HS300 Chapter Questions

Differentiate between a Chapter 7, Chapter 13, and Chapter 11 bankruptcy petition

- Chapter 7 = Liquidating Bankruptcy - Chapter 13 = Establishes a repayment plan - Chapter 11 = Reorganized bankruptcy more commonly used by corporations and partnerships.

Identify the five basic attributes associated with physical attending

- Face the other person squarely - Adopt an open posture - Lean toward the other person - Maintain good eye contact - Be relaxed while attending

Identify the seven Principles in the Code of ethics and Professional Responsibility of the CFP Board of Standards1

1. Integrity 2. Objectivity 3. Competence 4. Fairness 5. Confidentiality 6. Professionalism 7. Diligence

What are four typical regulatory requirements for state registration as an investment adviser

1. Minimum Capitalization Amount 2. Bond and an audited financial statement to accompany the application. 3. Registered investment advisers to pass certain NASD examinations , such as series 63, 22, etc. 4. Submission of all contracts, disclosure statements and documents, and literature the RIA/Financial Planner used in advising the client.

How do consumer debt ratios influence lending decisions?

Address the borrower's ability to handle additional debt. Capacity, collateral, capital, conditions, and character are called the five Cs of credit and debt ratios seek to evaluate the attributes of a debtor according to the five Cs of credit.

If an investment adviser conducts business primarily on the internet, where should he or she seek registration as an investment adviser?

Can register with the SEC regardless of the amount of assets under management.

Discuss how to size a client's emergency fund and how to invest that fund

Depends on age, health, job outlook, and personal financial situation. Equal about three to six months of either take-home pay or living expenses

Life Cycle Financial Planning

Occurs when an advisor actually engages in financial planning over client's entire financial life.

What purposes were served by SEC Release IA-1092 in October 1987?

Reaffirms the three-prong approach that was set forth in SEC Release No. IA-770. Any financial services professional who, by reason of his or her activities, must answer all three tests in the affirmative is subject to the Investment Advisers Act of 1940. Also devoted renewed attention to the antifraud provisions of the Investment Advisers Act of 1940.

Single Purpose Approach

Selling one product to a client that solves one specific problem and implements the recommendation of a plan developed according to the financial planning process and approved by the client.

Briefly describe how a financial position statement is used.

Show an individual's (or family's) wealth at a specified time and reflects the results of the individuals' past financial activities. Another name for this statement is the balance sheet.

When is the interest expense on a home equity loan not deductible on a client's federal income tax return?

The extent that when combined with the other outstanding mortgage loan balances, it exceeds the home's valuation or its exceeds $100,000 ($50,000 if married but filing separately)

Define assets under management as it relates to registering as an investment adviser.

"Securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services. 2 determinants if it is counted toward meeting the $100 million threshold: 1. is the account a securities portfolio 2. Does the account receive continuous and regular supervisory or management services?

Identify the various ways in which a client's net worth can increase during a period of time.

- Appreciation in the value of the client's assets - Addition to the client's assets through retention income - Addition to the client's assets through gifts or inheritances - Decrease in the client's liabilities through debt forgiveness

What is the intended outcome of the CFP Board's Financial Planning Practice Standards?

- Assure that the practice of financial planning by CFP professionals is based on established norms of practice. - Advance professionalism in financial planning - Enhance the value of the financial planning process.

Identify the hallmarks of professional behavior.

- Does the advisor listen to the client? - Does the advisor answer questions? - Is the advisor gathering information sufficient to provide good advice? - Has the advisor educated the client about the advisor's products and/or services? - Ability to deal with risk into consideration in making recommendations? - Has the advisor told the client his educational background? - Sense of steady service or is the client seeking a one-time sale? - Handle money matters properly? - Refer to other experts, or is he intimidated? - Seem up-to date?

Identify the four social styles and explain the characteristics of each

- Driver: Forceful, direct, will not waste time on small talk, wants power. - Expressive: Outgoing, enthusiastic, enjoys telling about personal projects and dreams, wants recognition - Amiable: easy-going, dependent, enjoys telling about personal relationships, wants approval - Analytical: Logical, quiet, uncomfortable with small talk, wants respect

The subjects that should be included in a comprehensive financial plan are:

- Financial Planning Principles - Insurance Planning and Risk Management - Employee Benefits Planning - Investment Planning - Income Tax Planning - Retirement Planning - Estate Planning

Compare and contrast a home equity line of credit with a home equity loan

- Home Equity Loan: fixed rate, self-amortizing loan with fixed loan payments. Entire loan proceeds are disbursed at closing. - HELOC: Variable rate loan with interest only payments in the early years of the loan and amortized payments at some point in the loan term. Can be used as needed subject to initial draw requirements and repayment provisions.

Describe the Three types of Structured Communication used in the Financial Planning Process

- Interviewing: Process of communication with a predetermined and specific purpose, usually involving the asking and answering of questions. - Counseling: Providing assistance to clients as they explore their present financial situations - Advising is giving specific guidance or suggestions to clients

What groups of individuals, who otherwise meet the definition of an investment adviser, are exempt from registration under the Investment Advisers Act of 1940?

- Investment adviser whose clients are all residents of the state within which the investment adviser maintains the principal office - Any investment adviser whose only clients are insurance companies - during the course of the preceding 12 months has had fewer than 15 clients - and adviser that is a charitable organization, or provides advice to only charities.

Describe several basic principles of communication.

- Learned through experience - Meaning of words is illusory, words are merely symbols - Language is learned, meaning of words stays with us for future reference - No two people are programmed alike. - Impossible for any individual to encode or process all parts of a message. - Assumption is the single greatest problem (believed by some experts). - Constantly communicating - Listening is communication also - Most effective communication occurs when the receiver of a message gives understanding responses, paraphrases - Personalizing messages enhances the communication process and the advisor-client relationship.

List four types of advisers that are required to register with the SEC despite their status.

- Nationally recognized statistical rating organizations, - Pension Consultants, - Certain affiliates that directly or indirectly control or are controlled with an investment adviser - Certain start-up investment advisers that have

What is a client for purposes of the national de minimis standard?

- Natural person and any minor child of the natural person - Relative, spouse, or relative of the spouse of the natural person who has the same residence - Accounts in which natural person and or others listed above are the primary beneficiaries - Trusts by which the natural person and others listed above are the primary beneficiaries

Three strongest obstacles preventing Americans from gaining control over their financial destines

- Natural tendency to procrastinate - Tendency to live up to or beyond their current income - Lack of financial knowledge

Describe the types of information about the advisor that the typical disclosure form provides to the client.

- Philosophy in working with clients - Educational background and employment history - Professional certifications and licenses - Sources of compensation

Describe the disadvantages associated with budgeting

- Psychological aversions to the record keeping required and may not maintain sufficient information for the budget to be useful. - Data utilized may be inaccurate, the conclusions drawn may be misleading - Stifles risk taking

If a client's net cash flow is negative, what alternative courses of action are available for either increasing income or reducing expenses?

- Reallocating some assets from low yielding cash and cash equivalents to other financial assets with higher potential returns. - Reducing the amount of discretionary expenses - Reducing the amount of certain fixed expenses to the extent possible - Refinancing the home mortgage at a lower interest rate - Reducing income taxes through greater use of tax-advantaged retirement accounts and tax-exempt bonds

List four federal securities law and regulations that still apply to state- registered investment advisers.

- SEC. 206 continues to make it unlawful for any investment adviser to engage in fraudulent, deceptive, or manipulative practices. - State-registered advisers continue to be subject to SEC. 204A's requirement to establish, maintain and enforce written procedures reasonably designed to prevent the misuse of material nonpublic information - State-registered advisers continue to be subject to SEC. 205, which contains prohibitions on advisory contracts that (1) contain certain performance fee arrangements, (2) permit an assignment of the advisory, (3) fail to require an adviser that is a partnership - Continue to be subject to SEC. 206(3) which makes it unlawful for any investment adviser acting as principal for its own account to knowingly sell any security to, or purchase any security from a client, without disclosure.

Explain the difference between secured and unsecured debt

- Secured debt is backed by pledged assets. Examples are home loans and auto loans. Lender can foreclose or repossess if the borrower does not stay up to date. - Unsecured debt has no asset backing.

What are the characteristics that define a professional?

- Specialized knowledge generally not understood by the public - Threshold entrance requirement - Sense of Altruism - Code of Ethics

Identify the attributes of an effective advisor

- Unconditional Positive Regard - Accurate Empathy - Genuineness - Self Awareness

Identify several sources of client resistance behavior in the financial planning process

- death and dying - marital tensions including separation/divorce, parent-child disputes, sex, empty-nest syndrome, mid life crisis - failure to attain the expected degree of professional success

Assuming that an individual meets the definition of an investment adviser, what determines whether he or she must register at the state or federal level?

-Advisors that have "assets under management" of $100 million or more - Advisers to registered investment companies - Advisers that are exempted from the prohibition by SEC rule or order - Advisers that are not regulated or required to be regulated as an investment adviser.

Describe each of the three tests contained in SEC Release IA-770 for determining whether a financial advisor is subject to regulation under the Investment Advisers Act of 1940.

1. Advise and Analyses about a security. It can include a great many financial instruments in addition to the best-known securities like common stocks or bonds. 2 Business Standard: which asks if the financial services professional is presented to the public as being "in the business" of providing advice about securities. 3. Compensation: if the practitioner receives compensation, and the test is met regardless of the source of payment.

Describe seven common themes and sentiments that are found in most codes of ethics applicable to financial advisors

1. Call on advisors to look out for the best interest of clients. 2. Ask advisors to conduct themselves with fairness, objectivity, honesty, and integrity 3. Require advisors to protect the confidential information of clients. 4. Require advisors to present enough information to clients to allow them to make informed decisions. 5. The require advisors to continue the learning process throughout their careers. 6. They ask advisors to conduct themselves in such a way as to bring honor to themselves and to their professions 7. Specify that advisors should comply with the law.

Identify the Eight Financial Planing Domains and Briefly Identify the Process that Takes Place During each Step

1. Establish and Define the Advisor - Client Relationship: Build a relationship and clarify each party's responsibilities. 2. Determine Goals and Gather Data: Find out the goals and prioritize them. 3. Analyze and Evaluate the Data: the strengths and weaknesses in the client's present financial condition as they affect the client's ability to achieve goals. Revise if necessary. 4. Develop Recommendations: Design a set of recommended strategies tailored to the client's circumstances and goals. 5. Communicate Recommendations to Clients: Present the plan to the client and obtain approval. 6. Implement the Plan: Motivate and help the client acquire all the necessary financial products and services to put the plan into action. 7. Monitor the Plan: Evaluate the performance of all implementation vehicles. 8. Practice Professionalism: Follow federal, state, and professional rules and regulations

Describe four types of leading responses

1. Explanatory: Relatively neutral description of the way things are. Deals with logical, practical, and factual information. 2. Interpretive: Generally can be extremely effective response because it often cuts to the heart of the matter. 3. Reassuring: Offers sympathy. Intention of making the client feel better. 4. Suggestive: Essentially involves telling the client what he or she should do.

Calculate the maximum amount a consumer can borrow under a home equity loan or HELOC

Appraisal x .8 - Balance = Maximum Home Equity Loan

Identify the key components of a financial position statement and briefly explain wha each component represents

Assets: items that the client owns. Financial and non financial assets. Liabilities: debts of the client. often subdivided into short-term, intermediate-term, and long-term. categorized in secured and unsecured debt Net worth: measures the client's wealth or equity at the date of the statement.

What is the importance of self-awareness in the advisor-client relationship especially as it relates to value orientations and differences

Better chance at avoiding the imposition of their values onto their clients. Want to help clients make decisions that stem from their own value system, rather than from ours.

How would you help a client decide if leasing an automobile was the right financial decision for him or her?

Compare the net cost of leasing to the net cost of owning the automobile over the planned ownership horizon.

Describe the procedure for registering with the SEC as an investment adviser

Completing form ADV and paying an initial fee of $150 - $1500 depending on the level of assets under management

Comprehensive Approach

Considers all of a client's financial needs and objectives by developing a plan according to the financial planning process and approved by the client for fulfilling those needs and objectives

How does a credit report differ from a credit score?

Credit Report provides the inputs into a mathematical model that has as its result the credit score, a ranking on the likelihood that a borrower will stay current on and repay a debt

Describe the Importance of Structuring Communication with clients.

Determines both the format and subject matter of a client session.

What famous rule does the American College's professional pledge require its designation holders to follow?

Essentially mandates that the Golden Rule be followed, that is, do unto others as you would have them do unto you.

What are the responsibilities of a compliance of for a registered investment adviser?

Establishing written policies and procedures to comply with federal securities law and for completing an annual review of those policies and procedures for adequacy and effectiveness.

Distinguish financial assets from non financial assets

Financial Assets: Cash and cash equivalents and other financial assets. Represent a variety of assets with wide-ranging degrees of risk in which clients may invest in an effort to earn a return. Non financial Assets: primarily for creature comforts they provide. Primary residence, his or her vehicles, and other tangible personal assets like clothes, household furnishings, appliances, jewelry, etc.

Why are professionals subject to a higher risk of legal liability than nonprofessionals?

Held by the courts to higher standards of expertise and behavior

Discuss how college costs, inflation, investment returns, and tax considerations shape investing for college.

Historically outstripped the CPI. Conservative investment allocations are not likely to keep pace with college cost inflation, influencing clients to select college-funding strategies that are tax advantaged like prepaid tuition programs and Section 529 college savings plans

Why is it important to assess the meaning of both verbal and nonverbal behaviors

If two types of communication are not consistent with each other, the advisor must delve further to determine the true meaning. Nonverbal are clues or indicators of the client's true feelings.

List three provisions of state investment adviser laws that still apply to SEC registered investment advisers.

In the Coordination Act: - State may enforce antifraud prohibitions, thus allowing a state to continue to investigate and bring enforcement actions with respect to fraud - State may require the filing of any service documents filed with the SEC, solely for notice purposes - May require the payment of filing, registration, or licensing fees.

Describe a number of similarities and differences between law and ethics.

Law is relatively clear cut, there must exist a concrete and accessible legal system. Ethical, not easily defined. No concrete body of ethical standards.

Financial Planning Pyramid

Level 1 (Base): Protects the client against life's financial uncertainties. Emergency Savings, Insurance Coverages, and a Properly Drawn Will Level 2 (Middle): Wealth accumulation goals. Level 3 (Top): Addresses both the management of retirement assets and the conservation and distribution of the estate.

With regards to liquidity ration, a. how is it calculated b. describe how it is used by a financial advisor

Liquid Assets / Total Current Debts (Total Current Debts = Current Liabilities + Annual Loan Payments) Ratio provides the advisor with information to help interpret whether the client is not liquid enough or whether the client is to liquid and needs to reallocate assets to other financial assets with higher potential rates of return.

Compare and contrast the availability of scholarships, grants, and loans for college funding.

Loans are more available than grants, which are more available then scholarships. Need-based aid versus merit-based aid also is a consideration.

Identify the two funding requirements associated with financing a college education

Lump-Sum Requirement and Monthly Savings Requirement

Describe the provisions of SEC Rule 204-3, known as the brochure rule.

Mandates delivery of a disclosure statement to both existing clients and prospective clients. This disclosure must be delivered to clients or prospective clients either 1. within 48 hours of entering into an investment advisory agreement of 2. when the contract is entered into if the client can terminate such contract within 5 days.

What are the key types of household debt?

Mortgage Debt, Non-revolving Credit, Revolving credit, car loans, and credit card debt.

Two reasons why people begin financial planning today?

Most will benefit from retirement planning and retirement related needs. Purchasing/renovating a home, accumulating capital/assets, providing life insurance coverage, preparing for future medical needs of yours or others, building an emergency fund, building a retirement fund, managing/reducing debt, providing health insurance coverage, generating current income.

Describe the responsibility of a fiduciary to his or her client.

Obligation to place the client's interests ahead of his or her own and is held to a standard of prudence in the financial management of a client's affairs.

Discuss the financial aid process from filling out the FAFSA form to establishing the expected family contribution.

Parental assets and income combined with student assets and income, less any exclusions or allowances, determines the parent and student contributions, which combined is the EFC.

Compare product suitability standards with standards in investing.

Point-of-sale standard that measures whether the product attributes of an investment match the client's stated goals in investing, while a fiduciary standard looks to the client's best interest and prudence of an investment decision.

Explain the role of projected financial statements in monitoring a client's financial plan.

Showing what the client's future financial statements are expected to look like if certain strategies are followed under specified assumptions.

Under what circumstances is a financial adviser, who otherwise meets the test elements in the definition of an investment adviser, not considered to be one under the Investment Advisers Act of 1940?

Six Specific Exclusions 1. Any bank or bank holding company as defined in the Bank Holding Company Act of 195 that is not an investment company. 2. Any lawyer, accountant, engineer, or teacher if the performance of advisory services by any of these is solely incidental to the practice of his or her profession. 3. Any broker, dealer, or registered representative thereof whose performance of advisory services is solely incidental to the conduct of his or her business as a broker or dealer and who receives no "special compensation" 4. Publisher of any newspaper, business or magazine or financial publication of general or regular circulation 5. Any other persons not within the intent of the law as the SEC may designate by rules and regulations or order. 6. Any person whose advice or analysis relate only to the securities that are direct obligations or obligations guaranteed as to principle or interest by the United States

If a lender requires a total loan-to-value of no more than 80%, what is the maximum size it will approve for a HELOC given an appraised value of $225,000 and an outstanding balance of $125,000 on the fist mortgage.

Sizing a home equity loan depends on the appraised value of the home and the outstanding balance on existing mortgage loans. (appraisal x .8 - balance = maximum home equity loan) 225,000 x .8 - 125,000 = 55,000

Multi-Purpose Approach

Solving multiple financial problems with financial products and/or services used to implement the recommendation of a plan developed according to the financial planning process and approved by a client.

Summarize the antifraud provisions of the Investment Advisers Act of 1940, noting to whom these provisions apply.

Unlawful to - Employ any advice, scheme, or artifice to defraud any client or prospective client. - Engage in any transaction, practice, or course of business that operates as a fraud or deceit upon any client or prospective client. - Act as principal for his own account, basically unethical too long to type. - Engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative.

Explain the impact that a positive net cash flow for a given period has on a client's assets, liabilities, and net worth.

Used to increase assets and/or reduce liabilities, the net result of which is an increase in the client's net worth.

Briefly describe how a cash flow statement is used, and identify its three basic components

Used to summarize a client's financial activities over a specified period of time by comparing cash inflows and cash outflows, and indicating whether the net cash flow for the period is positive or negative. Three components: Income, expenses, and net cash flow. Income - Expenses = Net Cash Flow

"Ethics is the glue that holds an entire economic and free enterprise system together" Why?

Without ethical behavior, business deals would collapse, working conditions would be intolerable, and trust would be nonexistent

Explain how each of the following is valued for purposes of a client's personal financial position statement: a. Assets b. Liabilities

a. Assets should be listed on the client's personal financial position statement at their fair market value as of the date the statement is being prepared. b. Liabilities: valued using the amount owned by the client as of the date of the financial position statement is prepared.

Identify and Briefly Describe the ways in which nonverbal behaviors are communicated by the body and the voice.

a. Body Positions: Clients who sit erect and comfortable are usually relaxed. Slouching indicate lack of interest or trust, poor posture lack of self assurance or low self esteem. b. Body Movements: frequent movements may indicate physical or emotional discomfort or a lack of interest. c. Gestures: used to illustrate or accent verbal statements. d. Facial Expressions: Look for frowns, smiles, or nervous habits, such as biting the lips. e. Eye Contact: if downcast and rarely meet the gaze of the advisor, client could be shy, anxious, or fearful. Stares or glares may be angry or hostile. f. Voice Tone: Talks loudly may be anger or softly may be fear or shyness. g. Voice Pitch: High pitched voice many indicate anxiety fear or anger.

a. Summarize the provisions dealing with insider trading SEC.2014A of the Investment Advisers Act of 1940 b. What steps should be taken by a a registered investment adviser to meet requirements of SEC 204A?

a. Every investment adviser subject to the Investment Advisers Act shall establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse in violation of this act or Securities Exchange Act of 1934 b. Following steps to meet the requirement of SEC 204A: Develop written policies and procedures setting forth the legal prohibitions, Communicate those policies and procedures to employees and supervisors, Implement those policies and procedures, and establish monitoring mechanisms to increase likelihood to prevent not complying with these policies and procedures.

With regard to a client's debt service ratio, a. how is it calculated b. describe how it is used by the financial advisor

a. Mortgage Payments + Debt Repayment / Net Income b. Client either can or cannot make current debt payment out of income.

With regard to a client's savings ratio, a. how is it calculated b. describe how it is used by the financial advisor

a. Net Cash Flow + Amounts Already Saved or Invested ? Annual After-Tax Income b. Indicate that the client is not saving enough of his or her after-tax income to achieve goals.

With regard to client's solvency ratio, a. how is it calculated b. how it is used by a financial advisor

a. Net Worth / Total Assets b. Extent to which the market value of a client's total assets could decline before wiping out all of the client's wealth as measured by net worth.

What type of question or questioning technique is illustrated in each of the following examples? a. "Why haven't you started converting some of that term insurance to who life?" b. "Don't you think your present portfolio is pretty illiquid?" c. "What goals do you have with respect to the education of your children?" d. "Do you plan to hold on to your mutual fund?" e. "Don't you think you should put $4,000 into an IRA this year? f. "You were born in 1946 right?"

a. Open-ended Question, Why Question. b. Close-Ended Question, Leading Question. c. Open- Ended Question d. Close-Ended Question e. Question Bombardment, Leading Question, Close-Ended Question f. Close-Ended Question, True-False

Explain why the following actions have no effect on a client's net worth. a. Paying off a debt, and b. buying an asset with cash.

a. Paying off a debt has no effect on a client's net worth because the cash account declines by the same amount that the liability declines. b. Buying an asset with cash has no effect on a client's net worth because total assets remain unchanged.

With regard to the preparation of a cash flow statement a. Describe and give examples of fixed expenses b. Describe and give examples of discretionary expenses

a. Payments the client makes for products and services essential to meet basic needs and or meet obligations established by contract or law b. Discretionary expenses are those expenses over which the client has considerable choice

Explain the purpose for each of the following components of cash flow management: a. Cash Flow Analysis b. Cash Flow Planning c. Budgeting

a. Process of gathering data concerning the client's cash flow situation, presenting the data in an organized format, and identifying strengths, weaknesses, and important patterns. b. Identifying courses of action that will help optimize net cash flow. c. Creating and following an explicit plan for spending and investing the resources available to the client.

Describe the opportunities resulting from each of the following trends

a. Rising Median Age: more clients needing retirement planning and assistance in planning for cost of their children's college educations. b. Increasing number of dual-income families: Higher total incomes, pay higher income and social security taxes, have less time to manage their finances, and providing many opportunities for advisers to assist them. c. Volatility of Financial Conditions: Possible exception of the bull market of the late 1990s when many investors felt they could do it themselves without the benefit of professional advice. d. Increasing use of Sophisticated Technology: Creation of many new financial products and has made it easier to tailor these products to the individual client.

What type of understanding response made during active listening is illustrated in each a. "Well, let's see what we've concluded then. you want to set aside about $3000 per year to save for a down payment on a vacation house at the shore, and safety is your prime consideration in the investment of that money." b. "I'm not sure I'm following you. Tell me again what your plan is for disposing of your interest in the partnership" c. From what you just told me, then, I gather that you want to stay away from the limited partnership and put the money into the stock market instead"

a. Summarization Response b. Clarifying Response c. Restatement of Content