Course 101: Professional Conduct and Fiduciary Responsibility, General Principles of Financial Planning, Personal Financial Planning Process, Behavioral Finance, Client and Planner Profiles, Communication

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To manage growth and attempt to prevent both an accelerated expansion and contraction, what two general methods does the government use to regulate the level of economic activity?

"Loosening" fiscal and monetary policy refers to a strategy to promote economic expansion. "Tightening" fiscal and monetary policy refers to a strategy for economic contraction.

The Retirement Savings Ratio is determined by what formula?

(Household + Employer Retirement Plan Contributions) / Income

Define "annuity due" and "ordinary annuity."

- An annuity due is when payments take place at the beginning of each period. - In an ordinary annuity, payments occur at the end of each period.

Name the three predominant learning styles.

- Auditory - Visual - Tactile

other members of team of financial advisors

- CPA/accountant - broker (or bank's trust officer) - insurance agents (both life and property and casualty) - estate planning attorney - private money manager - any other needed experts

What does it mean to define the "scope of engagement"?

- Clearly identify client (to know duty of loyalty) - Discuss financial planning process Identify and explain services - Assess and communicate ability to meet the client's needs and expectations (referral is made if skills and needs do not align) - Disclose compensation arrangements and associated potential conflicts of interest - Determine the client's and the practitioner's responsibilities - Define and document the duration and scope of the engagement

Identify benefits of a high credit score.

- Easier time obtaining a loan - Lower interest rates when borrowing - Easier time renting an apartment/home - Lower premiums on some insurance - Increased appeal to employers

open-market operations (monetary policy)

- Fed buys/sells government securities in open marketplace - if Fed wants to expand economic activity, will buy to increase money supply and drive down interest rates - if Fed wants to contract economic activity, will sell from existing inventory to decrease money supply, drive up interest rates, and reduce prices

What are the primary uses of credit reports?

- Help lenders decide whether to extend credit or approve a loan; determine interest rate; data for calculating a credit score - Provide data on past financial behavior for prospective employers, landlords, insurance companies, and other companies (cable TV, Internet, utility, or cell phone)

Why should someone consider refinancing his/her mortgage?

- Lowering interest rate and/or extending term, thereby reducing payment and freeing up cash flow to redirect toward tax-advantaged savings or higher interest debt - Lowering rate with same or lesser term to accelerate buildup of equity in the property

Describe changes to cash flow that will reduce tax liability.

- Making HSA/FSA contributions - Meeting charitable goals through appreciated stock or Qualified Charitable Distributions (QCDs) - Increasing pretax contributions to retirement plans

List the three primary skills associated with the communication of empathy.

- Nonverbal and verbal attending - Paraphrasing content of client communications - Reflecting client feelings and implicit messages

A credit score is based on what?

- Payment history, making payments on time: 35 percent - Balances outstanding, including unsecured-debt-to-credit ratio or utilization ratio: 30 percent - Credit history, how long accounts have been open: 15 percent - Applications for new credit accounts (called hard inquiries): 10 percent - Variety of credit accounts (e.g., mortgages, car loans, credit cards): 10 percent

What assets are exempt in a consumer bankruptcy?

- Qualified retirement plans - Deferred compensation - Annuities - Cash value life insurance - Residence (partial based on exemption amounts) - Rollover IRA (amount is unlimited) - Roth and traditional IRA (up to $1,000,000 indexed) - Limited QTP/529 Plan contributions (depending on amount and time of contribution)

savings and loan association (S&L) (aka thrift institution)

- accept savings and provide home loans - not permitted to provide demand deposits (checking accounts), but can offer interest-bearing NOW accounts (similar to demand deposit accounts) - regulated by OCC

7 grounds for discipline

- any act or omission violating provisions of CFP Code of Ethics and Standards of Conduct - any act or omission violating criminal laws of any state or of US - any act as proper basis for suspension of professional license - any act or omission violating CFP Disciplinary Rules and Procedures - failure to respond to request by Disciplinary and Ethics Commission without good cause - obstruction of Disciplinary and Ethics Commission's performance of its duties - any false or misleading statement made to CFP Board

important facts about statement of financial position

- assets are always presented at FMV; liabilities are always presented at principal value without regard to interest obligation - respective titling of assets and liabilities is shown on properly prepared statement - usually reflects client's current financial status as of December 31 of any calendar year

Investment Company Act of 1940

- authorized SEC to regulate certain financial products, including open-end investment companies or mutual funds - gave SEC regulatory authority regarding sale of variable products, such as variable annuities, as well as separate accounts within any variable product

duties owed to CFP Board

- avoid any adverse conduct - report incidents involving adverse conduct to CFP Board within 30 days - provide narrative statement to CFP Board on reportable matters - cooperation with CFP Board throughout investigations and disciplinary proceedings - compliance with terms and conditions of certification and license

3 components of interpersonal communication

- body language - voice pitch and tone - mirroring

Maloney Act of 1938

- brought OTC market under the regulation of the SEC and called for self-regulation of OTC securities dealers

dealer (principal)

- buy and sell securities from their own accounts/inventory (position trading) and charge clients markups rather than commissions - markup is difference between current interdealer offering price and actual price charged to client

financial advice

- communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the client take or refrain from taking with respect to: 1. development or implementation of financial plan 2. value of or the advisability of investing in, purchasing, holding, or selling financial assets 3. investment policies or strategies, portfolio composition, management of financial assets, or other financial matters 4. selection and retention of other persons to provide financial or professional services to client - exercise of discretionary authority over financial assets of client

fiscal policy

- conducted by Congress - attempts to influence consumer demand through governmental policies

monetary policy

- conducted by Federal Reserve Board (Fed) - seeks to control overall money supply and affect economic activity by raising/lowering short-term interest rates because they affect consumer spending/demand

Fair and Accurate Credit Transactions Act of 2003 (FACTA)

- consumers can get free credit report every 12 months from each of 3 national reporting agencies - requires consumer information be disposed of in secure manner - individuals can place alerts on credit histories if identity theft is suspected or if deploying overseas in military

Chapter 7 bankruptcy

- debtor claims either federal exemptions or exemptions available under state law - Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 significantly restricts availability of this filing for individuals - individual's personal unsecured debts generally canceled

Securities Investor Protection Act of 1970

- established the Securities Investor Protection Corporation (SIPC) to protect investors from losses arising from failure of any brokerage firm - membership in SIPC is voluntary - SIPC ensures that investors will receive securities held for their account in street name by a failed brokerage firm up to a limit of $500,000 per customer

Securities Exchange Act of 1934 (Exchange Act, 34 Act, or People Act)

- extended regulation of securities to secondary market or exchanges - established SEC as primary regulatory body overseeing the sale and purchase of securities by potential investor

Chapter 7 bankruptcy federal law exemptions

- federal Civil Service retirement benefits - railroad pensions - veterans' benefits

fiscal policy tools

- government spending - taxes

Chapter 7 bankruptcy state law exemptions

- homestead - some limited amount of personal property - pension and retirement plan rights (ERISA plans) - existing cash value of any life insurance policies - proceeds of any annuity contracts - disability income benefits - property held as tenants by entirety

Bankruptcy Act of 2005

- individuals with ability to pay debts are required to file Chapter 13 (cannot file for Chapter 7) - consumer use of Chapter 7 filing limited to liquidation of credit card bills or loans not secured by a house or other asset - debtors wanting to file Chapter 7 are required to submit to credit counseling before doing so - lenders required to provide consumer information about financial dangers of paying only minimum balances on credit card debts - established value of $1,283,025 of originally established IRAs are protected from creditor claims - unlimited amount of rollover IRA assets may be protected from creditor claims

IAA of 1940 exemptions from investment advisor registration requirement

- intrastate adviser for unlisted securities - adviser whose only clients are insurance companies - foreign private advisers - charitable organizations and plans - commodity trading advisers - private fund advisers - venture capital advisers - advisers to Small Business Investment Companies (SBICs)

Registered Investment Adviser (RIA)

- investment advisers registered with SEC - cannot use RIA after name, but spell out - must keep financial records for at least 5 years from end of fiscal year of last entry recorded with respect to record - terminate registration via Form ADV-W

IAA of 1940 exclusions from definition of investment adviser

- lawyer, accountant, teacher, or engineer (LATE) whose performance of advisory services is solely incidental to practice of profession - broker or dealer whose performance of advisory services is solely incidental to practice of profession and who receives no special compensation - bank or bank holding company - person whose advice is limited to securities issued and guaranteed by US government -

personal loan

- mostly obtained through banks or credit unions (credit unions offer lower interest rates and fees and more personal service) - secure or unsecured, installment or single payment, fixed or variable interest rates

4 sources of borrowing

- personal loans - credit cards - auto loans - retirement plans

4 forms of discipline

- private written censure: unpublished written reproach mailed to certificant - public letter of admonition: published written reproach of certificant's behavior in press release or other public form - suspension of right to use CFP marks for specified period of time, not to exceed 5 years; suspension greater than one year requires petition to be reinstated; usually made public - permanent revocation of right to use CFP marks; usually published

FDIC insurance

- protects all individuals' deposits at a US financial institution payable in the US - only covers cash and cash equivalent deposits (does not include securities, mutual funds, etc) - basic FDIC coverage is $250,000 - deposits maintained in different categories of legal ownership are separately insured - types of ownership: single, joint, retirement, revocable trust ($250,000 per beneficiary) - co-owner's share of every joint account owned at same insured bank are added together with other joint accounts at same banks and insured up to $250,000

Chapter 11 bankruptcy

- reorganization of a business where company can operate with pre-bankruptcy management in place while the entitlement of lenders and investors are reorganized to replace a failed capital structure - voluntary or involuntary petition filed and automatic stay and entry or order for relief provision will apply

Federal Bankruptcy Act of 1938

- requires a court-appointed trustee to oversee the affairs of a firm for which bankruptcy charges have been filed - provides for liquidation of hopelessly troubled firms and reorganization of troubled firms that might be able to survive

Fair Credit Billing Act

- requires consumers notify creditor in writing of any billing errors within 60 days of date billing statement is received - creditors have 30 days to respond to consumer and 90 days to resolve complaint

Consumer Credit Reporting Reform Act

- requires credit bureau reports to include accurate, relevant, and recent information about the financial situation of credit applicants - restricts access to credit files to bona fide users of financial information - applicants denied credit must ne advised why and given name and address of reporting credit agency - credit reporting agencies must follow reasonable procedures to protect confidentiality of credit information

IAA of 1940 disclosure requirements

- requires investment advisers entering into advisory contract to deliver written disclosure statement detailing adviser's background and business practices (Part 2A of Form ADV, aka adviser's brochure) - should spell out details of advisory relationship and other business interests of adviser, costs of services, etc. - must be given no later than time of entering into contract if rescission is permitted within specifically allotted time (if not, must be no less than 48 hours prior to entering into any written or oral investment advisory contract)

Consumer Credit Protection Act (aka Truth in Lending Act)

- requires lenders, before extending credit, to disclose both dollar amount of finance charges and APR, as well as loan terms and conditions - limits consumer liability for lost or stolen credit cards to lesser of amount charged or maximum of $50 per card

Securities Act of 1933 (33 Act or Paper Act)

- requires registration of new issues of securities or issues in the primary securities market and provides applicable procedures for issuing IPOs, while also specifying which securities are exempt from registration requirements - primary purpose was full and fair disclosure of material information regarding IPOs - prospectus: legal document created as part of security registration process; discloses material information regarding particular security; required to be updated on regular basis; must be made available to any prospective or current client if security is required by SEC to be registered; includes fees, expenses, investment objectives and strategies, risks, performance, pricing

cash inflow examples

- salary, wages, self-employment income - rental income - realized capital gains - interest and dividend income - alimony and child support - trust income as beneficiary or grantor - inheritance and gifts

Financial Industry Regulatory Authority (FINRA)

- self-regulatory organization (SRO) - registers and provides qualification exams to industry professionals, writes rules for trading, educates the investing public, provides trade reporting, resolves disputes between customers and firms - any planner or broker-dealer who wishes to sell securities must register with FINRA - SEC has delegated responsibility for overseeing sale and purchase of securities to FINRA

client should set aside six months of expenses for emergency fund if:

- single wage earner - married, but only one spouse is employed outside home

client should set aside three months of expenses for emergency fund if:

- single wage earner and has second source of sizeable income - married and both spouses are employed outside home - married and only one spouse is employed outside home, but second source of considerable income is available

thresholds for investment advisers registration

- small advisers: less than $25 million of AUM are regulated by one or more states - mid-sized advisers: between $25 million and $100 million of AUM are regulated by one or more states if: 1. adviser is registered with state where has principal office and place of business 2. adviser is "subject to examination" by state authority - large advisers: more than $100 million of AUM must register with SEC and state adviser laws are preempted

Insider Trading and Securities Fraud Enforcement Act of 1988

- specified what constitutes the insider trading of securities and stiffened the penalties - for insider trading to occur, there must be action taken related to material, nonpublic information

credit union

- sponsor financial products - members are provided with convenient place to save and borrow, but membership may be restricted on basis of employer or other affiliation - loans permitted for number of purposes - earnings from loan interest and investments are allocated to members in form of dividends - deposits in credit union insured up to $250,000 per qualifying account

Chapter 7 bankruptcy dischargeable obligations

- student and governmental loans - child support and alimony obligations - recent federal income taxes due

statement of financial position (personal balance sheet)

- total assets (what client owns), includes cash or cash equivalents, investments, personal use assets - total liabilities (what client owes) - net worth (what client is worth after all liabilities are fully paid)

trust company

- typically owned by one of three entities: independent partnership, bank, or law firm - owning entity specializes in managing estates and serving as trustee for various types of trusts

duties owed to firms and subordinates

- use reasonable care when supervising - comply with lawful objectives of CFP professional's firm - provide notice of any public discipline enacted by CFP Board

List the three-step process for calculating a needs analysis.

1. Determine the income need for the first year of retirement. 2. Determine how much will be needed to fund each year's income need throughout the entire retirement period. 3. Determine the required savings (yearly or monthly) to accumulate the necessary nest egg.

Identify the two ways a CFP® professional can strengthen the working alliance.

1. Increasing client-planner agreement on goals and tasks of the financial planning process 2. Increasing the emotional bond and affective trust between client and planner

3 national bank regulatory agencies

1. Office of the Comptroller of the Currency (OCC) 2. Federal Reserve Board 3. Federal Deposit Insurance Corporation (FDIC)* *FDIC supervises state banks that are not members of Federal Reserve System

List the 7 steps in the financial planning process.

1. Understanding the Client's Personal and Financial Circumstances 2. Identifying and Selecting Goals 3. Analyzing the Client's Current Course of Action and Potential Alternatives 4. Developing the Recommendation(s) 5. Presenting the Recommendation(s) .6 Implementing the Recommendation(s) 7. Monitoring Progress and Updating

6 principles of Code of Ethics

1. act with honesty, integrity, competence, and diligence 2. act in client's best interest 3. exercise due care 4. avoid or disclose and manage conflicts of interest 5. maintain confidentiality and protect privacy of client information 6. act in manner positively reflecting on financial planning profession and CFP certificant

3 financial life cycle phases

1. asset accumulation: debt high, cash flow and net worth are low; in phase until ~45 (or later if children are not yet independent) 2. conservation or protection: cash flow and net worth increasing, debt decreasing; in phase from ~45-60 or immediately preceding planned retirement date 3. distribution or gifting: net worth and cash flow higher than previous years, debt low; distribution strategies primary focus of estate planning; in phase from ~60 (or planned retirement date) until death

three potential consequences of using cash to complete a transaction

1. client's assets are increased (statement of financial position) 2. client's liabilities are decreased (statement of financial position) 3. cash outflows are increased (statement of cash flows)

financial advice

1. communication, based on content, context, and presentation, would reasonably be viewed as recommendation client take or refrain from with respect to (a) development or implementation of financial plan, (b) value of or advisability of investing in, purchasing, holding, or selling financial assets, (c) selection/retention of other financial or professional persons 2. exercise of discretionary authority over financial assets of client

8 elements required in letter of agreement (four Cs and PTSD)

1. compensation 2. conflicts of interest 3. competency 4. contact information 5. parties 6. termination 7. services 8. date

12 elements of financial planning

1. developing client goals 2. managing assets and liabilities 3. managing cash flow 4. identifying and managing risks 5. identifying and managing financial effect of health considerations 6. providing for educational needs 7. achieving financial security 8. preserving or increasing wealth 9. identifying tax considerations 10. preparing for retirement 11. pursuing philanthropic interests 12. addressing estate and legacy matters

6 sections of Standards of Conduct

1. duties owed to clients 2. financial planning and application of practice standards for financial planning process 3. practice standards for financial planning process 4. duties owed to firms and subordinates 5. duties owed to CFP board 6. prohibition on circumvention

15 duties owed to clients

1. fiduciary duty 2. integrity 3. competence 4. diligence 5. disclose and manage conflicts of interest 6. sound and objective professional judgment 7. professionalism 8. comply with laws 9. confidentiality and privacy 10. provide information to client 11. duties when communicating with client 12. duties when representing compensation method 13. duties when recommending, engaging, and working with additional persons 14. duties when selecting, using, and recommending technology 15. refrain from borrowing or lending money and commingling financial assets

practice standards must be adhered to where there is:

1. financial planning, 2. financial advice that incorporate relevant elements of client's situation, OR 3. engagement where client understands planner will offer or has already offered financial planning services

factors that shift the demand curve

1. income 2. price of related goods 3. expectations of future prices 4. number of buyers 5. tastes and preferences

factors that shift the supply curve

1. input/resource prices 2. technology 3. taxes 4. expectations of future prices 5. number of sellers

8 subject areas of financial planning

1. insurance and risk management planning 2. investment planning 3. income tax planning 4. retirement planning and retirement plans 5. estate planning 6. employee benefits planning 7. special needs planning 8. financial statement preparation and analysis

monetary policy tools

1. lowering or increasing amount of required reserves held by banking members of Fed 2. raising or lowering Fed's discount rate (interest charged by Fed bank to other banks) 3. engaging in open-market operations (most common)

5 factors weighed when determining if CFP agreed to provide or provided financial advice requiring financial planning

1. number of relevant elements of personal and financial circumstances advice may affect 2. portion and amount of financial assets advice may affect 3. length of time personal and financial circumstances may be affected by advice 4. effect on overall exposure to risk if advice implemented 5. barriers to modifying actions taken to implement advice

4 areas success of client-planner relationship is measured by and how they are enhanced by behavioral finance

1. planner understands long-term financial goals of client; BF helps planner understand reasons for client's goals 2. planner maintains consistent approach with client; BF adds structure and professionalism to help planner understand client before giving advice 3. planner acts as client expects; BF helps planner understand client's motivations to determine what actions to perform, information to provide, and frequency of contact to keep client happy 4. client and planner benefit from relationship; BF helps create closer bond

3 ways to protect against identity theft

1. safeguard confidential information at all times 2. routinely monitor financial accounts and billing statements for suspicious activity 3. immediately close financial account if suspected of being tampered with, place fraud alert on credit file with credit reporting agencies, file police report, and report theft to Federal Trade Commission (FTC)

6 main components of a financial plan

1. savings, budgeting, emergency funding, and education planning 2. risk management and insurance planning 3. investment planning 4. tax planning* 5. retirement savings and income planning 6. estate planning *tax planning is inherent to all 6 components

7 confidentiality and privacy exceptions for legal and enforcement purposes

1. to law enforcement authorities concerning suspected unlawful activities, to extent permitted by law 2. as required to comply with federal, state, or local law 3. as required to comply with properly authorized civil, criminal, or regulatory investigation or examination or subpoena or summons by governmental authority 4. as necessary to defend against allegations or wrongdoing made by governmental authority 5. as necessary to present or defend against civil claim raised by client 6. as required to comply with CFP Board investigation or adjudication 7. as necessary to provide information to professional organizations assessing CFP's compliance with standards

7 step financial planning process (Unicorns Go All Day Prancing In May)

1. understand client's personal and financial circumstances 2. goal identification and selection 3. analyze client's current course of action and potential alternative courses of action 4. develop financial planning recommendations 5. present recommendations 6. implement recommendations 7. monitor progress and update plan

6 step disciplinary rules and procedures process

1. upon receipt of written complaint, CFP Board Counsel reviews allegations and determines if investigation needed 2. written notification to CFP of investigation; CFP has 30 days to file a written response; if no response received, formal complaint issued and case presented to hearing panel 3. probable cause determination; if exists, formal complaint issued and notice of hearing; CFP has 20 days from receipt of complaint to file a written answer; if no response, allegations deemed admitted and CFP's right to use certification marks is revoked 4. hearing panel of minimum 3 individuals hears formal complaint; respondent entitled to appear in person or by telephone, represented by counsel, cross-examine witnesses, and present evidence on their behalf 5. hearing panel submits findings for review by Disciplinary and Ethics Commission, who issues final decision 6. CFP can appeal to Appeal Committee

3 Learning styles

1. visual - respond to visual objects like graphs, charts, pictures, and reading information 2. auditory - retain information by hearing or speaking; discuss orally with client before providing in writing 3. kinesthetic - understand concepts better using a hands-on approach; having client physically write goals and objectives as they are formulated

4 confidentiality and privacy exceptions for ordinary business purposes

1. with client's consent 2. to employer, partners, employees, or others providing services to client when information necessary to perform services 3. necessary to CFP's attorneys, accountants, and auditors 4. to person acting in representative capacity of client

liquidity: current ratio

= current assets / current liabilities *greater than 1 indicates client can pay off existing short-term liabilities with readily-available liquid assets

housing cost ratio

= housing cost / monthly before-tax gross income **should not exceed 28% of gross monthly income *housing cost includes rent, mortgage principal and interest, property taxes, homeowners insurance premium

consumer debt ratio

= monthly consumer debt payments / monthly net income **should not exceed 20% *consumer debt includes all non-mortgage debt, such as auto loans and credit cards *net income = gross income - taxes

total debt ratio

= total debt / monthly before-tax gross income **should not exceed 36% of gross monthly income *total debt includes housing cost and consumer debt payments

inflation-adjusted rate of return formula

= {[(1 + r) / (1 + i)] - 1} x 100 r = nominal or before-tax rate of return i = annual inflation rate

What does a "fee-only" practice, or compensation model, mean?

A certificant may describe his or her practice as "fee-only" if, and only if, all the certificant's compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage, or performance-based fees.

residential mortgage loan

A loan for which the collateral that underlies the loan is residential real estate

Define "credit score."

A number that rates a person's credit risk at a particular point in time and predicts the likelihood of his/her defaulting on a loan

Who is a "certificant"?

A person currently certified by CFP board.

How can listening skills be characterized?

Actively deciphering information to more fully understand the verbal and nonverbal information communicated by the client. Two primary sources of information: Content = clarifying and ensuring the planner is hearing exactly what the client is saying and expressing (i.e., verbal data) Process = how information was expressed and conveyed through body language, tone, facial expressions, eye movements, etc. (i.e., nonverbal data)

When does the income effect occur?

As a result of prices changing at a greater rate than income

What is the "client-centered counseling theory"?

Communicating with clients using unconditional positive regard, genuineness, and empathy. This helps clients fully experience and understand their feelings, thoughts, and goals.

What is the formula for the Emergency Fund Ratio?

Current Assets / Monthly Non-Discretionary Living Expenses

"Leveraging" is another term for what?

Debt

List the four phases of the business cycle.

Expansion phase Peak phase Contraction or recession phase Trough phase

real GDP

GDP adjusted for inflation

What is the formula for the Long-Term Debt Coverage Ratio?

Income / Long-Term Debt Payments

Are necessities considered elastic or inelastic?

Inelastic

What is a liability?

Liabilities are debts and other obligations that the individual or household has not paid off.

Current assets can also be called what?

Monetary assets, cash, and cash equivalents

What does a "fiduciary" do?

One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.

When assuming steady future income and a goal of accelerating the paydown of debt, what strategy should a planner recommend?

Prioritize debts and allocate extra cash flow only to highest-interest-rate debt (while making minimum payments required on all other debts)

One of the best ways someone can reduce insurance expenses is by doing what?

Raise the deductibles on homeowner's and auto insurance once an emergency fund is established.

property ownership and titling abbreviations

S1 - individual ownership of named spouse (or, in community property state, spouse's separate property) S2 - individual ownership of other named spouse (or, in community property state, other spouse's separate property) JT - property held jointly with rights of survivorship CP - community property of spouses with rights of survivorship (co-owner cannot pass interest to anyone else other than spouse in estate plans) TC - tenants in common (tenant may sell or give away interest without consent of other tenant) TE - tenants by entirety (tenant may not sell or give away interest without consent of other tenant)

List the two reasons why, when the price of a good or service increases, consumers will tend to buy less.

Substitution effect Income effect

Identify the financial planning subject areas.

The basic subject fields covered in the financial planning process, which typically include, but are not limited to: - Financial statement preparation and analysis (including cash flow planning); - Insurance planning and risk management; - Employee benefits planning; - Investment planning; - Income tax planning; - Retirement planning; and - Estate planning

A person currently certified by CFP board.

The interest rate at which the NPV of all cash flows (positive and negative) equals zero.

Define "status quo bias."

The reluctance to change a previously made decision; more likely when clients must make decisions under uncertainty.

What is the "prospect theory"?

To avoid a loss situation, individuals often make impulsive or intuitive decisions that are sometimes very risky and financially detrimental. Investors have a stronger emotional response to loss than gains.

FINRA license: Series 66

Uniform Combined State Law Examination; combines Series 63 and Series 65 license requirements; holder may provide investment advice and sell securities to any client in any state (Series 7 is a prereq)

FINRA license: Series 63

Uniform Securities Agent State Law Examination; state securities require passing this exam to sell securities within their states

When does the substitution effect occur?

When consumers are faced with rising prices and choose to purchase a similar, but lower priced, product or service instead

Chapter 13 bankruptcy

adjustment of debts of an individual with regular income by restructuring payments or reducing payments; debtor not usually required to relinquish any assets in payment of creditors

advantages and disadvantages of borrowing from retirement plans

advantages: - ease of borrowing and simplicity of repayment - no effect on credit - lower interest rates disadvantages: - no growth on borrowed amount - adverse tax treatment (pay tax on income used to repay loan and on distribution from plan) and 10% penalty if under 59 1/2

credit card advantages and disadvantages

advantages: convenience, rewards, purchase protection, build credit disadvantages: high interest rates on balances, transaction fees, fraud and identity theft

National Credit Union Share Insurance Fund (NCUSIF)

agency of federal government that regulates credit unions unless institution is chartered by state where separate regulation is provided

broker

agents who arrange trades for clients and charge commissions; arrange trades between buyers and sellers

net present value (NPV)

amount determined by discounting a potential investment's projected cash flows a the rate of return (aka cost of capital or opportunity cost) required by the investor and subtracting the original investment or initial cash outflow if NPV is positive, then investor will earn a rate of return greater than required rate of return and should consider making investment, and vice versa

inelastic demand

an increase or a decrease in price will not significantly affect demand for the product

FINRA license: Series 24

any person actively engaging in managing a member's securities or investment banking business (supervising, soliciting, conducting business or training persons associated with member) must qualify via this exam and register with FINRA as general securities principal (Series 7 or 72 is prereq for this license)

Federal Housing Administration (FHA) loan

appeal to buyers who may not meet underwriting requirements for conventional home loan; very low initial down payment and, sometimes, low interest rate; usually includes mortgage insurance (protects lenders against losses from defaults)

framing bias

asserts that people are given a frame of reference, a set of beliefs or values that they use to interpret facts or conditions as they make decisions; people will choose what they perceive is positive vs. negative, winning vs. losing, high value vs. low value

endowment bias

asset is felt to be special and more valuable simply because it is already owned impact: value of owned assets higher, stick with assets because of familiarity and comfort or were inherited

net worth formula

assets - liabilities

values

attitudes and beliefs a person feels strongly about and represent what they believe to be right

representativeness bias

based on belief the past will persist and new information is classified based on past experience or classification impact: base rate neglect (classification taken as 100% correct without consideration of other classifications), sample-size neglect (future classifications based on initial classification using overly small and potentially unrealistic sample of data), attach too much importance to new pieces of information; excessive turnover

home equity loan/line of credit

basically second mortgage; use current equity in homeowner's primary residence to provide money for home improvements or other purposes home equity loan: lump sum repaid in equal month payments over fixed term home equity line of credit (HELOC): provides set amount of credit from which funds may be drawn as needed; borrowers only make payments on amount they actually withdraw

unsecured loan

client merely promises to repay debt in exchange for borrowed funds; if debtor defaults, lender can take legal action (negatively affect debtor's credit)

financial counseling - cognitive-behavioral approach

client's attitudes, beliefs, and values influence their behavior; planners attempt to substitute negative beliefs that lead to poor financial decisions with positive attitudes to result in better financial results

financial counseling - strategic management approach

client's goals and values drive the client-planner relationship; SWOT done early in process; financial planner serves as a consultant

financial counseling - economic and resource approach

clients are assumed to be rational and will change to most favorable behavior if given appropriate counseling; financial planner is agent of change; focus is on obtaining and analyzing quantitative data

financial counseling - classical economics approach

clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs; increasing financial resources or reducing financial expenditures results in improved financial outcomes

financial planning

collaborative process that helps maximize client's potential for meeting life goals through financial advice integrating relevant elements of client's personal and financial circumstances

elastic demand

consumer demand is sensitive to changes in price

secured loan

creditor maintains security interest in property, which serves as collateral for debt; if debtor falls behind on payments, lender can repossess property securing debt

internal rate of return (IRR)

discount rate that, when applied to cash flows of an investment, equates the net cash inflows to the net cash outflows; tells you rate of return that will be realized given original investment amount and projected cash flows if IRR is greater than or equal to required rate of return, then investor should consider making investment if NPV > 0, then IRR > ROR if NPV = 0, then IRR = ROR if NPV < 0, then IRR < ROR

regret-aversion bias

do nothing out of excess fear that actions could be wrong impact: stay in low-risk investments, portfolio with limited upside potential, stay in familiar investments or "follow the herd"

cognitive errors

due primarily to faulty reasoning and could arise from a lack of understanding proper statistical analysis techniques, information processing mistakes, faulty reasoning or memory errors; can usually be corrected/mitigated with better training or information - illusion of control bias - conservatism bias - hindsight bias - confirmation bias - representativeness bias - mental accounting bias - self-attribution bias - anchoring and adjustment - outcome bias - framing bias - availability and recency bias

fiduciary duty

duty to act in client's best interest via the following required duties: - duty of loyalty: place client's best interests ahead of CFP's, firm's, or any other entity; avoid, fully disclose, obtain consent, or manage material conflicts of interest - duty of care: engage with care, skill, prudence, and diligence by consideration of client's goals, risk tolerance, objectives, and circumstances - duty to follow client instructions: adhere to terms of engagement and follow "reasonable and lawful" client instructions

self-attribution bias

ego defense mechanism; analysts take credit for their successes and blame other or external factors for failures

Privacy Act of 1974

establishes code of fair information practices regulating types of personal information federal government can collect and how it can be used - written consent from individual must be given before personal information is disclosed unless disclosure falls under one of 12 statutory exceptions

Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act)

establishes fair practices and enable consumers to better understand credit transactions

Myers-Briggs assessment

evaluates personalities based on whether individual is: - introverted or extroverted - driven by senses or intuition - influenced by thinking or feeling - apt to perceive or judge

financial planning engagement

exists when a certificant performs any type of mutually agreed upon financial planning service for a client

behavioral finance

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

annuity due

first payment occurs at the beginning of each period (ex: lease payments)

ordinary annuity

first payment occurs at the end of each period (ex: mortgage payments)

cash outflow examples

fixed: mortgage, auto loan, insurance premiums, property taxes variable: food, clothing, utilities, travel, entertainment

FINRA license: Series 65

holder can provide investment advice to clients within holder's primary state of residence

FINRA license: Series 6

holder can sell all open-end investment companies (mutual funds), variable annuities, variable life insurance, and initially-offered (not secondary) unit investment trusts

FINRA license: Series 7

holder can sell any security, including individual stocks and exchange-traded funds

interest-only mortgage

homeowner tries to keep mortgage payment at minimum while hoping FMV of home will increase so principal amount will be paid off by sale proceeds; should only be executed by risk-aggressive homeowners

IAA of 1940: who must register as an investment adviser?

if all of the following apply: - providing advice or issuing reports or analysis regarding securities - being in the business of providing such services - being compensated for such services

Where should emergency fund be kept?

in liquid assets (checkings, savings, money market deposit, money market mutual fund, certificate of deposit close to maturity)

budget

income, expenses, and spending patterns monitored and evaluated through the use of this; prepared from actual historical information unless values have changed; should consider financial goals and serve as control document for future cash flows

self-control bias

individuals lack self discipline and favor immediate gratification over long term goals impact: insufficient savings, excessive risk in portfolio

net cash flow formula

inflows - outflows* *fixed, variable, and taxes

adjustable rate mortgage (ARM)

initial rate and payment may change every month, quarter, year, three years, or five years; interest rate changes usually tied to specific index (one-year LIBOR); usually has cap limiting amount by which interest rate and payments can change *best for those who want lower initial payments and does not anticipate staying in home for long

prime rate

interest rate charged by commercial banks to its best business and personal customers; set directly by commercial banks; about 3% higher than federal funds rate

federal funds rate

interest rate charged on short-term borrowing (often overnight to fulfill reserve requirements) between banks; Fed targets this rate in all interest rate decisions, but does not directly control this rate

brokerage company

intermediary that facilitates transactions involving sales of investments or real estate

reverse mortgage

lender makes payments to homeowner based on FMV of home and age of borrower at time loan is made; secured by considerable amount of equity in home; available to borrowers 62 or older with residence free from indebtedness; once homeowner no longer occupies property, they must repay debt (usually by selling home); excess income from selling home is not protected and realized income (could cause medicaid eligibility issues)

conventional fixed-rate mortgage

level interest rate for term of loan and fixed payment amortization schedule

prospect theory

making choices that favor certain outcomes versus probable outcomes (investors will choose the smaller of two potential gains if it avoids a sure loss)

anchoring bias

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

illusion of control bias

market participants think they can control or affect outcomes when they cannot impact: excessive trading, fail to adequately diversify

adjustment bias

market participants who stay anchored to an initial estimate and do not adjust for new information

risk assessment and its 3 main components

measure of clients' psychological ability to deal with uncertain outcomes; best done via qualitative data risk tolerance, risk perception, and risk capacity

emotional biases

not related to conscious thought and stem from feelings, impulses, or intuition; more difficult to overcome - prospect theory - loss aversion theory - overconfidence bias - self-control bias - status quo bias - endowment bias - regret-aversion bias - affinity bias

coincident indicators

occur simultaneously during business cycle and confirm stage economic is in - industrial production - level of personal income - amount of corporate profits

stagflation

occurs when inflation and unemployment rise and general growth of economy is slow as business output falls

conservation bias

occurs when market participants initially form a rational view but fail to change that view as new information becomes available impact: hold investment too long

confirmation bias

occurs when market participants look for new information or distort new information to support an existing view impact: hold investments too long, underdiversify, overconcentrate in employer stock

bank

organization chartered by federal or state government to do any or all of the following: - accept deposits and, depending on type of account, pay interest on deposits - make various types of loans - invest customer funds in securities - honor instruments drawn on accounts - issue cashier's checks - provide safe deposit boxes

herding

part of recency/availability bias; when investors trade in the same direction or in the same securities, and possibly even trade contrary to information they have available, because makes them feel more comfortable trading with consensus of a group

serial payment

payment that increases at a constant rate (usually annual rate of inflation) to protect client's future purchasing power; good when client is expecting increases in wages; applications include retirement contributions and funding child's education initial serial payment will be less than fixed annuity, but last serial payment will be more than fixed annuity

integrity

perform professional services with honesty and candor not subordinated to personal gain or advantage

mutual fund company

pools money from shareholders and invests the funds in various types of securities, including stocks, bonds, and money market instruments according to fund's prospectus; regulated by SEC

phishing

posing as financial institution or company and sending spam over internet to entice individual to provide personal information

financial counseling

process that helps clients change their poor financial behavior through education and guidance

prohibition on circumvention

prohibited from using a third party to conduct business that violates Code and Standards

Equal Credit Opportunity Act

prohibits credit discrimination on the basis of - race, color, religion, national origin, sex, marital status, age (as long as applicant has mental capacity to enter contract and pay) - all or part of applicant's income derives from public assistance program - applicant has in good faith exercised any right under Consumer Credit Protection Act

Fair Debt Collection Practices Act

prohibits debt collectors from engaging in unfair, deceptive, or abusive practices when collecting debts

competence

provide professional services with relevant knowledge and skill to apply that knowledge

recency/availability bias

recent information is given more importance because it is most vividly remembered; based on data most readily available that may not provide a complete picture

discretionary expense

recurring or nonrecurring expense for an item or service that is either nonessential or more expensive than necessary (vacations, club dues, entertainment, gifts, etc.)

nondiscretionary expense

recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle (rent or mortgage payments, loan repayments, food, utilities, taxes)

attitudes

reflect person's opinions, values, and wants

monitor

requires CFP to: - analyze, at appropriate intervals, the progress toward achieving client's goals - review with client the results of recurring analysis - update, after communicating with client and getting approval, financial plan recommendations on recurring basis based on changing circumstances

Investment Advisers Act of 1940 (IAA)

requires person who fall within the definition of investment adviser to register with the SEC or with the states in which they do business with clients

price elasticity

responsiveness of quantity of a good demanded to changes in good's price

conduct: books and records violation

sanction: private censure

conduct: continuing education violation

sanction: private censure

conduct: diligence

sanction: private censure

conduct: employer policies violation

sanction: private censure

conduct: failure to disclose to CFP Board

sanction: private censure

conduct: failure to pay back loan to firm

sanction: private censure

conduct: failure to respond to CFP Board request for information or notice of investigation

sanction: private censure

conduct: failure to supervise

sanction: private censure

conduct: misdemeanor criminal convictions

sanction: private censure

conduct: misrepresentation to nonclients

sanction: private censure

conduct: misuse of CFP marks

sanction: private censure

conduct: "holding out" as a financial planner to client, then not providing financial planning services to that client