CFP Fundamentals Review

Calculating Housing & Other Debt Ratio

(Monthly Housing Costs + All Other Recurring Debt Payments) / (Monthly Gross Income)

Exemptions from Registration with SEC

- Advisors solely to venture capital funds - Advisors whose only clients are insurance companies - Advisors solely to private funds less than 150MM ***VIP*** -Advisors whose clients reside in their state of business and do not advise on nationally listed securities -Foreign advisors without a place of business in the U.S.

Tax Considerations **Important**

- Individual may claim AO or LL in the same year as a distribution from 529 plan, but NOT for same expenses - Individual may NOT claim both AA and LL for same child in same year - Individual may NOT use AA or LL for same expense paid by a qualified tuition program -Individual may use AA or LL in same year as distribution from a qualified tuition plan, but NOT for same expenses

Buying vs Renting a House

-1 to 3 Years: LEASE Buy if : 1. time in property is greater than 3 years 2. goal is to build equity 3. if client has high marginal tax bracket because of the income tax deduction for interest expense associated with the clients primary residence.

Goals of the Federal Reserve

-3 main goals: 1. Maintain long term economic growth 2. Maintain price levels supported by the economy 3. Maintain full employment A. can ease monetary policy -increasing money supply -decrease interest rates B. can tighten monetary policy -decrease money supply -increase interest rates

Emergency Fund

-3-6 months of nondiscretionary expenses -only expenses that do NOT go away if you lose your job INCLUDES: -mortgage, utilities, food, car loan, property taxes, etc EXCLUDES: -income taxes, payroll taxes, contributions to a retirement savings account Emergency Fund = Current Assets / Monthly Nondiscretionary Expenses

UGMA and UTMA

-ASSET OF THE CHILD for financial aid purposes -UNEARNED INCOME: a. taxed at child's rate if greater than 19 b. MAY be taxed at parent's rate if less than 19 -ASSETS: a. UTMA: real estate, stocks, mutual funds, and bonds b. UGMA: same but NO REAL ESTATE -RISK: -child uses assets for something other than education

529 Plan

-ASSET OF THE PARENT for financial aid purposes -Appreciation is tax free if used for qualified education expenses -CONTRIBUTIONS: up to $65,000 in one year without any gift tax consequences A. Advantages: -Possible state income tax deduction for contributions -No AGI phase out so anyone can participate -Account owner control the assets, typically parent -Account owner can change beneficiary at any time -Contributor can remove the assets from gross estate B. Disadvantages -10% penalty on the earnings and included in gross income if NOT used for qualified education expense -EXCEPTION: distributions on account of death, disability and scholarship for the beneficiary

Coverdell Education Savings Account (ESA)

-ASSET OF THE PARENT for financial aid purposes -CONTRIBUTIONS: a. limited to $2,000/yr per beneficiary b. grow tax-deferred unless used for qualified education expenses which are then tax free c. private elementary or secondary education (only plan providing this option) d. cannot be made after beneficiaries 18th bday -Account owner can change beneficiary at any time -Funds must be used by age of 30 of beneficiary -10% penalty on the earnings and included in gross income if NOT used for qualified education expense

Prepaid Tuition

-ASSET OF THE PARENT for financial aid purposes -In state college credit at todays cost A. Advantage -Locks in tuition cost in today's dollars B. Disadvantages: -Only earns a return equal to tuition inflation -Child may receive scholarship and not use the credits -If returned, can only receive principal back -Do not include room and board

Shift in Demand Curve Example

-Anything that causes discretionary income to increase will shift the demand curve up and to the right -Ex: consumers income increases, government lowers tax rates, or consumers lower savings rates; all lead to consumers spending more -Decreases down and to the left

Shift in Supply Curve Example

-Anything that causes production to IMPROVE will shift the supply curve down and to the right -EX: as more firms enter the marketplace, or as technology improves, or as goods used in manufacturing decrease in price; all will shift the supply curve down and to the right -Anything that causes an increase in production costs or supply to decrease, the supply curve will shift up and to the left -EX: As less firms enter the marketplace, or as goods used in manufacturing process increase in price; all will shift up and to the left.

Savings Ratio

-Benchmarks: A. before age 32 - 10-12% B. age 45 to 50 - 15-20% Annual Savings / Annual Gross Income **savings includes both EE and ER contributions**

Roth IRA

-CONTRIBUTIONS: a. $5,500 /yr b. NOT tax deductible c. grow tax-deferred and qualified distributions are excluded from gross income -QUALIFIED DISTRIBUTIONS: a. must meet 5 yr holding period, and 1 of the following b. death, disability, 59 1/2, or first home limited to 10K -NONQUALIFIED DISTRIBUTIONS: a. earnings are included in gross income, and b. subject to 10% penalty *10% penalty is waived on nonqualified distributions used for education expenses, BUT earnings are still included in gross income*

Patient Protection and Affordable Care Act

-Children may stay on their parents health insurance until their 26th birthday -Insurers can no longer exclude children under 19 years old for preexisting conditions -Employers who provide health insurance must disclose the value of the benefit provided on their Form W2 -Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Accounts (HRA) cannot be used to pay for over the counter drugs without a prescription. -Provides 50% discount on drugs purchased inside Medicare Part D

Fair Debt Collection Act

-Collection phone calls are limited to 8am - 9pm -Collectors must contact your attorney -Collection calls are not permitted at work

Liabilities

-Debt obligations owed by the client -Stated at principal outstanding Classified according to the timing of when they are due, which includes either current or long-term liabilities 1. Current Liabilities -Due in next 12 months -credit cards, taxes payable, unpaid bills -excludes interest unless already incurred 2. Long-Term Liabilities -remaining balance on any outstanding debt beyond 12 months -mortgage, car loan, etc

FDIC Insurance

-Each depositor has total of $250K of insurance per type of account ownership -Accounts at different banks are insured separately -FDIC does not cover mutual funds, stocks, bonds, or annuities

Contraction/Recession

-GDP slowing -Inflation and interest rates also beginning to decline -Unemployment rate begins to increase during contraction -Equities and hard assets should be sold and reinvested into short-term cash and bonds until the market settles

Trough

-GDP, inflation, and interest rates being at their lowest levels -Unemployment at its highest -High duration bonds tend to perform well as bond yields drop and interest rates fall

Ratio Analysis

-Gain additional insight into the financial situation and behavior of the client -Generate questions for the client to answer to gain further insight

Fair Credit Billing Act

-Gives a creditor 30 days to acknowledge receipt of a billing dispute and explain or correct the error within 90 days -A consumers liability for a lost or stolen credit card is limited to $50 or the actual amount charged on the card

Reverse Mortgage

-Homeowner receives a monthly payment or a lump sum from a bank while retaining the right to live in the house -Repayment of the outstanding mortgage occurs at homeowners death -Appropriate to generate income for elderly homeowners -Must be 62 or older

Quantity Demanded

-How much consumers are willing to demand at certain price levels -Anytime there is a change in price, it's a movement along the demand curve or a change in quantity demanded

Fair Credit Reporting Act

-If a consumer is refused credit or employment based upon information contained in a credit report, the consumer must be provided with information in the report. -3 main credit bureaus: Equifax, Experian, Transunion

Inflation

-Impact on cost of goods, services, and money -As inflation increases, so does the cost of goods, services, and money -The cost of money is measured by interest rates

Interest Rates

-Impact on investment returns and purchasing power -If interest rates increase, stock and bond prices decrease in value

Unemployment

-Impact on wage rates -As unemployment rate decreases, the wage rate increase because firms are competing for workers.

Taxes

-Impact redistribution of wealth -As tax rates increase, there is a redistribution of wealth from the higher tax brackets to the lower tax brackets

Deductibility of Student Loan Interest

-Interest on student loans is deductible above-the-line (before Adjusted Gross Income) -Limited to $2,500 -MUST be used for: a. tuition b. room c. board d. supplies e. other necessary expenses

Truth in Lending Act

-Lenders must disclose the total cost of financing -Interest must be stated in term of Annual Percentage Rate (APR) -Administered by the Federal Reserve

Dodd-Frank Wall Street Reform and Consumer Protection Act

-Lenders must now verify whether a borrowed can reasonably repay the loan, based on credit history and other data. -Lenders are now prohibited from refinancing borrower unless the new mortgage provides a benefit to the borrower -Definition of Accredited Investor: 1. Have 1MM net worth, excluding residence 2. Make min 200K per year if single, or 2. Make min 300K per year if married

Cash Flow Statement

-Listing of income, savings, expenses, and taxes -Income includes: salary, interest, dividends, and business income -Savings is an outflow to retirement plans, or other savings accts -Expenses are either: A. Variable -car repairs, entertainment, utilities, charitable contributions, etc B. Fixed -mortgage, car payment, student loans, etc. -Captures a PERIOD of time

Federal Perkins Loan Program

-NEED Based -For students with exceptionally low EFC amounts

Subsidized Stafford Loan

-NEED Based -Interest is paid off by the federal government

Unsubsidized Stafford Loan

-NOT need based -Interest begins to accrue when the funds are disbursed

Parent Loans for Undergraduate Students (PLUS)

-NOT need based -depends on the parents credit score -Loan for parents to pay for their students undergraduate studies -Appropriate for parents who can make a loan payment but dont have savings for education.

Series EE Savings Bond

-Parents MUST: a. own the bonds, and b. be 24 years or older when purchased -May be rolled into 529 or Coverdell ESA -Bond must be redeemed same yr as expenses are paid -No federal income tax on interest if used to pay for qualified education expenses

Personal Financial Statements

-Primarily used as a scoring mechanism for capturing and analyzing an individuals financial position and performance A. Balance Sheet B. Statement of Cash Flows

Stafford Loan

-Primary type of Financial Aid provided -Repayment begins after a 6 month grace period of leaving school or falling below part time status -Not appropriate if parents intend to repay the loans -Subsidized or Un-subsidized

Complements

-Products that are consumed jointly -A price change in one product changes the quantity demanded for another product Ex: If razors are put on sale, demand for razor blades may increase

Assets

-Property owned either wholly or partially -All assets are stated at FMV 3 Categories of Assets: 1. Cash and Cash Equivalents, or Current Assets (Liquid) -cash, checking, money market, CD's -does NOT include EE savings bonds 2. Invested Assets -stocks, bonds, mutual funds, etc -greater than 12 months maturity 3. Personal Use Assets -house, car, furniture, etc -lifestyle assets

Consumer Protection Laws

-Protect weak consumers from powerful corporations -Help protect honest businesses

Social Security

-Provides Old Age, Survivor, and Disability benefits (OASDI) -Funded by payroll taxes on wages earned

Unemployment Compensation

-Provides moderate income replacement for a specified period of time if an employee loses his/her job -Max number of weeks to receive unemployment is 39 with regular benefits lasting up to 26 weeks. **unemployment comp. insurance premiums are funded by a tax on employers**

Inelastic Demand

-Quantity demanded changes VERY LITTLE to changes in price -Life's necessities respond very little to changes in price Ex: milk and gasoline -Inelastic Demand curve is almost vertical; sloping down and to the right. (Think I for inelastic to remember vertical demand curve)

Elastic Demand

-Quantity demanded responds SIGNIFICANTLY to changes in price -Elastic Demand products: airline tickets, move tickets, alcohol, luxury goods. -Elastic Demand curve is almost horizontal; slopes down and to the right

Bankruptcy Laws Chapter 13

-RELIEF THROUGH ADJUSTING DEBTS

Bankruptcy Laws Chapter 7

-RELIEF THROUGH LIQUIDATION -debts that are NOTdischarged: a. Student Loans b. 3 years of back taxes c. Alimony d. Child Support -Debts related to fraud are not discharged -Debts associated with negligence are discharged -Traditional and Roth IRA's are exempt up to 1MM -Qualified plans and converted IRA's have unlimited exemptions -To qualify, a debtor must have average monthly income below the threshold established for their region.

Bankruptcy Laws Chapter 11

-RELIEF THROUGH REORGANIZATION -for businesses or self-employed

Demand

-Reflects the quantity of a good or a service that consumers are willing to purchase -Heavily dependent on price; as the price increases, consumers demand less; as price decreases, consumers demand more.

Worker Compensation

-Regardless of fault, if injured at work the employee will collect benefits

Securities Act of 1933

-Regulates NEW ISSUES of securities in the PRIMARY markets -Initial Public Offerings (IPO's)

Securities Act of 1934

-Regulates secondary markets -Established the SEC

Federal Pell Grant

-Strictly NEED based and dependent on EFC amount -EFC determines eligibility and amount awarded -Only students who have not earned a bachelors degree qualify

Rate of Return on Investments (ROI)

-Target is 9-12% ROI = (End Investments - Beg Investments - Savings - Gifts Received) / (Average Invested Assets) Average Invested Assets = (Beginning Investments + Ending Investments) / 2

American Opportunity Tax Credit

-Tax Credit for: a. 4 years of post-secondary education -AMOUNT: a. 100% of first $2,000 in qualified expenses b. 25% of second $2,000 in qualified expenses c. Max $2,500/yr PER STUDENT QUALIFIED EXPENSES: -tuition and fees -student activity fees paid direct to University -books -supplies, and -equipment

Lifetime Learning Credit

-Tax Credit for: a. undergraduate b. graduate, or c. professional programs -AMOUNT: a. 20% up to $10,000 in qualified expenses/yr, BUT b. Max $2,000/yr PER FAMILY *can be claimed for an unlimited number of years* QUALIFIED EXPENSES: -tuition and fees -books -supplies, and -equipment

Supply

-The quantity of a good or service that businesses are willing to supply at a given price -The higher the price, the more suppliers are willing to supply -The lower the price, the less suppliers are willing to supply

Expected Family Contribution (EFC)

-Used to determine how much to contribute towards childs education -Used to determine what type of federal financial aid EFC = (Tuition / Cost of Attendance) - Expected Contribution

Economic Indicators Leading Indicators

-anticipate changes in the economy a. Initial unemployment Claims b. Stock Prices c. Money Supply d. New manufacturing orders e. New private housing units f. Consumer Sentiment

Exceptions to Registration with SEC

-any broker/dealer whose advisory services are solely incidental to the conduct of business - Lawyers, Accountants, Teachers, and Engineers whose advice is solely incidental to their profession

Change in Quantity Supplied

-anytime there is a change in price, there is a movement along the supply curve due to a price change; also called a change in quantity supplied

Adjustable Rate Mortgage (ARM)

-appropriate when clients time in property will be short (1-3 years) -2/6 ARM -interest rate cannot increase more than 2% annually or 6% during term of the loan

Economic Indicators Coincident Indicators

-change along with the changes in the business cycle a. Employees on payroll b. Personal income c. Industrial production d. Manufacturing sales

Peak

-characterized by GDP being at its highest -Inflation and interest rates are peaking, and the unemployment rate is at its lowest level -bonds, preferred stock, and other high-duration or fixed income assets should be sold -Equities and hard assets perform well in this environment

Expansion

-characterized by increasing GDP, inflation, and interest rates; decreasing unemployment rate -Investments should be in short-duration bond and equities

Economic Indicators Lagging Indicators

-confirm past performance a. Avg Duration of unemployment b. Change in CPI c. Change in labor cost per unit d. Consumer credit to income e. Value of outstanding loans f. Average prime rate charged by banks

Debt Ratios

-consumer debt payments not to exceed 20% of NET income -housing debt less than or equal to 28% of GROSS income -housing plus other recurring debt less than 36% of GROSS income

Inflation

-increase in prices -a loss of purchasing power Inflation = [(price level year x) - (price level year x-1)] / (price level year x-1) ex: coffee beans cost $2.20 this yr and $2.00 last year. The inflation rate is: (2.20 - 2.00) / 2.00 = .10 or 10%

Fiscal Policy

-means by which CONGRESS controls spending and taxation, which influences the money supply and interest rates

Monetary Policy

-means by which the FEDERAL RESERVE controls the money supply and influences interest rates

Liquidity Ratios Current ratio

-measures a clients ability to meet short-term obligations -includes assets and liabilities less than 12 mo. maturity Current Ratio = Current Assets / Current Liabilities

Consumer Price Index (CPI)

-measures the price change in a basket of goods and services at the RETAIL level -applicable to consumer purchases -historically = 2-3%

Yield Curve

-plots the current interest rates against the term to maturity for similar securities A. NORMAL -long term rates greater than short term rates -concave, sloping upward and to the right B. INVERTED -short term rates greater than long term rates -convex, sloping downward to the right

Deflation

-prices are falling -Individuals prefer to hold cash because cash becomes more valuable, as it ban buy more goods and services, and prices decrease.

Substitutes

-products that serve a similar purpose -a price change in one product changes the quantity demanded for another product Ex: If move ticket prices increase, demand for move rentals may suddenly increase

529 Plan Qualified Expenses

-tuition and fees -books -supplies -equipment -room and board if enrolled at least half time

Roth IRA Qualified Expenses

-tuition/fees -books -supplies -equipment -room and board if enrolled at least half time

Series EE Savings Bonds Qualified Expenses

-tuition/fees ONLY

4 Types of Financial Aid Programs

1. Federal Pell Grant 2. Stafford Loan 3. Parent Loans for Undergraduate Students (PLUS) 4. Federal Perkins Loan Program

Categories of Ratios

1. Liquidity Ratios -measures ability of a client to meet short-term or current liabilities 2. Debt Ratios and Debt Analysis -indicates how well a person manages overall debt 3. Performance Ratios -assess the financial flexibility of the client, and their progress towards goals

3 Goals of Fiscal Policy

1. Maintain economic growth 2. Maintain price stability 3. Maintain full employment

Tax Advantaged Plans for Education Savings

1. Qualified State Tuition Plans a. Prepaid Tuition b. 529 Savings Plan 2. Coverdell Education Savings Accounts 3. Roth IRA 4. Series EE Savings Bonds 5. Uniform Gift to Minors Act (UGMA)

Tools of the Federal Reserve Reserve Requirement

1. Reserve Requirement -a percentage of deposits a bank must maintain in cash A. INCREASES -less cash available to lend, therefore the money supply decreases and interest rates increase B. DECREASES -more cash available to lend, therefore the money supply increases and interest rates decrease

Tools of Congress Taxation

1. Taxation A. increasing tax rates -reduce the money available for spending, increasing interest rates B. decreasing tax rates -increase money available for spending, decreasing interest rates

Risks Benchmark 1 Life Insurance

10 to 16 x gross income

Tools of the Federal Reserve Discount Rate

2. Discount Rate -member banks borrow from the Fed to meet reserve requirements. A. INCREASES -short-term interest rates increase B. DECREASES -short-term interest rates decrease

Tools of Congress Spending

2. Spending A. Government Spending -increase the money supply, decreasing interest rates B. Can Spending -increasing interest rates

Short Term Savings and Investments Benchmark 1 Emergency Fund

3-6 months of non-discretionary expenses

Tools of Congress Debt Management

3. Debt Management -Defect spending is when congress spends more than tax revenues that are collected -This means Congress must borrow to continue spending -As Congress borrows more, the amount of dollars available to be lent decreases, placing increasing pressure on interest rates.

Tools of the Federal Reserve Open Market Operations

3.Open Market Operations -As the Fed buys or sells government securities, the money supply is influenced and places pressure on interest rates A. Fed BUYS -money supply increases and interest rates decrease B. Fed SELLS -money supply decreases and interest rates increase

Tools of the Federal Reserve Excess Reserve

4. Excess Reserve -Monies that a bank holds at the Fed in excess of the reqired reserve amount -2008, under the Economic Stabilization Act, the Fed began paying interest on excess reserves

Recession

6 consecutive months (or two quarters) of declining GDP

Short Term Savings and Investments Benchmark 3 The Housing Ratio Plus All Other Debt Ratio

A clients primary mortgage plus all other recurring debt payments should not exceed 36% of gross income.

Short Term Savings and Investments Benchmark 2 Housing Ratio

A clients primary mortgage, which includes principal, interest, taxes, and homeowners insurance, should not exceed 28% of gross income

Risks Benchmark 4 Property

A policy covering both home and auto for FMV

Risks Benchmark 5 Long Term Care

A policy that provides a daily benefit that is inflation protected is necessary

Coverdell Education Savings Account (ESA) Qualified Expenses

A. Elementary and Secondary -tuition/fees -books -supplies -tutoring -uniforms -room and board B. Higher Education -tuition and fees -books -room and board -computer related expenses

Credit CARD Act

AKA: Credit Card Accountability Responsibility and Disclosure Act of 2009 -Card companies must give card cardholders 45 days notice of and interest rate increases -Companies cannot charge interest on debt that is paid on time during the grace period -Card cannot be issued to someone under the age of 21 unless they have a co-signer who is 21 or over -Late fees limited to $25

Legacy Benchmark

All clients should have: -A Will -Durable Power of Attorney for Healthcare -Advanced Medical Directive

Long Term Savings and Investments Benchmark 3 Savings Rate

An individual should save 10-12% towards retirement goals. **Does NOT include education goal**

Balance Sheet

Assets-Liabilities = Net Worth -captures a particular moment in time

Long Term Savings and Investments Benchmark 2 Retirement Account

At age 62-65 an individual should have 16 times the amount of income needed annually saved for retirement.

Risks Benchmark 6 Personal Liability Umbrella Policy

Clients need a PLUP with $1-3MM in liability protection

Form ADV Part 2

Contains advisors compensation, fees, education, investment objectives, conflicts of interest, and background of advisory personnel. ADV Part 2 and Brochure must be provided to all clients annually

Form ADV Part 1

Contains the advisors name, education, business, and disciplinary history within the last 10 years An RIA must file ADV Part 1 and Schedule 1 annually 90 days before year end

Shift in Demand Curve

Demand curve will shift and create a change in demand due to an increase/decrease in: -Income -Taxes -Savings Rate, -Disposable Income

Limitations of Cash Flow Statement

Does Not: -consider employers contributions to retirement plans -report the giving or receiving of gifts or inheritance

The Financial Planning Process

E - stablish Client / Planner Relationships G - athering Client Data - Determining Goals and Expectations A - nalyze and Evaluate Clients Financial Status D - eveloping and Presenting the Financial Plan I - mplementing the Financial Plan M - onitoring the Financial Plan **EGADIM** (Every Girl At Dinner Interests Me)

Risks Benchmark 3 Disability

If a client is paying premiums with after-tax dollars, then a policy paying 60-70% of gross income is necessary

Depression

If the recession lasts 18 months or 6 consecutive quarters it becomes a depression

Price Elasticity

Measures the change in quantity demanded, relative to changes in price

Risks Benchmark 2 Health Insurance

Minimum of $1MM Lifetime Cap

Calculating Housing Ratio

Monthly Housing Costs (P+I+T+I) / Monthly Gross Income P = Principal I = Interest T = Taxes I = Homeowners Insurance

ERISA

Protects retirement plans of employees

Long Term Savings and Investments Benchmark 1 Education Funding

Public State University - $1,000 each year for 18 years Semi Private University - $3,000 each year for 18 years Competitive Private University - $6,000 each year for 18 years

Equilibrium

Quantity Demanded = Quantity Supplied

Financial Industry Regulatory Authority (FINRA)

Register with FINRA using Form U-4 Must pass securities exam to sell securities

The Brochure Rule

Requires written disclosure to every client of: - Advisory services that are provided and the fees pertaining to those services - Types of securities that are part of investments - Education and Background of the advisor - Participation / interest in securities transactions Must be given to client 48 hours prior to entering a contract

Long Term Savings and Investments Benchmark 4 Risk

Risk is measured using standard deviation. The benchmark for the standard deviation of a diversified portfolio is 8-14%

Shift in Supply Curve

The supply curve will shift to the left or right because of a change in: -Technology -Competition -Anything other than price

Registered Investment Advisors

Under 100MM - Registers with the State Over 100MM - Registers with the SEC Advisory contracts may not be assigned to another advisor or firm without the clients consent Advisors Act of 1940 defines an investment advisor as someone who is: 1. In the Business, 2. Of Providing Advice about Securities 3. For Compensation (ABC's) To register with the SEC - must file form ADV To withdrawal from SEC - must file form ADV-W

Lesson 3, Question 2 Calculate 1.emergency fund 2.current ratio 3.housing ratio 4.housing ratio and all other debt ratio

given.. CA = 21,000 CL = 7,000 Monthly Nondiscretionary Expenses = 3,000 Annual Income = 120,000 Mortgage, Interest, and Taxes = 2,000/mo Total Monthly Debt including Mortgage = 3,000/mo

Producer Price Index (PPI)

measures price changes in the wholesale and manufacturing secots

Gross National Product GNP

measures the amount of goods and services produced domestically and by US workers in foreign countries Ex: a U.S. citizen working in Japan is included in GNP

Gross Domestic Product GDP

measures the amount of goods and services produced in the U.S.