care C)Duty of Loyalty D)Duty to Comply
The answer is Duty of Loyalty. Standard A.1, Fiduciary Duty, defines the Duty of Loyalty as a CFP® professional's obligation to "avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client's informed consent, and properly manage the conflict."
You have acquired the Financial Industry Regulatory Authority (FINRA) Series 6 and Series 63 licenses and are appropriately state insurance licensed. Which of the following are you permitted to sell? 1.) Mutual funds 2.) Variable life insurance 3.) Individual stocks 4.) Options
The answer is I and II. Holding the FINRA Series 6 and Series 63 registrations and the appropriate insurance licenses qualifies an individual to sell mutual funds, variable life insurance, variable annuities, and initially offered unit investment trusts (UITs). A Series 7 license is required to sell individual stocks and options.
Which of the following statements regarding savings and loan associations (S&Ls) is CORRECT? 1.) S&Ls are also known as thrift institutions. 2.) One purpose of S&Ls is to provide home loans. 3.) Checking and savings accounts are offered by S&Ls. 4.) Federally chartered S&Ls are regulated by the FDIC.
The answer is I and II. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. The main purposes of an S&L are to accept savings and provide home loans. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency.
Which of the following statements regarding savings and loan associations (S&Ls) is CORRECT? S&Ls are also known as thrift institutions. One purpose of S&Ls is to provide home loans. Checking and savings accounts are offered by S&Ls. Federally chartered S&Ls are regulated by the FDIC.
The answer is I and II. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. The main purposes of an S&L are to accept savings and provide home loans. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency.
Candace is a financial planner who advises clients about specific securities and issues written financial plans. Candace will occasionally sell a client some mutual funds. Candace does not sell insurance, but she does give in-depth advice to her clients about their insurance needs. With what regulatory agencies is it likely that Candace must register? 1.) Securities Exchange Commission (SEC), or her state, as an investment adviser 2.) Financial Industry Regulatory Authority (FINRA), Series 6 3.) FINRA, Series 24
The answer is I and II. The SEC requires anyone (who does not fall into one of the exception categories) doing the work of an investment adviser to register as one, either with the SEC or their state of domicile. Candace gives specific investment advice as an integral part of her practice, so she needs to register. Also, mutual fund sales require a Series 6 license (Series 63 may also be required). Series 24 is for a registered principal.
Damien has hired a CFP® professional for consultation on estate planning strategies that preserve wealth for his family. Identify the relevant elements in Damien's financial planning engagement. I. Preserve or increase wealth II. Identify tax considerations III. Pursue philanthropic interests IV. Address estate and legacy matters A)II, III, and IV B)II and III C)I and IV D)I, II, III, and IV
The answer is I and IV. Damien has specifically identified preservation of wealth and estate matters in his financial planning arrangement. Both of these are considered relevant elements.
Which of the following statements regarding interpersonal communication is CORRECT? Also known as communicating one on one. Important throughout the financial planning process. Will ensure that the listener understands and responds effectively to the communicator. Involves understanding differences when communicating across generations, cultures, and genders.
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.
The CFP Board Code of Ethics and Standards of Conduct prohibits a CFP® certificant from doing which of the following activities? 1.) Commingling client funds with funds of the financial planning firm 2.) Misleading a client 3.) Accepting any consideration (e.g., gift, gratuity) that might compromise the planner's objectivity 4.) Using the initials RIA after his or her name A)I and IV B)I, II, III, and IV C)II and III D)I, II, and IV
The answer is I, II, III, and IV. A CFP® certificant may not commingle client funds with the funds of the financial planning firm and may not mislead a client. The CFP Board Standards of Conduct, Duties Owed to Clients, Standard A.6 (Sound and Objective Professional Judgement) prohibits accepting any consideration that might compromise the planner's objectivity. The use of the initials RIA after one's name is governed (and prohibited) by the SEC and by CFP Board.
Identify the Integration Factors that indicate a Financial Planning Engagement is occurring. 1.) The number of relevant elements of the Client's personal and financial circumstances that the Financial Advice may affect 2.) The portion and amount of the Client's Financial Assets that the Financial Advice may affect 3.) The effect on the Client's overall exposure to risk if the Client implements the Financial Advice 4.) The length of time the Client's personal and financial circumstances may be affected by the Financial Advice A)III and IV B)I and II C)I only D)I, II, III, and IV
The answer is I, II, III, and IV. All of these are Integration Factors that help a planner determine whether Financial Planning is occurring.
Choose the requirements that must be fulfilled for a CFP® professional to act as a fiduciary. 1.) Engage the client with care, skill, prudence, and diligence. 2.) Consider the client's goals, risk tolerance, objectives, and circumstances. 3.) Adhere to the Terms of the Engagement and follow 'reasonable and lawful' client instructions. 4.) Avoid, fully disclose, obtain consent or manage Material Conflicts of Interest. A)III and IV B)I, II, III, and IV C)I and II D)II only
The answer is I, II, III, and IV. All of these are requirements that must be fulfilled for a CFP® professional to act as a fiduciary, set forth in the Standards of Conduct, Fiduciary (Standard A.1).
Which of the following statements regarding the Federal Reserve's use of the discount rate is CORRECT? 1.) The Fed will lower the discount rate in order to increase the money supply. 2.) To curb inflation, the Fed will raise the discount rate. 3.) If the Fed lowers the discount rate, banks will be able to borrow funds at lower rates. 4.) To contract the money supply, the Fed will raise the discount rate.
The answer is I, II, III, and IV. All of these statements are correct. To follow an expansionary (easy) monetary policy, the Federal Reserve will lower the discount rate. To institute a restrictive (tight) monetary policy, the Federal Reserve will raise the discount rate.
Which of the following may be affected by a client's risk tolerance and risk perception? Investment decisions Decisions concerning insurance coverage Decisions concerning types and amount of mortgages Decisions concerning pension payout options
The answer is I, II, III, and IV. Although risk tolerance and risk perception are most often associated with investing, they may affect all of these financial decisions.
Which of the following requires an individual to be registered as an investment adviser under the Investment Advisers Act of 1940? 1.) The individual provides advice about a specific security. 2.) The individual is in the business of providing advice about specific securities. 3.) The individual receives compensation for providing advice. 4.) The individual is a CFP® practitioner.
The answer is I, II, and III. A CFP® practitioner does not necessarily have to register by virtue of receiving the designation.
Which of the following requires an individual to be registered as an investment adviser under the Investment Advisers Act of 1940? 1.) The individual provides advice about securities. 2.) The individual is in the business of providing advice about securities. 3.) The individual receives compensation for providing advice. 4.) The individual is a CFP® practitioner.
The answer is I, II, and III. A CFP® practitioner does not necessarily have to register by virtue of receiving the designation.
Which of the following statements regarding securities and insurance regulation legislation are CORRECT? 1.) The Securities Act of 1933 requires the registration of new issues of securities or issues in the primary market. 2.) The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house failures. 3.) The Investment Company Act of 1940 assures investor safety of investment value in companies engaged primarily in investing, reinvesting, and trading in securities. 4.) The Investment Advisers Act of 1940 requires that persons or firms advising others regarding securities must register with the Securities and Exchange Commission.
The answer is I, II, and IV. Investors are not assured of safety when investing and trading in securities.
Olen and Kiera Littrell have three children. Their oldest child is currently in college, their second child will be starting college next semester, and their third child is still in high school. Olen works at the assembly plant with an income of $45,000 and Kiera is a homemaker. They rent an apartment and carry various credit card balances. What potential avenues would they most likely have to finance college expenses? 1.) Perkins loans 2.) Stafford loans 3.) Parent Loans for Undergraduate Students loans (PLUS loans) 4.) Pell grants A)I, II, and IV B)III and IV C)I and IV D)I, II, III, and IV
The answer is I, II, and IV. PLUS loans are taken out by the parents, which requires reasonable credit. Due to the Littrells' finances, they most likely would not qualify for a PLUS loan. Perkins loans, Pell grants, and FSEOG are needs-based. Stafford Loans can be subsidized or unsubsidized—subsidized are needs-based. Most likely they would qualify for the subsidized loans.
Valarie is planning to go to college in the fall and wants to apply for a federal grant. She is interested in the Pell grant but does not know if she will be able to apply. Pell grants are available to which of the following students? 1 ) Part-time students 2 ) Full-time students 3 ) Graduate students 4 ) Undergraduate students A)I, II, and III B)I, II, III and IV C)I, II and IV D)II and IV
The answer is I, II, and IV. Pell grants are available to half-time, full-time, and part-time (less than half-time) undergraduate students.
Identify the financial aid programs available through the U.S. Department of Education that are need-based, have eligibility requirements, and require completion of the FAFSA. 1.) Pell Grant 2 ) Supplemental Educational Opportunity Grant(SEOG) 3 ) Unsubsidized Stafford Loan 4 ) Teacher Education Assistance for College and Higher Education (TEACH) Grants A)III and IV B)I and II C)I, II, and IV D)III only
The answer is I, II, and IV. The U.S. Department of Education offers various federal grants to students attending four-year colleges or universities, community colleges, and career schools. Each requires completion of a Free Application for Federal Student Aid (FAFSA) and fulfilling need-based eligibility criteria. The federal grants include federal Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Teacher Education Assistance for College and Higher Education (TEACH) grants, and Iraq and Afghanistan Service grants. An unsubsidized Stafford Loan is not based on income and is not need-based.
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. Planners using the economic and resource approach assume clients are rational and will change to the most favorable behavior if given the appropriate counseling. Financial counseling is a process in which the planner helps a client change poor financial behavior by making recommendations to improve financial status. The cognitive-behavioral approach to financial counseling asserts that clients' attitudes, beliefs, and values influence their behavior.
The answer is I, II, 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. The cognitive-behavioral approach to financial counseling believes that clients' behaviors are influenced by their attitudes, beliefs, and values. Financial counseling is a process that helps clients change their poor financial behavior through education and guidance. Making recommendations to improve clients' financial statuses is not part of financial counseling.
National banks are subject to regulation by which of the following independent federal agencies? Federal Reserve Board Securities and Exchange Commission (SEC) Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC)
The answer is I, III, and IV. Although it is true the SEC is an independent federal agency, it regulates the securities markets, not national banks.
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.
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.
Select the instances in which a CFP® professional must adhere to the Practice Standards. 1.) Financial Planning 2.) Any communication where financial matters are discussed 3.) Financial Advice that incorporates relevant elements of a client's situation 4.) Any engagement where the client understands that the planner will offer or has already offered financial planning services A)I, II, and IV B)II only C)III and IV D)I, III, and IV
The answer is I, III, and IV. There are several instances in which a CFP® professional must adhere to the Practice Standards, such as providing Financial Advice that incorporates relevant elements of a client's situation, and any engagement where the client understands that the planner will offer or has already offered financial planning services. There is no requirement to follow the Practice Standards in any communication where financial matters are discussed.
An employer's Educational Assistance Program could apply to which of the following expenses? 1 ) Books and supplies 2 ) On-campus housing 3 ) Full-time, graduate tuition 4 ) Part-time, undergraduate tuition A)III only B)I, III, and IV C)III and IV D)I and II
The answer is I, III, and IV. Under this program, an employer can reimburse an employee's tuition (both graduate and undergraduate), enrollment fees, books, supplies, and equipment; these benefits are excluded from the employee's income up to $5,250 per year. Meals, transportation, and lodging are not qualifying expenses for this program.
Nathan and Angela Flesher have three children. Their oldest child is currently in college, their second child will be starting college next semester, and their third child is still in high school. Nathan is a vice president at AJAX Corp with W2 income of $150,000 per year, and Angela is an administrative assistant earning $45,000 per year. What potential avenues would they most likely have to finance college expenses? 1 ) Perkins loans 2 ) Parent Loans for Undergraduate Students loans (PLUS loans) 3 ) Pell grants 4 ) Work study program A)III and IV B)II and IV C)I and III D)IV only
The answer is II and IV. Perkins loans and Pell grants are needs-based, and Nathan and Angela most likely would not qualify based on their income.
An individual is considering investing $350,000 through a national bank. Which of the following statements is CORRECT? 1.) If the individual deposits the funds in a savings account, the FDIC guarantees the full amount of his deposit. 2.) If the Federal Deposit Insurance Corporation (FDIC) guarantees the funds in a savings account, the excess of the savings deposit over $250,000 is not guaranteed for an individual's savings account. 3.) If the funds are invested in a mutual fund sold by a bank, the FDIC affords the individual protection up to $250,000. 4.) If the individual deposits $175,000 into each of two savings accounts at the same bank in his name only, the full amount of his investment is afforded protection by the FDIC because neither account exceeds $250,000.
The answer is II only. The FDIC guarantees amounts up to $250,000, while the excess over $250,000 is at risk to the depositor. Only deposits up to $250,000 are guaranteed. Funds invested in a mutual fund are subject to market risk and are not guaranteed by the FDIC. The FDIC guarantees amounts by individual depositor (ownership) and not by types of accounts.
Walker, age 24, is single. He occasionally takes courses at a local college to follow personal interests, but he is not pursuing a degree. He is enrolled on less than a half-time basis. He pays tuition expenses of $2,000, and his modified adjusted gross income (MAGI) is $45,000. Which of the following tax credits may Walker claim on his federal income tax return? 1.) American Opportunity Tax Credit 2.) Lifetime Learning Credit A)I only B)Neither I nor II C)Both I and II D)II only
The answer is II only. Walker is eligible for the Lifetime Learning Credit, but he is not eligible for the American Opportunity Tax Credit because he is not pursuing a degree and is not enrolled on at least a half-time basis.
Which of the following statements regarding a client's credit score is CORRECT? Using a high percentage of available credit will positively affect a credit score. Considering a client's credit history only, the longer the history, the higher credit score. A) Neither I nor II B) I only C) II only D) Both I and II
The answer is II only. When considering a client's credit history and no other FICO categories, in general, the longer the credit history, the higher the credit score. Using a high percentage of available credit will negatively affect a client's credit score.
List these steps in the CORRECT order according to the financial planning communication model. Client: Response message encoded and sent Financial planner: Message encoded and sent Client: Message received, decoded, and interpreted Financial planner: Message received, decoded and interpreted
The answer is II, III, I, IV. The correct sequence for the financial planning communication model is: 1) Financial planner: Message encoded and sent, 2) Client: Message received, decoded, and interpreted, 3) Client: Response message encoded and sent, and 4) Financial planner: Message received, decoded, and interpreted.
Select the obligations the CFP® certificant has to her current clients. 1.) To maintain competence in all areas of financial planning 2.) To advise of any certification suspension or revocation she received from CFP Board 3.) To be in compliance with applicable regulatory requirements governing the professional services provided 4.) To provide reasonable and practical professional supervision to any subordinate or third party to whom she assigns responsibility for any client services A)I, II, and IV B)III and IV C)II, III, and IV D)III only
The answer is II, III, and IV. Under CFP Board Standards of Conduct, CFP® certificants must only have competence in areas in which they are engaged to provide professional services.
Which of the following FINRA licenses entitles the holder to provide investment advice to clients within the holder's primary state of residence? 1.) Series 7 2.) Series 63 3.) Series 65 4.) Series 66
The answer is III and IV. Individuals with Series 65 licenses can provide investment advice to clients within their primary states of residence. Series 66 registration entitles holders to not only provide advice within their primary states of residence, but in any state.
A financial planner who, as a part of his business, wants to provide advice on investments but does not plan to sell investment products may be required to register (i.e., not test) with which of the following organizations? 1.) The Financial Industry Regulatory Authority (FINRA) 2.) CFP Board 3.) The Securities and Exchange Commission 4.) His or her state of domicile
The answer is III and IV. The financial planner plans to advise clients regarding investments as a part of business. The planner does not need to register with the FINRA if he or she does not intend to sell any investment products (though advice regarding certain products may make such registration an excellent idea). In addition, there is no need to register with the CFP Board unless the planner intends to identify himself or herself as a CFP® certificant. The choice between the planner's state and the SEC is determined by the RIA rules. Generally, a planner will register with his or her state unless he or she manages over $100 million of client assets.
A Chapter 13 bankruptcy has which of the following characteristics? The debtor is generally required to relinquish assets to discharge debts. All debts are forgiven or discharged. The debtor generally is not required to relinquish assets. It is sometimes referred to as the wage earner plan. A)I, III, and IV B)I, II, and III C)I and II D)III and IV
The answer is III and IV. Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding debts within a specified time period. Rather than debts being forgiven or discharged, they are included in the repayment plan.
Mr. and Mrs. Smith come to you for advice on the financing of their son's college education at their state university. Even though their annual family income exceeds $100,000, they have not saved enough for his college expenses. You advise that their best opportunity to acquire education funds would be through A)supplemental education opportunity grants B)Pell Grants C)Subsidized Stafford Student Loans D)Parent Loans for Undergraduate Students (PLUS) loans
The answer is Parent Loans for Undergraduate Students (PLUS) loans. PLUS loans allow parents to borrow money for their children's education. The loans are not need-based, and therefore potentially available to any parent. Each of the other options is based on student financial need, and the Smiths are unlikely to qualify. Stafford loans may also be offered without considering financial need, on a nonsubsidized basis, but this question specifies subsidized Stafford loans, which are need-based.
General categories of communication include all of these except A) interpersonal. B) restricted. C) mass. D) intrapersonal.
The four general categories of communication are: 1) intrapersonal, 2) interpersonal, 3) group, and 4) mass. Restricted communication is not considered a general category of communication.
"A CFP® professional may not do indirectly, or through or by another person or entity, any act or thing that the Code and Standards prohibit the CFP® professional from doing directly." This statement is included in which of the Standards of Conduct? A)Duties Owed to Firms and Subordinates B)Duties to CFP Board C)Duties Owed to Clients D)Prohibition on Circumvention
The answer is Prohibition on Circumvention. Under the Standards of Conduct, this statement identifies Prohibition on Circumvention.
Rock Enterprises is an intermediary that facilitates transactions involving sales of investments or real estate. Rock Enterprises is..?
The answer is a brokerage company. This describes a brokerage company. A trust company specializes in managing estates and serving as trustee for various types of trusts. A mutual fund company pools money from shareholders and invests these funds in various types of securities, including stocks, bonds, and money market instruments according to the fund's prospectus. The main purpose of a thrift institution, also known as a savings and loan association (S&L), is to accept savings and provide home loans.
Your client, a single person with no dependents, comes to you and inquires about the possibility of filing for Chapter 7 bankruptcy. Under the laws of most states, which of the following items is exempt from creditors? A)Wages earned B)Student loan proceeds C)An extravagant home D)Accrued pension benefits
The answer is accrued pension benefits. Under most states' laws, pension benefits are exempt from creditors once an individual files for bankruptcy. Although a homestead may be exempt, there is usually a cap or ceiling on the value of the home that may be protected.
If the demand for a product is inelastic, it means that A)an increase in the price would lead to an increase in the total amount spent on purchases of the product. B)an increase in the price would lead to a decrease in the total amount spent on purchases of the product. C)the price of the product cannot be increased or decreased. D)an increase in the price would have no effect on the total amount spent on purchases of the product.
The answer is an increase in the price would lead to an increase in the total amount spent on purchases of the product. Theoretically, if a product exhibits inelastic demand characteristics, an increase in the price would lead to an increase in the total amount spent to purchase the product.
CFP Board releases _________________ to summarize decisions pertaining to violation of the Code and Standards. A)certification rulings B)practice assessments C)anonymous case histories D)disciplinary memoranda
The answer is anonymous case histories. Anonymous case histories summarize decisions pertaining to violation of the Code and Standards.
All of the following are often used as leading indicators of a change in the economy except A)durable goods orders. B)average employment duration. C)stock market. D)housing starts.
The answer is average employment duration. Leading indicators include housing starts, new claims for unemployment, the direction of the stock market and interest rates, changes in investor sentiment, and orders for durable goods. Average duration of employment is a lagging or confirming indicator.
All of the following are likely decline in value during a deflationary period except A)bond prices. B)real estate. C)collectibles. D)precious metals.
The answer is bond prices. Bond prices rise and purchasing power increases during deflation. A deflationary period can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value.
Under the Investment Advisers Act of 1940, how may a financial planner provide written disclosure of his background and business practices when establishing an advisory account? 1.) Investment advisory regulations require that Part 2A of Form ADV or the brochure be given to customers in advance or no later than the time of entering into a contract if rescission is permitted within a specifically allotted time 2.) Delivery of Part 2A of Form ADV not less than 48 hours before entering into an investment advisory contract
The answer is both I and II. Both of these statements are correct.
George is a CFP® certificant who recently violated the ethical standards set forth by the CFP Board. Which of the following is not a possible form of discipline? A)Suspension B)Client censure C)Private censure D)Public letter of admonition
The answer is client censure. Article 4 of the CFP Board's Disciplinary Rules and Procedures lists four forms of discipline: private censure, public letter of admonition, suspension, and revocation. Client censure is not an accepted form of discipline.
All of the following economic activities represent fiscal policy except A)tax cuts. B)cuts to the federal funds rate. C)increases in purchases of goods and services. D)tax increases to dampen consumption and discourage private investment.
The answer is cuts to the federal funds rate. The Federal Reserve sets the discount rate, upon which the federal funds rate is based. The Fed will lower the discount rate when it wants to increase the money supply. When the government increases purchases of goods and services or cuts taxes, it is an example of expansionary fiscal policy. If the government raises taxes to dampen consumption and discourage private investment, it is an example of restrictive fiscal policy.
Sarah, a CFP® professional, completed a life insurance application for her client, Chase. When Chase called her two weeks later about the status of the application, Sarah realized she had not submitted it to the insurance company. Which of the following ethical principles has Sarah violated? A)Professionalism B)Objectivity C)Integrity D)Diligence
The answer is diligence. Sarah violated the Standard of Diligence because she did not provide services in a reasonably prompt and thorough manner.
Which of the following are common features between the Coverdell Education Savings Account (CESA) and the Section 529 plan? A)Both have an income phaseout. B)The CESA can only be used for K-12 education expenses. C)Both have an age restriction for use of funds. D)Neither provides any federal income tax deductibility to the contributors.
The answer is neither provides any federal income tax deductibility to the contributors. Only the CESA has an income phaseout and age restriction at age 30. Both can be used to pay for qualified elementary and secondary school expenses as well as college expenses, but neither plan is deductible for federal income tax purposes.
Donnie is a director of operations at an alternative investment group. He is taking part-time evening classes to obtain a Master of Finance degree through an online college. This year, he incurred $10,000 in qualified educational expenses. Identify the program or credit(s) that Donnie could use to offset his expenses this year. A)Employer-provided assistance program + Lifetime Learning Credit B)Employer-provided assistance program + American Opportunity Tax Credit C)Lifetime Learning Credit + American Opportunity Tax Credit D)Employer-provided assistance program only
The answer is employer-provided assistance program + Lifetime Learning Credit. An employer can reimburse an employee's tuition (both graduate and undergraduate), enrollment fees, books, supplies, and equipment, and these benefits are excluded from the employee's income up to $5,250 per year. The employer or the employee cannot, however, also claim an education credit (American Opportunity Tax or Lifetime Learning Credit) for the same expenses. If the employee has expenses greater than $5,250, the employee will be permitted to claim an education credit for the expenses over $5,250 (assuming the employee also meets the requirements for the education credits). In Donnie's case, the Lifetime Learning Credit would apply after the educational assistance benefit because he is enrolled part time and on a graduate level. It would create a nonrefundable credit on 20% of all qualifying educational expenses above $5,250 ($950 reimbursement in Donnie's case [$4,750 × 0.20 = $950 LLC]).
The behavioral finance concept that asserts that people are given a means of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions, is known as A) mental accounting. B) anchoring. C) framing bias. D) confirmation bias.
The answer is framing bias. The framing bias asserts 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. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Mental accounting is putting money into separate "accounts" based on the function of these accounts.
Which of the following obligations could possibly be reduced or eliminated in a personal bankruptcy? A)401(k) loan B)Installment payments C)Student loans D)IRS tax obligation
The answer is installment payments. Installment payments could potentially be reduced or eliminated in a personal bankruptcy. Student loans and IRS tax obligations will not be eliminated through bankruptcy. 401(k) loans will not be eliminated through bankruptcy because the lienholder is the client. If the client defaults on the 401(k) loan, the entire loan will be taxable as a distribution immediately.
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
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.
The CPI program is characterized by all of the following except A)quantifying a representative basket of goods and services. B)measurement of the average change over time in the selling prices received by domestic producers for their output. C)production of monthly data on changes in the prices. D)tracking of prices paid by urban consumers.
The answer is measurement of the average change over time in the selling prices received by domestic producers for their output. The PPI program measures the average change over time in the selling prices received by domestic producers for their output. The CPI program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.
What is the term used to describe the Federal Reserve's controlling the money supply, enabling it to significantly affect interest rates?
The answer is monetary policy. The Fed will follow an easy, expansionary policy when it wishes to increase the money supply and ultimately decrease interest rates and use a tight, restrictive policy when it wishes to decrease the money supply and ultimately increase interest rates.
All of the following items should be included on an individual's statement of financial position except A) mortgage balance. B) mutual fund balance. C) fair market value of a home. D) mortgage payment.
The answer is mortgage payment. The mortgage payment, which is considered a fixed outflow, is included on the statement of cash flows, not the statement of financial position. The mortgage balance should be shown as a liability on the statement of financial position. The fair market value of a home and the balance of a mutual fund should be listed as assets on the statement of financial position
Identify the item that is NOT a responsibility of the Respondent following an Interim Suspension Order, per the Procedural Rules. A)Must not suggest that Respondent is a CFP® professional B)Must refrain from all activities in financial services C)Refrain from use of the CFP® certification marks D)Prohibited from stating that Respondent is a CFP® professional
The answer is must refrain from all activities in financial services. A Respondent subject to an Interim Suspension Order must not use the CFP® certification marks or state or suggest that Respondent is a CFP® professional while the Interim Suspension Order is in effect.
Which of the following statements regarding liabilities on the statement of financial position is CORRECT? They are categorized as fixed or variable. Any outstanding mortgage balance is reported as its original amount. A) I only B) Both I and II C) II only D) Neither I nor II
The answer is neither I nor II. Liabilities are categorized as current (short-term) liabilities or long-term on the statement of financial position. The current outstanding mortgage balance as of the date of the statement of financial position, not the original mortgage amount, is reported on this statement.
CFP Board's Fitness Standards apply to all of the following except A)individuals who are not currently certified but have been certified by CFP Board in the past. B)individuals who are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination. C)practicing CFP® professionals. D)CFP® candidates.
The answer is practicing CFP® professionals. The Fitness Standards apply to CFP® candidates and Professionals Eligible for Reinstatement (PER). PER includes both individuals who are not currently certified but have been certified by CFP Board in the past and individuals who are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.
The responsiveness of the quantity demanded of a good to changes in the good's price, other things being held constant, is called A)substitution effect. B)equilibrium. C)demand curve shift. D)price elasticity.
The answer is price elasticity. A good is elastic when its quantity demanded responds greatly to price changes (e.g., luxury items) and is inelastic when its quantity demanded responds little to price changes (e.g., food).
Which of the following most accurately describes the McCarran Ferguson Act of 1945?
The answer is provides that insurance is to be regulated at the state level as long as the state's regulation is adequate. The McCarran Ferguson Act of 1945 provides that the states will regulate insurance as long as their regulation is adequate. The Securities Investors Protection Act of 1970 established the Securities Investor Protection Corporation (SIPC) to protect investors against losses arising from the failure of brokerage firms. The Investment Company Act of 1940 authorized the SEC to regulate mutual funds and variable products, and the Securities Exchange Act of 1934 established the SEC as the primary regulatory body overseeing the sale and purchase of securities.
Your clients, Jason and Marcela, have a six-year-old daughter, Michelle. They want to start a savings plan for Michelle's college education. You are convinced that a Section 529 plan is the best option for Michelle's college education. What can you accurately tell Jason and Marcela about the 529 plan? A)Qualified higher education expenses include tuition, fees, books, special needs services, and room and board if Michelle is at least a half-time student. B)The maximum annual contribution to a 529 plan is currently $15,000. C)Jason and Marcela would be able to change the investment mix within a particular 529 plan only once per year. D)There is ordinary income treatment and a 10% penalty on all 529 distributed funds that Michelle doesn't use for education.
The answer is qualified higher education expenses include tuition, fees, books, special needs services, and room and board if Michelle is at least a half-time student. The $15,000 is the annual gift tax exclusion amount. While there is generally no annual maximum contribution, gifts of up to five times the annual gift tax exclusion may be made in a single year, essentially without gift tax implications. Funds not used for education may be rolled over to another beneficiary who is a family member. In addition, the ordinary income treatment and penalty would apply only to the earnings distributed. The investment mix within a 529 plan may be changed twice per calendar year. Qualified higher education expenses (QHEE) include tuition, fees, books, equipment necessary for enrollment, and special needs services. In addition, room and board expenses are QHEE for a student who is at least half-time. Expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or Internet access and related services may also be treated as qualifying expenses if they are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Distributions of up to $10,000 annually may also be used for elementary and secondary school, as a result of TCJA.
If the central monetary authorities want to slow the rate of inflation, the central bank should A)decrease the discount rate to lower the market rate of interest; this will cause both costs and prices to fall. B)raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services. C)decrease taxes, which will reduce costs and cause prices to fall. D)buy government bonds to reduce the money supply; this will cause interest rates to rise and aggregate demand to fall.
The answer is raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services. To slow inflation, the Fed needs to decrease the money supply, which it can do with several of the tools available to it. One tool is the discount rate; to decrease the money supply, the Fed raises the rate. When the money supply is reduced, loan demand falls because interest rates rise; then demand for products and services decreases. Buying government bonds increases the money supply. Raising taxes is a way to fight inflation.
You are a CFP® certificant, and as an integral part of your financial planning business expansion plan, you have recently employed a young woman who is eminently qualified as a paraplanner and is currently studying for the CFP® Certification Examination. However, you notice that she is using the CFP® mark after her name already. Which of the following should you do? A)Terminate her employment immediately. B)Advise her to cease using the mark immediately. C)Report her immediately to CFP Board D)Do nothing, because she is not a CFP® certificant.
The answer is report her immediately to CFP Board. Although it might seem easier and appear to be a kinder option to simply advise her to stop using the marks, as a CFP® practitioner you are under obligation to CFP Board to immediately advise the Board of any misuse of the marks. Once reported it is possible, as indicated within the Guide to Use of the Marks, that CFP Board will take action to prevent her from using the marks in the future.
Identify the item that is NOT included in the Duties Owed to CFP Board section of the Standards of Conduct. A)Cooperation with CFP Board throughout investigations and disciplinary proceedings. B)Provide a narrative statement to CFP Board on reportable matters. C)Report incidents involving adverse conduct to CFP Board within 45 days. D)Compliance with the Terms and Conditions of Certification and License.
The answer is report incidents involving adverse conduct to CFP Board within 45 days. To comply with the Duties Owed to CFP Board section of the Standards of Conduct, a CFP® professional must report incidents involving adverse conduct to CFP Board within 30 days.
All of the following statements regarding Financial Advice are correct except A)the determination of whether Financial Advice has been provided is an objective rather than subjective inquiry. B)responses to directed orders is considered Financial Advice. C)the more customized a planner's communications are to a client's individual situation, the greater the likelihood that Financial Advice is being provided. D)the exercise of discretionary authority over the financial assets of a client is considered Financial Advice.
The answer is responses to directed orders is considered Financial Advice. This activity is not considered Financial Advice. All of the other statements are correct.
A client's assessment of the magnitude of the risks being traded off is known as
The answer is risk perception. A client's assessment of the magnitude of the risks being traded off is known as risk perception. Risk tolerance refers to the tradeoffs clients are willing to make between potential risks and rewards. Risk capacity is the degree to which a client's financial resources can cushion risks. 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.
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
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.
Which one of the following factors would be the strongest indication that interest rates might rise? A)Selling of dollar-denominated assets by foreign investors B)Decreasing United States government deficits C)Decreasing rates of inflation D)Weak credit demand by the private sector of the United States economy
The answer is selling of dollar-denominated assets by foreign investors. When an asset is being sold by investors, the compensation paid to entice an investor to hold that asset must be raised. Raising the interest rate paid on fixed income investments is one method to increase the compensation paid to hold U.S. dollars. Decreasing the deficit might actually lower rates since the holding of U.S. debt becomes less risky. Also, government spending would decrease, thereby decreasing the demand for money and decreasing rates. Decreasing inflation also would cause rates to decrease because the Fed generally decreases interest rates when inflation falls. Weak credit would cause banks to decrease interest rates to attract new demand.
Justin and Maddie have asked you to provide them with a comprehensive financial plan. During your initial meeting, you asked several questions to understand their feelings, goals, and objectives. Based on this discussion, you believe a consultative approach should be used that specifically identifies their strengths and weaknesses, among other factors. Which of the following techniques is most closely aligned with your financial counseling approach in this case? A) Cognitive-behavioral approach B) Strategic management approach C) Classical economics approach D) Economic and resource approach
The answer is strategic management approach. A SWOT analysis identifies a client's strengths, weaknesses, opportunities, and threats. This analysis is completed early in the planning process. With this approach, the planner assumes the role of consultant.
All of the following statements regarding the expected family contribution (EFC) as it relates to student financial aid are CORRECT except A)the home equity in the parents' home is excluded from parental assets. B)student assets and income are assigned a higher rating in the EFC calculation than parental assets and income. C)student assets include the value of everything the student owns or that has been saved on the student's behalf. D)student income includes only taxable income from the year preceding the award year.
The answer is student income includes only taxable income from the year preceding the award year. Student income includes both taxable and nontaxable income from the year preceding the award year.
Jason is delinquent on a number of credit card payments. He is concerned that these creditors will start to use scare tactics in order to embarrass and humiliate him until he pays the debts. What act prohibits creditors from harassing Jason? A)The Bank Act of 1933 B)The Consumer Credit Protection Act C)The Fair Debt Collection Practices Act D)The Bankruptcy Act of 2005
The answer is the Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act prohibits debt collectors from engaging in certain practices, such as contacting a debtor at his place of employment if the employer objects, harassing or intimidating the debtor, or using false and misleading approaches. A state court may issue an order for garnishment of a portion of a debtor's wages in order to satisfy a legal judgment obtained by a creditor.
Which of the following acts extended the regulation of securities previously issued in the primary market to the secondary market and exchanges?
The answer is the Securities Exchange Act of 1934. In addition, the Securities Exchange Act of 1934 also established the Securities and Exchange Commission (SEC) as the primary regulatory body overseeing the sale and purchase of securities.
Select the parental assets that are excluded from consideration when calculating the expected family contribution (EFC) for federal financial aid. A)The excess of value over the amount owed on a personal residence B)Annual contributions to a retirement plan C)Mutual fund ownership D)Rental real estate property
The answer is the excess of value over the amount owed on a personal residence. The equity in a personal residence or home is not included in the calculation of the EFC. The accrued benefit or account balance in a retirement plan is an exempt parental asset, not the annual contributions made to that plan.
SERIES 63:
This is the Uniform Securities Agent State Law Examination. State securities laws require individuals to pass a qualification exam to sell securities within their states. Almost all states require individuals to pass the Series 63 exam as a condition of state registration.
SERIES 7:
This is the broadest license and entitles the holder to sell any security, including individual stocks and exchange-traded funds.
Many financial planners use an informal means of psychological profiling by
conducting fact-finding interviews in which they acquire information about how their clients process information, make decisions, prefer structure, and behave socially.
Duties Owed to Firms and Subordinates
Use reasonable care when supervising. Comply with lawful objectives of the CFP® professional's firm. Provide notice of any public discipline enacted by CFP Board
MODULE 3 KEY TERMS 1 OF 2
adjustable-rate mortgages (ARMs) back-end ratio balloon mortgages budget cash and cash equivalents cash flow statement closed-end lease conforming loans consumer debt ratio conventional mortgage loans current assets current (short-term) liabilities emergency fund fair market value Federal Housing Administration (FHA) loans fixed outflows fixed-rate loan fixed-rate mortgages front-end ratio graduated payment mortgage home equity line of credit (HELOC) home equity loan housing cost ratio inflows installment loan interest-only mortgage invested assets investing jumbo loans liquid assets long-term liabilities long-term loan mortgage insurance negative amortization
The serial payment is calculated by using..
an inflation-adjusted rate of return, and this becomes the interest rate (I/YR) that is entered into your financial calculator.
Investments that are ineligible for SIPC protection are
commodity futures contracts, investment contracts (such as limited partnerships), and fixed annuity contracts that are not registered with the SEC under the Securities Act of 1933.
SERIAL PAYMENTS
commonly mean payments increase each year by the amount of inflation (to maintain a constant or real dollar amount).
Consequences and implications of confirmation bias may include clients who
consider positive but ignore negative information and, therefore, hold investments too long; set up the decision process or data screens incorrectly to find what they want to see; underdiversify as they become overly convinced their ideas are correct, or overconcentrate in the stock of their employer, believing they have an information advantage in that security; or fail to adequately diversify.
Increasing a Credit Score
consistently making payments on time can greatly improve your client's credit score. Using a high percentage of available credit will negatively affect a score, but using a low percentage of available credit can have a positive impact. In fact, using a low percentage of available credit can have a greater positive impact than not using available credit at all. Shopping for mortgage or auto loans from different lenders within a short time period are typically treated as a single inquiry. closing credit card accounts that have been held for a long time can lower a credit score. Too many new credit inquiries can also lower a credit score,
LONG-TERM LOAN
is a loan due more than one year from a specified date.
CONSERVATISM BIAS
occurs when individuals initially form a rational view but fail to change that view as new information becomes available. They consider their original view and the information upon which it is based and do not consider new information important—especially if it is difficult to understand
USA PATRIOT Act of 2001
requires broker-dealers, among others, to have internal policies, procedures, and controls to meet the know your customer mandate, which combats terrorism and money laundering. **Enacted As a response to the terrorist attacks of September 11, 2001
Disclosure Requirements Under the Investment Advisers Act of 1940
requires investment advisers entering into an advisory contract with a client to deliver a written disclosure statement detailing the investment adviser's background and business practices. The key document in making these disclosures is Part 2A of Form ADV, often referred to as the adviser's brochure.
Duty of Loyalty
requires that the client's interests be put ahead of one's own, and that all actions be made solely for the benefit of the client. In cases where the interests of the firm, the investment professional, and the client compete, fiduciary duty requires that the client's interests come first.
