CFP 501 - Financial Planning Process and Insurance

Rules of Conduct: 4. Obligations to Prospective Clients and Clients

4.1 A certificant shall treat prospective clients and clients fairly and provide professional services with integrity and objectivity 4.2 A certificant shall offer advice only in those areas in which he or she is competent to do so and shall maintain competence in all areas in which he or she is engaged to provide professional services 4.3 A certificant shall be in compliance with applicable regulatory requirements governing professional services provided to the client 4.4 A certificant shall exercise reasonable and prudent professional judgement in providing professional services to client 4.5. A certificant shall make and/or implement only recommendations that are suitable for the client 4.6 A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns responsibility for any client services 4.7 A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from CFP Board

Rules of Conduct: 5. Obligations to Employers

5.1 A certificant who is an employee/agent shall perform professional services with dedication to the lawful objectives of the employer/principal in accordance with CFP Board's Code of Ethics 5.2 A certificant who is an employee/agent shall advise his or her current employer/principal of any certification suspension or revocation he or she receives from CFP Board

Rules of Conduct: 6. Obligations of CFP Board

6.1 A certificant shall abide by the terms of all agreement with CFP Board 6.2 A certificant shall meet all CFP Board requirements, including continuing education requirements to retain the right to use the CFP marks 6.3 A certificant shall notify the CFP Board of changes to contact information 6.4 A certificant shall notify CFP Board in writing of any conviction of crime, except misdemeanor traffic offenses or traffic ordinance violations unless such offense involves alcohol or drugs; or of any professional suspension or bar within 10 calendar days after date on which certificant is notified 6.5 A certificant shall not engage in conduct which reflects adversely on his or her integrity or fitness as a certificant, upon the CFP marks, or upon the profession

Rules of Conduct: 3. Prospective Client and Client Information and Property

3.1 A certicant shall treat information as confidential except as required in response to a proper legal process; as necessitate by obligations to a certicant's employer or partners; as required to defend against charges of wrongdoing; in connection with a civil dispute; or as needed to perform the services 3.2 A certificant shall take prudent steps to protect the security of information and property, including the security of store information 3.3. A certificant shall obtain the information necessary to fulfill his or her obligations; if the necessary information cannot be obtained, the certificant shall inform the prospective client or client of an and all material deficiencies 3.4 A certificant shall clearly identify the assets, if any, over which the certificant will take custody, exercise investment discretion, or exercise supervision 3.5 A certificant shall identify and keep complete records of all funds or other property of a client in the custody, or under the discretionary authority, or the certificant 3.6 A certificant shall not borrow money from a client - exceptions to this rule include if the client is an immediate family member or the client is an institution in the business of lending money and the borrowing is unrelated to professional services 3.7 A certificant shall not lend money to a client - exceptions to this rule include if the client is an immediate family member or the client is an institution in the business of lending money and the money lent is that of the institution 3.8 A certificant shall not commingle client's property with the property of the certificant or the certificant's employer unless the commingling is permitted by law or explicitly authorized 3.9 A certificant shall not commingle client's property with the property of other clients' property unless the commingling is permitted by law or explicitly authorized 3.10 A certificant shall return a client's property to the client upon request as soon as practicable or consistent with a time frame specified in an agreement with the client

Bankruptcy

CFP professional who has filed for bankruptcy (once) within the last five years will the bankruptcy disclosed on their public profile for 10 years after the CFP board is notified of the bankruptcy

Rules and Conduct and Practice Standards Violation Notification Requirements

Certificants are expected to notify the CFP Board as soon as possible of any act or omission that violates the Rules of Conduct or Practice Standards

Future Value of a Serial Payment (Inflation Adjusted)

FV N inflation rate INPUT rate of return SHIFT % CHANGE I/YR solve for PMT x inflation rate

Amortization Calculation

Mortgage amount +/- PV Mortgage length SHIFT N I/YR solve PMT 1 INPUT Mortgage length x 12 SHIFT AMORT =

200-1: Determining a Client's Personal and Financial Goals, Needs, and Priorities

The financial planning practitioner and the client shall mutually define the client's personal and financial goals, needs, and priorities that are relevant to the scope of the engagement before any recommendations is made and/or implemented

Underwriting Process: Risk and Risk Sharing

the insurance company must be capable of ascertaining that the risks in the process of being insured comply with the elements of an insurable risk and that adverse selection is controlled by: - Creating risk categories and establishing guidelines that, if followed, will minimize the possibility of problems - Determining how much risk sharing through deductibles, coinsurances, or limits will be established to discourse moral and morale hazard, and share risk with clients

Budgeting

the process of estimating and tracking where money is spent each month in order to develop a clear picture of where an individuals money is usually being spent

Parol Evidence Rule

when parties put their agreement into a final, written form, evidence of prior understanding - written or oral - will not be admitted to contradict the writing; does not apply to subsequent modifications and evidence of oral modifications made after the agreement is admissible to clarify the parties' intent

Void Contracts

a contract is not enforceable, lacks one or more of the requirement for an enforceable contract

Contracts: Aleatory, Adhesion, and Conditional

*Aleatory Contract* - outcome is controlled by chance, and the dollars that change hands are generally of substantially unequal amounts *Adhesion* - the entity that writes the contract is bound by any ambiguities created by the contract; since the insurer usually writes the contract, the courts generally find in favor of the insured as it relates to ambiguities; also a contract that is prepared by one party and accepted or rejected by by the other party *Conditional* - insurance contracts are conditional in the sense that the insurance company pays on the condition that a covered loss occurs

Insurance Contract Sections and Provisions

*Declarations*: information provided by the applicant, or the application itself *Insuring Agreement*: identifies what is insured, for what amount, and under what conditions *Exclusions*: identifies circumstances or situations that would preclude the company from paying a claim when a loss occurs *Conditions*: states the rights and duties of the insurance company and the policy owner *DICE*

Emergency Fund Ratio

*emergency fund ratio = liquid assets available for emergency/expenses* since emergency fund should cover 3-6 months expenses, healthy emergency fund ratio is .25-.50 (25-50%)

Net worth

*net worth = assets - liabilities* - Comparison of net worth over time can reveal how well the client is doing in achieving financial goals that involve a permanent increase in net worth - For planning purposes, it is helpful to take note of how the amount of net worth is reduced after subtracting the value of home equity, personal property, and/or retirement benefits

Forms of Discipline

- *A private written censure*: an unpublished reproached mailed to the certificant - *A public letter of admonition*: a published written reproach of the certificant's behavior; the Letter of Admonition will be published in a press release or other public form - *Suspension of the right to use the CFP marks for a specified period of time, not to exceed five years*: used with certificants the board deems can be rehabilitated; suspensions may be for any period not to exceed five years; any suspension period greater than one year requires a petition to be reinstated; suspensions are usually made public - *Permanent revocation of the right to use the CFP marks*: permanent denial of rights associated with the use of the marks; revocations normally are published

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

Trusts (Education Funding)

*Minor's Trust*: - Designed to use gift tax exclusion ($14,000/$28,000) - Potential taxes may be higher than the parent or child's tax bracket - Funds must be given to the child when they turn 21 *Current Income Trust*: - Must have income paid out annually to beneficiary with no discretion left to trustee to accumulate income - Need not be distributed to the child by a specific age - Recommendation is to invest in things that increase in value but don't pay income while the child is young *Crummey Invasion Trust*: - Transfers money from one individual to a trust for the benefit of another - Permits the beneficiary to withdraw from the trust an amount equal to the lesser of annual addition to the trust or the annual gift tax exclusion - Trust does not require distribution at any age but if the trust accumulates income and it is taxed to the trust itself, the tax rates are high

Legal Requirements of an Enforceable Contract

*Offer and acceptance*: an offer must be made by one party and accepted by the other party (ex. the offer to insure by the insurer, the willingness to be insured by the prospective client) *Consideration*: each party must give the other something of value (ex. the insured pays an initial premium, the insurer binds coverage) *Legal object*: the contract must not be contrary to public policy (so basically the contract will not be enforced if the object of the contract is illegal) *Competent parties*: Parties to the agreement must be capable of contracting in the eyes of the law *Legal form*: must satisfy any legal requirements specifying its form (e.g. written)

Federal Grants

*Pell Grants* - Available only to undergraduates and distributed on the basis of severe financial aid - Maximum amount available each year changes but it is generally not enough to cover all tuition expenses - Part-time students may be eligible for reduced grants *Federal Supplemental Education Opportunity Grants (FSEOGs)* - Funded by the federal government but administered by individual schools - Available to undergraduate students only and are need-based - Available to full-time, part-time students - Pell Grant recipients are of the highest priority for FSEOGs *Teacher Education Assistance for College and Higher Education (TEACH) Grant Program* - Provides grants for $4,000 per year to students who agree to serve as full-time teachers in a high-need field in public or private elementary or secondary-school that serves low-income students - Students enrolled less than full-time will have grant amounts reduced - Failure to complete this service obligation results in a conversion of all amounts received to a Federal Direct Unsubsidized Stafford Loan

Federally Funded Loans

*Perkins Loans* - Low interest rate loans funded by the federal government but administered by individual schools - Available for undergraduate, graduate students - Need-based, available to students who are at least half-time and have exceptional financial need - Students who temporarily drop below half-time should be able to retain Perkins loan eligibility but if they drop out or continue to take fewer classes, they will lose their eligibility - Borrowers are not charged interest until repayments begin nine months following graduation, leaving school, or dropping to less than half-time - Repayment is typically for 10 years *Stafford Loans* - Most common type of loan - Private lenders are the source of funds - Include direct subsidized and direct unsubsidized loans - Students who qualify based on need will likely have subsidized loans - Available only for undergraduates attending at least half-time - There are annual limits - the cost of the student's education less other loans or grants is set as an alternative maximum *Parent Loans to Undergraduate Students (PLUS)* - Parents may borrow funds for their children's undergraduate studies - Amount received is unlimited, except that the total of all aid received cannot be higher than the total cost of schooling - Not need-based - Interest rate charged (in 2017) is fixed at 6.31% - Graduate and professional students can borrow money directly through the Grad Plus program - Repayment begins within 60 days of taking out the loan, repayment may be delayed while the student is still in school - Private lenders are the source of funds *Direct Consolidation Loans* - Allows for the combination of multiple student loans into one loan - A parent loan cannot be consolidated with a student loan - Prior to 2014 there was an 8.25% interest rate cap

Equitable Remedies

*Rescission*: equitable remedy by which the original contract is deemed null from its beginning; the party seeking relief must show fraud, impossibility, misrepresentation of material fact, concealment in the application, or mutual mistake relating to a material fact; rescissions is usually sought by the insurer because the insurer is only required to return premiums when a contract is rescinded *Reformation*: the written instrument between the parties is changed to express the original intentions of the parties; before a contract is reformed, it must be shown that there was a mutual mistake, duress, or related misconduct

Creating a Budget

*Step 1* - identify the client's financial goals and determine what is required of each of them *Step 2* - estimate income from all sources *Step 3* - estimate fixed and variable expenses *Step 4* - Compare income and expenses to determine if expected expenses are equal to or less than expected income *Step 5* - If expenses are too high, attempt to identify potential sources of additional income or places where expenses may be reduced *Step 6* - present each category of income and expense as a percentage of the total *Step 7* - establish a process at the end of each month to review the budget and make adjustments

Financial Planning Process

*Step 1*: Establishing and defining the client-planner relationship *Step 2*: Gathering client data, including goals *Step 3*: Analyzing and evaluating the client's financial status *Step 4*: Developing and presenting financial planning recommendations *Step 5*: Implementing the financial planning recommendations *Step 6*: Monitoring the financial planning recommendations

Lease vs. Buy (Home)

*When to Consider Leasing*: - Does not have funds for a down payment - Has a temporary housing need - Expects his/her housing needs to change substantially in the foreseeable future and does not own a home - Is looking for a job or changing careers which would likely require a move *When to Consider Buying*: - Intends to live in an area for many years - Wants to improve the appearance or structure of the residence - Can benefit from the income tax advantages of ownership

Lease vs. Buy (Automobile)

*When to Consider Leasing*: - Wants a new car every 2-4 years - Does not have the funds for 20% down payment - Will not drive the car for more than 12-15,000 miles per year - Uses his/her car for business - Needs a lower monthly car payment and is willing to compromise on ownership *When to Consider Buying*: - Keeps a car for many years - Drives well over 15,000 miles per year - Wants to stop making payments eventually

300-1: Analyzing and Evaluating the Client's Information

- A financial planning practitioner shall analyze the information to gain an understanding of the client's financial situation and then evaluate to what extent the client goals, needs, and priorities can be met by the client's resources and current course of action - Analysis involves reviewing all data gathered to determine the strengths and weaknesses in the client's total financial situation with respect to the achievement of stated goals - During this stage, the financial planner prepares the statement of financial position (net worth) and cash flow statement

Chapter 13 Bankruptcy

- A plan is created under which the debtor will repay outstanding debts within a specified time period (usually 3-5 years) - Chapter 13 is available for those whose debts total less than certain amounts and who have regular income (sometimes called the "wage earner plan") - The debtor is generally not required to relinquish assets to discharge debts

Insurance Producers: Broker

- Agent of an insurance provider - Individuals who are licensed with and can work with many insurers - Responsible for increasing business for life insurance companies - Companies that do not maintain extensive field forces of their own may sell their products using agents of other companies through broker contracts - Clients benefit because brokers have access to products from a large number of companies - Cannot bind the prospective insured to an insurance contract

Insurance Producers: Agents

- Agents act on behalf of the insurer - Insurer is legally liable for the acts of its agents, even if the agent makes a fraudulent statement unknown to or unauthorized by the insurer - It is assumed that anything the agent knows, the insurer knows - Agents have three types of power: -- Express authority: authority specifically conferred on the agent in the contract with the insurer -- Implied authority: authority not expressly granted but which the agent is assumed to have in order to transact business for the insurer -- Apparent authority/ostensible authority: authority based on the actions, words, or deeds of the agent/insurer; derived from the relationship between the client and the agent

Reverse Mortgage

- Allows seniors to receive money from their homes without having to make any repayments for as long as they remain in the home and maintain up-to-date property taxes, homeowners insurance, HOA fees, utilities, and general upkeep - To be eligible for a reverse mortgage, the borrowers must: -- be 62 years old or older -- own the home (but the house does not need to be paid off completely) -- occupy the home as a primary residence -- attend a third-party counseling session - Reverse mortgage funds may be released using one of the six plans listed below: -- Tenure: equal monthly payments as long as at least one borrow lives and continues to occupy the property as a principal residence -- Term: equal monthly payments for a fixed period of months selected -- Line of credit: unscheduled payments or installments at times and in an amount of the borrower's choosing until the line of credit is exhausted -- Modified tenure: a combination of line of credit with monthly payments for as long as the borrower remains in the home -- Modified term: a combination of line of credit with monthly payments for a fixed period of months selected by the borrow -- Purchase - purchase of a new home

Insurance Producers: Producing General Agents

- Also called personal producing general agents - Generally produce the majority of their income by selling insurance personally - Do not have specified territories - Usually do not hire agents to work for them - Often found in the life insurance field with companies that do no have their own agencies; PGA contract allows an insurer to pay a producer and expense allowance, in addition to the normal commissions, as an incentive

Grounds for Discipline

- Any act or omission which violates the provisions of the CFP Board's Code of Ethics and Professional Responsibility (Code of Ethics) - Any act of omission which fails to comply with the CFP Board's Financial Planning Practice Standards - Any act or omission which violates the criminal laws of any state or of the US - Any act as the proper basis for suspension of a profession license - Any act or omission which violates the CFP Board's Disciplinary Rules and Procedures - Failure to respond to a request by the Disciplinary and Ethics Commission without good cause - Obstruction of the Disciplinary and Ethics Commission's performance of its duties - Any false or misleading statement made to the CFP Board

Comprehensive Plan: Data Gathering Areas

- Areas explored may include: -- Retirement -- Education or other accumulation goals -- Emergency reserves goals -- Debt management goals and concerns -- Health insurance concerns -- Disability contingency plan -- Loss of life contingency plan -- Long-term care needs contingency plan -- Property and liability concerns -- Legal documents and estate planning distribution plan -- Anticipated changes in lifestyle, family, health, or other concerns - Quantitative data to collect may include: -- Cash flow statements (usually prepared by planner) -- Benefit package descriptions -- Copies of personal insurance policies and latest statements -- Investment and bank statements including retirement accounts -- Social Security statement -- Liability contracts/debt statements including family loans -- Copies of wills, durable powers of attorney, trusts, prenuptial agreements, divorce decrees, business entity formation, gift tax returns, and other legal documents

Lifetime Learning Credit

- Available for individuals listed on tax return - Can be used for undergraduate, graduate, or professional degree courses - Credit is limited to 20% of qualified education expenses up to $10,000

American Opportunity Tax Credit (AOTC)

- Available for students pursuing and undergraduate degree and is only available for the first four years of undergraduate study - Student must be enrolled at least half time for one academic period beginning in the tax year and cannot have a felony drug conviction - Credit is 100% of the first $2000 of qualified education expenses and 25% of the next $2000 for a total of $2500

Indemnity

- Based on the idea that when a person suffers a loss, they should be made whole; insureds should not profit form a loss - Indemnity concept is supported by various policy provisions such as requirement of insurable interest, payment of actual cash value, other insurance provisions, and provision of subrogation - Subrogation prevents the insured from profiting when payments are made from property insurance and health insurance policies - If the insurance company pays, the person causing the loss may still have to pay the insured or the insured's estate

Balloon Mortgage

- Borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage - Payments are made only for a short duration (frequently 5-7 years) and then the borrower is required to pay off the remainder of the mortgage in a lump sum - This type of mortgage may be appropriate for borrowers who plan to sell their homes before the fixed payment period is over

Interest-only Mortgage

- Borrowers make only interest payments for some predetermined period - The principal will have to be repaid, resulting in a significant increase in payments - Renting would be a better option for these clients

Assets

- Cash/Cash equivalents: low-risk assets that may be readily converted into cash; typically includes checking accounts, savings accounts, and money market funds/accounts - Invested assets: assets that are invested; includes stocks, bonds, mutual funds, gold, gems, precious metals, collectibles, investment real estate, fine art, vested pension benefits, ownership in a closely held business, long-term CDs; often separated into taxable, tax advantaged, and retirement plans on the statement of financial position - Use assets: assets with value that are in use by the client; includes client's residence, automobiles, boats, recreational real estate, and personal effects such as furnishings and jewelry - Difficult-to-categorize: life insurance - sometimes given it's own category on statement of financial position - Valuation: assets are generally shown at fair market value on the statement of financial position

Coverdell Education Savings Account

- Contribution limit is $2,000 subject to modification based on AGI - AGI phaseout for contributions is: $95,000-$110,000 for single filers, $190,000-$220,000 for married filing jointly - Qualified distribution can be used for primary, secondary, college, and graduate expenses - Balances must be distributed within 30 days of when the beneificiary reaches age 30 or if the beneficiary dies

Outflows

- Divided into savings and investments, fixed outflows, and variable outflows - Fixed expenses are relatively predictable and recurring expenses over which the client does not have much control (ex. mortgage, car note payments, insurance premiums) - Variable outflows are those which client can exercise some degree of control (ex. food, transportation, clothes, entertainment)

Fair Credit Reporting Act

- Enacted in 1971 - Establishes consumers right to access information ; if consumer has been denied credit, s/he must e notified which credit reporting agency provided information to the potential creditor, and then has 30 days to request a copy of that information; the information must be provided to the consumer free of charge - If a consumer has not been denied credit, s/he is allowed to review the credit information maintained by a credit bureau for a nominal fee

Truth in Lending

- Established in 1968 - Purpose of this act was to have lenders make certain uniform disclosures available, enabling the consumer to evaluate credit terms - Regulation Z Disclosures -- Annual percentage rate (APR) -- When payments begin -- Charges for late payments -- Prepayment information -- Amount financed -- Right of rescission (cancel with the lender within three days of signing contract)

Transgressions that will *always* bar an individual from becoming certified

- Felony conviction for theft, embezzlement, or other financially based crimes - Felony conviction for tax fraud or other tax-related crimes - Revocation of a professional license (e.g. registered securities representative, accountant, investment adviser) unless the revocation was administrative in nature (e.g. result of individual not renewing license or not paying required fee) - Felony conviction for any degree of murder or rape - Felony conviction for any violent crime within the last five years

Open-end lease

- Generally has a lower monthly payment but at the end of lease, the lessee may owe the lessor additional money if the assets rents or sells for an amount less than the value projected at the time the lease was initiated - Also called finance or equity lease - Often used for automobile acquisition

Insurance Producers: Surplus-Line/Excessive- Line Brokers or Agents

- Handle any type of insurance that cannot be purchased using normal distribution channels within a given state - Has the authority to go outside of a given state and place with an insurer if the necessary coverage cannot be obtained within state - Found almost exclusively in the property and casualty field

Back-end Ratio

- Identifies the percentage of income that goes toward paying *all recurring debt* payments, including those covered by the front-end ratio, as well as other debts such as credit card payments, car loan payments, student loan payments, child support, alimony, etc. - Important to use the minimum required payment versus the amount the client is paying - Should not exceed 36%

Inflows

- Includes gross salaries and wages, interest and dividend income, rental income, tax refunds, and other monies received by the client - Funds withdrawn from savings or investment accounts are classified under a special category - Dividend reinvestment could be left off of cash flow statement, or shown as both inflow and outflow to indicate that cash flow could be adjusted if financial situation called for it

Personal Contract

- Insurance contracts are personal contracts because the nature of the risk is related to the individual who owns the contract - Generally, personal contracts are not transferrable without the written permission of the other party (insurer); the benefits can be transferred

CFP Board's Code of Ethics

- Integrity: provide professionals services with integrity, honesty, and candor - Diligence: provide professional services in a prompt and thorough manner - Objectivity: provide professional services with intellectual honesty and impartiality - Competence: attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients - Confidentiality: ensuring that information is only accessible to those authorized to have access - Fairness: conducting all professional services with impartiality, intellectual honesty, and disclosure of material conflicts of interest; subordination of one's own feelings, prejudices, and desires - Professionalism: behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities *I DO C CFP*

Fixed Rate Mortgage

- Interest does not change over the repayment period - Payments are generally made monthly by the borrower and include both the payment of interest and repayment of principal; the percentage of interest included in each payment is very large in early years but is reduced with each payment - Lender bears most of the risk of changes in interest rates because if the prevailing rate rises, the lender is committed to lending money at the agreed-upon rate; if interest rates drop, the borrower generally has the option of refinancing at a lower rate

Adjustable Rate Mortgage

- Interest rate that varies with interest rate changes in the economy - Changes in rates are usually tied to changes in a stated economic index - Borrowers bear most of the risk of changes in interest rates - Initial interest rates are typically lower than on fixed mortgages

Closed-end Lease

- Lessee agrees to pay a stated monthly fee for the use of an asset for a specified period of time; also called a fixed-cost lease - Usually has no end of lease costs but provisions regarding unusual damage may create an additional financial obligation - Most often used for business that need to acquire equipment but it is also an option for car leases

Emergency Fund

- Maintaining a sufficient amount of liquid assets at all times to handle emergencies as a safeguard against needing to borrow money or liquidate assets at a potentially inopportune time - Client should have 3-6 months of fixed and variable expenses, depending on their individual circumstances and income streams - Appropriate emergency fund assets are cash/cash equivalents, money market positions, short-term CDs (<90 days), savings, and checking (one month's expenses should be reserved)

Insurance Regulation: Federal

- Most regulation of insurance is indirect - The McCarran Ferguson Act left direct regulation of the insurance industry largely to the states but but it regulates many areas related to products or activities in which insurance companies are involved - Examples of federal regulation include: -- *Internal Revenue Code* (provisions dealing with insurance and investments): specify the income and estate tax treatment of life insurance death benefits, cash value buildup, loans, interest on loans, disability premiums and benefits, property and liability premiums and benefits -- *SEC*: securities packaged in products sold by broker-dealer subsidiaries of life insurance companies - variable life insurance, variable universal life insurance, variable annuities -- *ERICSA/PBGC/DOL/IRS*: insurers and their agents provide products to pensions and employee benefit plans -- COBRA and the Family Medical Leave Act of 1993 -- Civil Rights Act of 1964; Age Discrimination in Employment Act; Americans with Disabilities Act -- Health Insurance Portability and Accountability Act of 1996 (HIPAA) -- Patient Protection and Affordable Care Act of 2010 (PPACA) -- Dodd Frank Wall Street Reform and Consumer Protection

National Associate of Insurance Commissioners (NAIC)

- NAIC began introducing a series of model laws in 1989 that if enacted, would give that state accreditation by the NAIC - If all states become accredited, that states will have a good argument for Congress to leave regulation of the industry to the states - The purpose of the NAIC accreditation program is to increase the reliability of the oversight of the insurance companies by various states - NAIC is comprised of insurance regulators from all states - some are elected bust most are appointed - Largely independent of any political system

Unilateral Contract

- Only one party can enforce the contract - A policy owner may enforce the terms of the contract, but the insurance company may not force the policy owner top ay the premium

Insurance Producers: Captive Agents

- Only represent one company or one group of companies under common ownership - Sell property and liability insurance for companies that are known as direct writers

Credit Score

- Payment history: accounts for 35% of credit score and is most heavily weighted because lenders want to know first and foremost whether an individual paid past credit accounts on time - Amounts owed: accounts for 30% of credit score; measures how much an individual owes relative to how much credit they have available - Length of credit history: 15% of credit score - New credit: 10% of credit score; measures how many new accounts the individual has - Credit mix: 10% of score; the various types of credit the individual has

Series EE and I Savings Bonds

- 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 exemption, the bondholders must be 24 years or older when the bond is purchased and the taxpayer or his/her spouse or children must incur tuition or other education expenses at certain postsecondary or educational institutions - The amount of eligible expenses is reduced by the amount of any scholarships, fellowship, employer-provided educational assistance, and other tuition reduction - Expenses must be incurred during the same year the bonds are redeemed - Taxpayer must file joint tax return - Income phaseout range is $78,150-$93,150 for single, and $117,250-$147,250 for marriage filing jointly

Bankruptcy Abuse Prevention and Consumer Act of 2005

- Purpose is to prevent individuals from abusing bankruptcy filing - Moves individuals more toward Chapter 13 rather than Chapter 7; if an individual's income over the last six months is above the state median or s/he can pay $100 toward creditors, chapter 7 will likely not be an option

Insurance Producers: Independent Agents

- Represent several insurance companies doing business under the American or independent agency insurance system - Do not affiliate with only one particular company; not uncommon for agents to favor just a few companies - Decide where they will place their business, dividing policies between the various companies they represent while (ideally) basing their choice on the needs of the client and the suitability of the companies - May affiliate with a producer group - Agents/agencies try to give insurers a large amount of annual new business premiums because those that do so may receive extra benefits from the insurer - Many insurers have informal requirements that an agency must write a set amount of a specific line of insurance before they are able to gain access to another line

Rules of Conduct

- Rules of Conduct articulate the professional duties owed to the clients on the part of the financial planners - Revised rules extend into duties and obligations existing between financial planners and current clients, prospective clients, employers, and CFP Board, regarding information, property, disclosure, and defining of relationships

Consumer Debt

- Short-term debt used by consumers to acquire products and services; examples include credit card debt, auto loans, and personal lines of credit - Secured debt is one for which collateral is used to back the promise to repay; if the borrower does not repay the loan, the lender can repossess the collateral; interest rates are typically lower on this type of debt - Unsecured debt is one for which no specific property is pledged; the lender can pursue legal action against the debt - Revolving credit is when a borrower wishes to have access to credit that s/he can use at their discretion (ex. home equity line of credit)

Section 529 Plan

- State-based tax deferred college savings options - The custodian controls distribution of funds - Many states offer tax deductions for making contributions - Does not guarantee a certain amount will be available; amount available will be based upon the rate of return of the investment choices - Contributions are considered completed gifts under the federal law and are entitled to one gift tax annual exclusion since there is only one beneficiary per account; contributions made in a current year can be taxed as if they were made over a five-year period (five-year averaging) - If beneficiary changes, gift tax *will not* be incurred so long as the new beneficiary is a family member - Generally withdrawals for qualified expenses are tax-free; withdrawals for non-qualified expenses will be taxed as ordinary income and subject to 10% penalty - Can now be used to pay for secondary, college, and graduate education

Financial Aid

- Students are required to complete the Free Application for Federal Student Aid (FAFSA) in order to determine if or how much financial aid they will receive - The FAFSA looks at income of both parents and students, assets of both, family size, and how many siblings are in college at the same time - Student contribution rate is measure at 20-25% and parents' is 5-5.64% so assets held in the students name will increase the expected family income and decrease the amount of need-based aid - Elite schools typically use their own formula to calculate aid; other methods used are the Institutional Methodology and the Consensus Methodology

Cash Flow Statement

- Summarizes the inflows and outflows of cash and reveals the client's pattern or spending, saving, and investing over a specific period of time - Helps the planner to identify resources available to meet financial goals, address conflicting goals, and guide clients to prioritize goals - It can be helpful to develop a pro forma cash flow statement showing what cash flow will look like after implementing the adviser's recommendations

600-1: Defining Monitoring Responsibilities

- The financial planning practitioner and client shall mutually define monitoring the responsibility - Generally, clients expect their planner to monitor changes in tax law, economics, products, and how those changes will impact the client - At regular intervals the planner should evaluate the progress toward the client's goals and whether shifts to the agreed upon strategies and recommendations need to be made

500-1: Agreeing on Implementation Responsibilities

- The financial planning practitioner and the client shall mutually agree on the implementation responsibilities consistent with the scope engagement - The practitioner's responsibilities may include, but are not limited following: -- Identifying activities necessary for implementation -- Determining division of activities -- Referring to other professionals -- Coordinating with other professionals -- Sharing of information as authorized -- Selecting and securing products and/or services

100-1: Defining the Scope of the Engagement

- The financial planning practitioner and the client shall mutually define the scope of the engagement before any financial planning service is provided - Mutually defining the scope of the engagement is accomplished by: 1. Identifying the service(s) to be provided 2. Disclosing the practitioner's material conflict(s) of interest 3. Disclosing the practitioner's compensation arrangements(s) 4. Determining the client's and the practitioner's responsibilities 5. Establishing the duration of the engagement 6. Providing any additional information necessary to define or limit the scope

400-3: Presenting the Financial Planning Recommendations

- The financial planning practitioner shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision - The practitioner shall avoid presenting opinion as fact and communicate the factors critical to the client's understanding of he recommendations such as: -- Personal and economic assumptions -- Interdependence of recommendations -- Advantages and disadvantages -- Risks -- Time sensitivity - Good recommendations will: -- Briefly outline the problem and the potential consequences of not addressing the problem -- Provide a clear, actionable recommendation that leaves no doubt what the planner believes is in the best interest of the client to implement -- Detail a list of advantages and disadvantages that tells the clients the pertinent fact they should know in making a decision -- Highlight the second best alternative from the adviser's viewpoint so the client can see that there are options available and the adviser considered them -- Show clients the cost of the alternatives being recommended will fit within their budget or require changing the budget constraints they provided

400-1: Identifying and Evaluating Financial Planning Alternative(s)

- The financial planning practitioner shall consider sufficient and relevant alternatives to the client's current course of action in an effort to reasonably meet the client's goals, needs, and priorities - This process may result in a single alternative, multiple alternatives, or no alternative to the client's current course of action

400-2: Developing the Financial Planning Recommendations

- The financial planning practitioner shall develop the recommendation(s) based on the selected alternative(s) and the current course of action in an effort to reasonably meet the client's goals, needs, and priorities - The recommendations shall be consistent with and will be directly effected by: -- Mutually defined scope of the engagement -- Mutually defined client goals, needs, and priorities -- Quantitative data provided by the client -- Personal and economic assumptions -- Practitioner's analysis and evaluation of client's current situation -- Alternative(s) selected by the practitioner (all previous stages of the financial planning process)

200-2: Obtaining Quantitative Information and Documents

- The financial planning practitioner shall obtain sufficient quantitative information and documents about a client relevant to the scope of the engagement before any recommendation is made and/or implemented - The practitioner shall obtain sufficient and relevant quantitative information and documents pertaining to the client's financial resources - The practitioner shall communicate to the client a reliance on the completeness and accuracy of the information provided - If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the practitioner shall either 1. restrict the scope of the engagement to the matters for which sufficient information is available 2. terminate the engagement

500-2: Selecting Products and Services for Implementation

- The financial planning practitioner shall select appropriate products and services that are consistent with the client's goals, needs, and priorities - The practitioner shall make all disclosures required by applicable regulations

Chapter 7 Bankruptcy

- The individual is permitted to keep certain assets, but all others are relinquished to satisfy the cost of bankruptcy and the claims of creditors - The debtor is not required to give up certain payments received such as Social Security benefits, pension benefits, unemployment compensation, and alimony - Upon completion of Chapter 7 proceedings, most debts are discharged completely (although some cannot be, such as child support)

Utmost Good Faith

- The insurance company can make three claims if it believes that good faith was not maintained: -- *Misrepresentation*: occurs when a false statement is made that at least partially induces the company to issue the contract -- *Warranties*: statement by the applicant that all the information on the application is absolutely true; any mistake however insignificant could permit the insurer to void or rescind the contract -- *Concealment*: the intentional failure to provide material information

Liabilities

- The liability amount is usually the outstanding principal balance as of the date of the statement; if the client is delinquent in payments, the amount overdue + accrued interest should be added to the outstanding principal balance

Insurance Regulation: State

- The state insurance department, headed by the state insurance commissioner, sets regulations implementing legislation and administers compliance - Areas of insurer operations regulated by the insurance commissioner include: -- examination of companies -- rates -- guarantee funds -- involuntary markets -- competence of agents -- unfair practices -- company insolvencies -- policy forms -- access to insurnace -- social pricing -- investments -- licensing of companies -- reserves - State courts interpret and apply the laws and regulations regarding insurers and interpret policy provisions

Transgressions that are presumed unacceptable but subject to review by Disciplinary and Ethics Commission

- Two or more personal bankruptcies - Revocation or suspension of non-financial professional license (e.g. real estate, attorney) unless the revocation was administrative in nature - Suspension of financial professional unless the suspension is administrative in nature - Felony conviction for nonviolent crimes (including perjury) within the last five years - Felony conviction for a violent crime other than murder or rape that occurred more than five years ago

Insurance Producers: Career Agents

- Usually life insurance agents in a general agency or a company owned office under the agency management or the branch office systems - Career against maintain selling contracts with other companies to better server their clients - Have production requirements in order to maintain their career agent contracts

Financial Planning Process: Questions

- What is the client's current condition? - Is there an area that requires immediate attention; what is not working right, or for what situations would the client like to make preparations? - What are the consequences of not addressing their concerns or making the proper preparations? - What are the likely outcomes of any suggested courses of action; how do any recommendations specifically address the clients' concerns?

Disciplinary Process and Procedures

1. *Request for Investigation* - upon receipt of a written complaint, CFP Board Counsel reviews the allegations to determine if further investigation is warranted 2. *Investigation* - if CFP Board Counsel determines to proceed an investigation, CFP professional is given written notice of the investigation which contain the general nature of the allegations; the CFP professional is given 30 days within which to file a written response. If no response is received, a formal complaint is issued and the case is presented to a hearing panel. 3. *Probable Cause Determination* - CFP Board Counsel determines if there is probable cause to believe grounds for discipline exist. If so, a formal complaint will be issued against the CFP professional as well as a notice of hearing. The complaint contains the specific allegations of misconduct and the potential Code of Ethics and/or Practice Standard violations. The CFP professional has 20 days from the date of receipt of the complaint to file a written answer; if no answer is received, the allegations in the complaint are deemed admitted and the CFP professional's right to use the mark is administratively revoked. 4. *Hearing Panel* - A hearing takes place before a panel of a minimum of three individuals; at least one member of every panel is a member of the Disciplinary and Ethics Commission and at least two members must be CFP professionals. The respondent is entitled to appear in person or telephonically, to be represented by counsel at the hearing, to cross-examine witnesses and to present evidence on his or her behalf. 5. *Disciplinary and Ethics Commission* - The hearing panel submits its findings for review to the full Disciplinary and Ethics Commission, which renders a final decision 6. *Appeals Committee* - A CFP professional has the right to petition the decision to the Appeals Committee if the respondent is aggrieved by the decision of the Disciplinary and Ethics Commission. Members of the Appeals Committee may not be members of the Disciplinary and Ethics Commission.

Rules of Conduct: 1. Defining the relationship with the prospective client or clients

1.1 The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant 1.2 If the certificant's services include financial planning or material elements of financial planning, the certificant shall provide the client with the following information either written or orally prior to entering into an agreement: a. The obligations and responsibilities of each party with respect to: i. Defining goals, needs, objectives ii. Gathering and providing appropriate data iii. Examining the result of the current course of action without changes iv. The formulation of any recommended actions v. Implementation responsibilities vi. Monitoring responsibilities *(six steps of the financial planning process)* b. Compensation that any party to the agreement or any legal affiliate to a party to the agreement will or could receive under the terms of the agreement; factors or terms that determine costs; how decisions benefit the certificant and the relative benefit to the certificant c. Terms under which the agreement permits the certificant to offer proprietary products d. Terms under which the certificant will use other entities to meet any of the agreement's obligations 1.3 If the services include financial planning or material elements of financial planning, the certificant or the certificant's employer shall enter into a written agreement governing the financial services. The agreement shall specify: a. The parties to the agreement b. The date of the agreement and its duration c. How and on what terms each party can terminate the agreement d. The services to be provided 1.4 A certificant shall at all times place the interest of the client ahead of his or her own

Rules of Conduct: 2. Information Disclosed to Prospective Clients and Clients

2.1 A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information directly or indirectly related to the certificant's professional qualifications or services; a certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients 2.2 A certificant shall disclose to a prospective client or client the following information a. An accurate and understandable description of the compensation arrangements being offered b. Information related to the costs and compensation to the certificant and/or certificant's employer c. Terms under which the certificant and/or the certificant's employer may receive any other sources of compensation, and what the sources of these payments are and on what they are based d. A general summary of likely conflict of interest between the client and the certificant, the certificant's employer or any affiliates or third parties e. Any information about the certificant or the certicant's employer that could reasonably be expected to materially affect the client's decision to engage the certificant that the client might reasonably want to know in establishing the scope and nature of the relationship f. Contact information for the certificant and the certificant's employer g. Disclosures must be in writing

Voidable Contracts

a contract where one party has the option of voiding the contract, but the other party is bound (ex. where a contract is made with a minor - the minor can void but the other party cannot)

Statement of Financial Position

a financial profile of what is owned (assets), what is owed (liabilities), and the client's net worth on a specific date

Doctrine of Waiver

a party, by his or her own actions, has voluntarily relinquished or surrendered a known right ex.* An insurance company receives an application that does not meet underwriting criteria but issues the policy anyway - if a subsequent claim is filed, the insurance company is barred from denying the claim

Moral Hazard

a result of a client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim

Budget

an estimation of all income and expenses used to plan and evaluate spending patterns

Footnotes

clarify items in the statement or indicate values or circumstances not disclosed in the body of the statement; also indicate relevant contingencies (ex. inheritance or pending lawsuit) that may affect future assets or liabilities

Waiver Provision

clause included with contract that is intended to prevent a company's agent from intentionally or unintentionally waiving a privilege or benefit the company would otherwise have

Net-Investment-Assets-to-Net-Worth Ratio

compares the value of investment assets with net worth; useful in showing how well an individual is advancing toward capital accumulation goals; an individual should have a ratio of at least 50% (it is typically lower for younger individuals) *net-investment-assets-to-net-worth ratio = net investment assets/net worth*

Front-end Ratio

indicates the percentage of income that goes toward housing costs; for homeowners, that includes PITI (principal, interest, taxes, and insurance) and HOA dues; should not exceed 28% of gross monthly income

Inflation Adjusted Return

inflation adjusted interest rate = ((1 + rate of return / 1 + inflation rate) -1 ) x 100 calculator input: 1 + inflation rate INPUT 1 + rate of return SHIFT % CHNG I/YR

Doctrine of Estoppel

prevents a party from asserting a right to which he or she would otherwise be entitled where, because of the party's own actions or behavior, he or she misled someone who relied on this understanding to his or her own detriment *ex.* Jayma buys $20,000 of stereo equipment and calls his insurance agent, Astrid, to determine if any additional insurance is needed. Astrid says that the sound system will be covered by the homeowners policy. A lightning strike hits the house and shorts out the stereo. The home insurance company is estopped from denying the claim because were it not for Astrid's incorrect advice, Jayma would have bought additional insurance or not purchased the stereo in the first place.

Nonmortgage Debt-to-Income Ratio

provides insight into what amount of after-tax income is going toward nonmortgage debt; a ratio of 15% or lower is healthy and ratio of 20% or higher is considered a warning sign *nonmortgage debt-to-income ratio = annual nonmortgage debt repayment/annual net income*