Wiley Vignettes

Based on their average annual return and the education inflation rate, Brooke and Luke have found that they will need $123,600 on the day their son, Jake, begins college. Jake just turned five and will begin college at age 18. Brooke and Luke both get paid at the end of each month and would like to know how much of their paychecks they should allocate to Jake's education savings account. Assume they can earn an average annual return of 8% and that education costs grow at 5%.

$453 • Ignore the education inflation rate. You will only use the rate of return. • This is an ordinary annuity problem. Brooke and Luke will be saving at the end of each month. • They want to save monthly, so the number of periods and the rate of return will need to reflect that.

Pat and Taylor are married. They are both covered under Pat's PPO health plan. The plan has a $500-per-person deductible requirement, with an 80/20 coinsurance provision. The plan's out-of-pocket maximum is $3,000 per person. How much must Pat and Taylor pay if they have the following claims this year? • $250 ear exam for Taylor • $2,000 vein surgery for Pat • $4,500 elective cosmetic surgery for Taylor • $3,200 follow-up surgery for Pat

$6.190

Assume the following: • The annual cost of LTC services is $55,000. • Your client is age 50. • Your client has $225,000 in assets that can be used in case of emergency. • The cost of LTC services is increasing by 6% per year. • The length for LTC services is six years. • A client's need for LTC services begins at age 75. • The average annual rate of return on investment assets is 7%. Based on this information, what is the client's LTC insurance need?

$9,222

As an element of her practice, Lindsey, a CFP® professional, requires each new client to complete a risk-tolerance assessment, in addition to other forms designed to measure each client's attitudes and expectations. Lindsey uses the risk-tolerance score obtained from her assessment as a key input into portfolio decisions. Today, after meeting with a prospective client, Lindsey learned that the prospect refused to complete the risk-tolerance assessment. What should Lindsey do?

A CFP® professional is required to communicate to the client that any recommendations rely on the completeness and accuracy of the information provided by the client. It is essential to disclose that incomplete or inaccurate information will impact conclusions and recommendations. A financial planner should not make recommendations on issues for which a client has failed to provide needed information. Lindsey should either restrict the financial planning engagement to elements that do not require the use of a risk-tolerance score and, in doing so, arrive at this decision mutually with the prospective client. or terminate the engagement.

Lafawna and her husband, Ted, believe that they need to purchase some type of LTC insurance. They are concerned that Ted, in particular, may need LTC services in the future based on his family history. Unfortunately, their current family budget is very tight. Lafawna is concerned that they must make a choice between being adequately insured in the case of unexpected death and LTC needs. What type of policy could be recommended to address Lafawna's concerns?

A hybrid insurance product can be recommended to solve Lafawna's concern.

Kim is interested in purchasing a life insurance policy. She would like a policy that will guarantee to pay her husband $250,000 at her death. She wants lifetime coverage with a fixed monthly premium. What type of insurance policy would be most appropriate for Kim?

A traditional whole life insurance policy would be appropriate for Kim. This type of policy provides a fixed death benefit and lifetime premium. She might consider purchasing a participating whole life policy. The receipt of dividends would help reduce her monthly premium if applied toward the purchase of insurance.

Marcos has a dilemma. He has a very high tolerance for risk, but he also knows that he needs to have a risk management plan in place to take care of his family should he unexpectedly die. He would like to combine the features of a cash value life insurance product with a subaccount that will allow him to invest his accumulated cash value aggressively. What type of life insurance policy will provide Marcos the greatest flexibility in terms of adjusting the face value of the policy, potentially adjusting premiums, and investing aggressively?

A variable universal life (VUL) policy would be perfectly suited to Marco's needs. Unlike a variable policy, a VUL allows for adjustable premiums, and unlike a universal policy, Marco can use subaccounts in the VUL to invest aggressively. He should know, however, that neither the face value nor the rate of return in a VUL is guaranteed.

A credit card charges 1% interest on a loan every month. What is the interest rate that it charges on an annualized basis (APR)?

APR: (1 + .01)12 - 1 = 12.68%

Kaylee, a CFP® professional, was engaged by her client who is retiring soon. The client hired Kaylee to provide financial advice. The client has most of her retirement funds invested in her employer's 401(k) plan. Kaylee did not obtain any information about the 401(k) plan because she assumed there are more (and better) investment options available in an individual retirement account compared to the 401(k) plan. Based on this assumption, Kaylee concluded that the client's portfolio would be better off in an IRA. Kaylee appropriately disclosed her material conflicts of interests and then recommended that the client take a distribution from her 401(k) plan and roll the assets into an IRA. Kaylee intends to analyze and recommend an investment strategy for the IRA after the funds have been distributed to the IRA. Did Kaylee satisfy her fiduciary standard of care?11

According to CFP Board, Kaylee did not satisfy her fiduciary duty. CFP Board states: At all times when providing financial advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the client. A Client is any person to whom a CFP® professional provides or agrees to provide Professional Services pursuant to an Engagement. Financial Advice includes communications that, based on their content, context, and presentation, would reasonably be viewed as a recommendation to take or refrain from taking a particular course of action with respect to the advisability of investing in, purchasing, holding, gifting, or selling Financial Assets. The Fiduciary Duty includes a Duty of Loyalty, a Duty of Care, and a Duty to Follow Client Instructions.13 This vignette focuses on the duty of care, which requires a CFP® professional to act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances. Making the particular recommendation is not in the client's best interests. Furthermore, Kaylee did not act with care, skill, prudence, or diligence in this matter.

Nedra, a CFP® professional, received a call from a client who is approaching retirement age. The client asked Nedra whether she should invest in a real estate investment trust to generate retirement income. In order to make the investment, the client will need to liquidate other investment assets, all of which Nedra manages under an assets under management agreement. The real estate investment trust assets will be managed by another firm. Nedra conducted an analysis and concluded that investing in the real estate investment trusts is a bad idea because she believes the current asset mix will generate higher returns. Additionally, Nedra knows that even if she earns a commission on the sale of assets used to purchase the real estate investment trust, the amount earned will be less than her ongoing management fee. What should Nedra do?

According to CFP Board, this is a classic case that involves the duty to disclose conflicts of interest. A CFP® professional must make full disclosure of all material conflicts of interest that could impact the client-planner relationship. Information is material when a reasonable person would consider the information important when making a decision. A CFP® professional must make full disclosure and obtain the consent of the client before providing any financial advice. In this vignette, Nelda has a material conflict of interest because she can earn more compensation if her client does not invest in the real estate investment trust. Keep in mind that Nelda may disclose her conflict of interest either in writing or orally. However, as a best practice, CFP Board recommends that a CFP® professional disclose any conflicts of interest in writing.

Alexis purchased a car five months ago for $24,000. She borrowed $22,000 from a local credit union to finance the purchase. Yesterday, Alexis was involved in an accident. She was not at fault, but her new car was damaged beyond repair. The other driver's insurance company agreed to pay for damages but determined that Alexis's car was totaled, with a fair market value of $18,000. What optional endorsement should Alexis have purchased with her personal automobile policy to ensure that she would receive replacement value rather than fair market value for her car?

Alexis should have purchased gap insurance. This coverage pays the difference between her vehicle's actual cash value and what she still owes on the loan. She would have received $18,000 from the other insurance company, plus $4,000 from her insurance company.

Aman is considering a career change. He has heard about the opportunities available to those who hold the CFP® marks. His goal is to help people deal with financial questions and concerns using a process that is consistent and proven. Do Certified Financial Planner professionals follow a process, and, if yes, what are the steps in that process?

All Certified Financial Planning professionals who provide financial planning services are required to follow the seven-step financial planning process. One way to remember these steps is to use the acronym UGADPIM.

Nellie is considering filing for Chapter 7 bankruptcy, but she is worried that she will lose her home, retirement savings, and other assets. If Nellie does end up filing for bankruptcy, what assets are exempt from liquidation?

All the assets Nellie is holding in qualified retirement plans are exempt from liquidation. Depending on the state in which she lives, and based on whether she filed a homestead exemption, she may be required to sell her home and use the equity to pay back creditors. Most other assets will need to be liquidated, although the law does provide provisions to maintain a car, if needed, and some personal items (e.g., wedding band, clothing, etc.). Some debt and liabilities cannot generally be discharged. These can be thought of as items where the government is the debt holder, taxes are owed, criminal and civil issues liabilities are due to another party, or support for divorced individuals and children is expected to be paid. Examples of nondischargeable debts include: • Internal Revenue Service (IRS) liabilities • Local and state tax liabilities • Student loan debt • Money owed to others obtained via criminal or unethical behavior • Government loans • Civil court jury awards • Criminal fines • Money obtained from embezzlement • Liability claims from driving under the influence • Credit card advances • Extravagant purchases made with a credit card(s) • Alimony • Child support

Nigel is 50 years of age. He works out three times per week and eats a sensible diet of fruits, vegetables, and protein. Everyone in his family is on the heavy side. At 5 feet 10 inches tall, Nigel is just like his father, weighing 220 pounds. Although he has been trying to stop, Nigel does smoke 7 to 10 cigarettes per day. Given this information, would Nigel be considered a preferred, standard, or substandard risk in the life insurance underwriting process? What will his rating mean for his ability to obtain insurance?

Although Nigel eats well and works out on a regular basis, it is likely that an insurance company will rate him as substandard on a life insurance application. This rating stems from his weight and the fact that he uses tobacco on a regular basis. Insurance companies typically have tiered systems in which tobacco and nontobacco ratings apply. Although a substandard risk rating will not prohibit Nigel from obtaining insurance, he can expect to pay a higher premium than others.

Sheri is a CFP® professional. She has held the certification for nearly 15 years. During that time, she has held several positions in large and small financial service firms. Recently she took a position with a retirement planning firm. Sheri no longer provides advice or guidance on issues related to cash flow or net worth planning, education planning, or education planning, although she does review each client's tax and investment situation when developing retirement plan recommendations. Sheri would like to know if she must follow the CFP Board Practice Standards when working with her new retirement planning clients.

Although Sheri is not practicing comprehensive financial planning, she is providing financial advice that integrates elements of the financial planning process and a client's situation. As such, Sheri is required to follow the financial planning process and to provide services using the Practice Standards.

Barbara is a single retiree. Barbara is considering purchasing an annuity to supplement her retirement income. She has no direct dependents; however, she has a niece that she would like to help financially in the future. If Barbara is concerned about receiving a minimum return on her annuity premium and not losing benefits should she die unexpectedly, what type of annuity option should she purchase?

As a single person who is interested in helping her niece financially, if possible, Barbara should consider purchasing a life contingent annuity option with a period certain or a refund feature. This strategy will ensure that either Barbara or her niece will receive payments in the future should Barbara die unexpectedly.

Jack is a recent college graduate and believes that he will be able to save $200 from his salary every month. Jack wants to start investing. He has done some research on the different investment choices that are available to him but he is still very confused. He likes the idea of investing all his money into a high-quality stock, but his colleague at work has advised him to create a portfolio of very-low-quality penny stocks instead. Jack's boss at work has, however, told him to put his savings into a high-quality mutual fund or an exchange-traded fund instead. What should Jack do?

Although it is a good idea for Jack to start investing, he needs to avoid putting all his money into one stock, even though it may be of high quality. This is because if all his savings are allocated narrowly into one stock, should the stock of the corporation not do well in the future, Jack could lose a lot of money. One benefit of allocating to a portfolio of multiple securities is that the investor's risks are diversified across these different securities. Although creating a diversified portfolio of penny stocks sounds like a good idea at first, Jack may not have enough information or the ability to create and manage a portfolio of penny stocks. Additionally, penny stocks are very risky, and in his beginning years of investing Jack may not have sufficient financial capacity to take this type of risk. Investing his savings into a mutual fund or ETF as his boss has suggested is perhaps Jack's best option. This is because the risk within a pooled investment portfolio, such as a mutual fund or an ETF, is relatively lower because of the diversification benefits and professional management that such instruments offer.

Jake is starting college in a few months. His mom, Karen, wants to pay for Jake's education but has not begun saving yet. Karen and her husband earn $120,000 annually. Which of the following is the best method for Karen to cover the cost of college? A. 529 plan B. PLUS Loan C. Series EE bonds D. American Opportunity Tax Credit

Answer: Since Jake is only a few months away from beginning school, saving to a 529 plan and Series EE bonds are not the best options. Karen would likely be eligible for the American Opportunity Tax Credit, but this is not an option available to pay for college as the credit is available only on the tax return after payments have been made. Thus, the best answer is choice B. • Remember that the AOTC is per student.

A fund is currently trading at a discount of −20%, but over the past year it has traded at a discount of −5%. If the one-year standard deviation of the discount is 5, calculate the Z-statistic for the fund. Based on this finding, determine whether the fund is relatively cheap or expensive, given its one year average.

Applying, the formula for the Z-statistic: Z−statistic=(−20−(−5))/5=−3Z-statistic=(−20−(−5))/5=−3 Therefore, with a Z-statistic of −3, the fund would be considered relatively less expensive, given its historic standard deviation and discount rates.

Dasani works as an insurance agent for a national property and casualty insurance firm. She has been working with a recent college graduate to establish a new automobile and renter's policy. To whom does Dasani owe a fiduciary responsibility, the insurance company or the client? Would her obligation change if Dasani were an insurance broker?

As an agent, Dasani owes her fiduciary responsibility to the insurance firm. Had Dasani been an insurance broker, her duty of care would have changed to that of the policy applicant.

Sonya, a CFP professional, advertises her services as "financial counseling with a heart." When working with clients, she writes a targeted financial plan. Each plan contains an analysis of the client's cash flow and net worth situation, a review of insurance issues, and a detailed retirement analysis. Sonya always provides recommendations that can be implemented to improve a client's situation. Will CFP Board consider her work financial planning?

Based on CFP Board's definition of financial planning and the definition of financial advice, Sonya is providing financial planning. Keep in mind that delivery of marketing materials, general financial education, or other general financial communications generally will not be classified as financial planning. For example, teaching a financial class or continuing education program is not considered financial planning.

Kristy is reviewing her employer-provided long-term disability insurance policy. She pays policy premiums on a pretax basis. The policy provides a benefit based on the following income benefit formula: Employee Income×70%,excluding Social Security benefits If Kristy makes $89,000 and becomes disabled under the terms of the policy, how much can she expect to receive monthly?

Based on an annual income of $89,000, Kristy receives $7,417 (rounded) per month before taxes. Her policy will pay her 70% of this amount during her disability, which is approximately $5,192 before taxes. Because she has paid premiums on a pretax basis, the full amount will be subject to income taxes.

Abed and Michelle work for a large sales and marketing firm. They are both thinking about making a career change. The thought of financial planning as a career is very appealing to both Abed and Michelle. Unfortunately, in the past, their financial behavior was problematic. Abed, for example, was convicted of felony theft three years ago, and Michelle filed for personal bankruptcy four years ago. Based on CFP Board's Fitness Standards for candidates, who will be barred from becoming certified?

Based on the candidate Fitness Standards, Abed will be barred from becoming certified as a CFP® professional. The Disciplinary and Ethics Commission might find Michelle's bankruptcy to be unacceptable, depending on the circumstances. If this is the only bankruptcy she has filed in the last five years, and if she is not under any investigation by CFP Board for other misconduct, she will most likely not be barred. This is known as a bankruptcy-only case. Michelle should expect CFP Board to disclose the bankruptcy publicly. The concern with bankruptcy is that those who work with financial planners expect their advisers to be experts in managing personal financial affairs; a bankruptcy indicates problematic personal behavior on the part of the adviser. However, Michelle may petition the Disciplinary and Ethics Commission to allow her to become certified. If she shows, for instance, that divorce was the cause of the bankruptcy, the Commission may grant the petition.

Muriel currently earns $145,000 per year. She and Tucco believe that they can earn an 8% return on their investment portfolio assets. Given this information, how much life insurance does Muriel need using the capital retention approach? How much does Muriel's insurance need to change using the income retention approach if it is assumed that Tucco earns $100,000 per year?

Based on the capital retention approach formula, Muriel needs approximately $1,800,000 in life insurance coverage. This estimate is close to that found with the human life valuation approach. $1,812,500=$145,0000.08$1,812,500=$145,0000.08 Muriel's life insurance need is significantly less using the income retention approach. She needs approximately $500,000 in coverage. [Note: The 22 superscript in the equation represents the time until Tucco turns age 67.] $495,756=45,0000.08[1−1(1+ 0.08)22]$495,756=45,0000.08[1−1(1+ 0.08)22]

Muriel and her partner, Tucco, are 45 years old. They have two teenage children. She is employed as a pharmacist and earns $145,000 yearly. Muriel is interested in purchasing a life insurance policy that will cover lost income until Tucco turns age 67, should she die prematurely. She and Tucco believe that Muriel needs coverage only for the next 20 years. At that time, their primary residence will be paid in full and their children will no longer be dependents. If they believe they can earn 8% on an annualized basis on a diversified portfolio, how much life insurance does Muriel need today using the human valuation approach? (Assume she has no other policies at this time.) Also, what type of life insurance product would be most appropriate for her?

Based on the human valuation approach, Muriel needs approximately $1,600,000 in life insurance coverage. Note that the solution shown is based on an annuity-due estimate. A beginning payment assumption is appropriate because the calculation is designed to estimate an amount need to generate future income. Given the information in the vignette, a 20-year term policy would be an appropriate choice for her coverage. [Note: The 22 superscript in the equation represents the time until Tucco turns age 67.] $1,479,108=145,0000.08[1−1(1+ 0.08)22]$1,479,108=145,0000.08[1−1(1+ 0.08)22]

Lucy is covered by an employer-provided health care plan. She is worried that her coverage will be canceled because over the past two years she has incurred significant medical expenses due to a life-threatening disease. Explain to Lucy how the concepts of guaranteed renewability and noncancellability apply to her situation.

Besides tax and cost benefits, an advantage associated with purchasing health insurance coverage through an employer-provided health plan is that this type of coverage is guaranteed renewable and noncancellable. Guaranteed renewable means that Lucy may renew her coverage without proof of insurability. Noncancellable in this case means that Lucy cannot be singled out based on her health history and denied coverage. Since she is part of a group plan, the insurance company must cover her.

Duncan, an amateur chef, owns his own home in the suburbs of a large city. He spends a lot of time at work. He worries that his home could become a target of burglars. This is a worry because he generally keeps small amounts of cash ($100 to $200) in the house. He is also worried that someone might steal his cooking utensils, computer, and gold jewelry. What should Duncan do to ensure that if this property is lost or stolen, it will be replaced at replacement value? Also, what can Duncan do to reduce the risk of being burglarized that might reduce his homeowner's premium?

Duncan should purchase personal property endorsement coverage for the high-value items he owns. This is particularly true in relation to his jewelry, computer, and cooking utensils. Duncan should also consider installing an alarm on his house. This will reduce the likelihood that he will be burglarized. The alarm may also qualify Duncan for a premium discount.

Using CAPM, calculate the expected return of a security P when its beta is 1.2. The risk-free rate is 3%, and the return of the market is 10%.

E(RP)=0.03+(1.2×(0.10−0.03))=0.114or11.4%

Jessica has been a CFP professional for nine years. She was pulled over two weeks ago by a State Trooper initially because he suspected her of reckless driving. Later, during the traffic stop, the Trooper determined that Jessica was driving while intoxicated. She was booked and taken to jail. Later, in court, she was found guilty of misdemeanor DWI; however, she was acquitted of the reckless driving charge. Jessica would like to know if she is subject to CFP Board discipline and, if yes, what she needs to do.

Each aspect of Jessica's situation is subject to potential CFP Board disciplinary procedures. The conviction for DWI must be reported to CFP Board within 30 days. Under the rules, Jessica must also report the reckless driving charge even though the charge was later withdrawn. CFP Board retains the right to penalize Jessica beyond what occurs in a court proceeding.

Damion has been promoted to a position of vice president in his firm. With the promotion came a significant increase in income. He is worried that should he become disabled, his family would have a hard time adjusting to his lost income. What definition of "disability" will provide the most advantageous description of disability for Damion to ensure that he will receive benefits in case he is no longer able to work as a vice president?

For some clients, it is considerably more difficult to qualify for benefits when subjected to an any-occupation definition instead of the more lenient own-occupation definition. In Damion's case, he should seek out an own-occupation disability policy. He may be able to negotiate coverage directly with his employer.

Michelle is 63, afraid of losing money, and needs cash for her current needs. She is retired and has a marginal tax rate of 15%. She is looking to add some fixed income assets to her portfolio. She has decided to select from the following securities to potentially add to her portfolio: revenue bonds issued by the local government, debt securities guaranteed by Fannie Mae, debt securities guaranteed by Ginnie Mae, and debentures issued by the Ford Motor Company. She wants to invest only in securities that are backed by the full faith and credit of the U.S. government. Which of these securities should she consider for her portfolio?

Given her high level of risk aversion and low income tax bracket, the fixed income investments are suitable for Michelle. All of the securities that Michelle has on her short list are fixed income instruments. However, only one of these is backed by the full faith and credit of the U.S. government. The debenture issued by the Ford Motor Company is corporate debt and can be immediately eliminated from her options. Revenue bonds issued by the local municipality are not backed by the full faith and credit of the local government or municipality but instead depend on the revenue generated from the project(s) for which the revenue bonds were issued. The Fannie Mae debt is not backed by full faith and credit of the U.S. government. Only Ginnie Mae debt is backed by the full faith and credit of the U.S. government.

Xavier, a financial planner, is conducting an evaluation of his client's life insurance needs. He has determined that the client needs $800,000 in new coverage. Xavier's analysis suggests that the client needs lifetime coverage. What policy should Xavier recommend if the client has sufficient income to cover policy premiums and is looking for a policy that provides flexible premiums and the ability to invest in equity investments?

Given the client's wishes (the need for flexible premiums and the ability to invest in equities), Xavier should recommend a variable universal life insurance (VUL) policy. This type of policy can provide lifetime permanent coverage with some degree of premium and investment flexibility.

The price of a security at the beginning of a period was $1,000. During this period, the portfolio earns dividends worth $50. Calculate HPR if at the end of the period, its price is $1,100.

HPR=($1,100+$50)$1,000−1=0.15or15%

The price of a security at the beginning of a period was $1,000. During this period, the portfolio earns dividends worth $50. Calculate HPRR if at the end of the period, its price is $1,100.

HPRR=HPR+1 1.15 Holding period return relative (HPRR) is simply the ratio of value of a security at the end of a period to its value at the beginning of the period.

You have just started to work with a client and have finished evaluating his current financial situation. You determine his emergency fund is inadequate based on his salary and monthly expenses. After some discussion, the client explains that he does not like holding any cash because "It doesn't earn anything." He would rather contribute the funds to his 401(k) plan, since he currently lacks the cash flow to take full advantage of this account. What should you advise him to do?

If your client does not want to hold money in liquid assets, he should ensure he has access to a line of credit in case of an emergency. If he owns a home, he can open a HELOC at a bank. This will allow him access to the equity in his home if needed. He can also borrow from a cash-value life insurance policy and/or his 401(k) plan if available. You could also suggest holding one or two months of expenses in short-term bonds for smaller unexpected expenses.

Lamar is a CFP® professional. He is also an SEC Registered Investment Advisor. Recently Lamar was reprimanded by the SEC for recommending a product that provided an undisclosed referral payment to him. He reported the incident to CFP Board, but he does not expect to be sanctioned because he believed at the time of the recommendation that the product was the best available to the client. Is Lamar correct in thinking that CFP Board will not discipline him for his actions?

Lamar's primary regulator in this case is the SEC. Whenever CFP Board rules appear to contradict a federal or state regulation, CFP Board requires CFP® professionals to comply first with federal and state regulations. Because Lamar failed to comply with regulatory requirements, he could come under discipline by CFP Board.

Sheri is a practicing financial planner, but she does not yet hold the CFP Board certification. She currently acts as the trustee to her family's charitable trust. Sheri would like to know if she is considered a fiduciary.

In her role as a trustee, Sheri would be considered a fiduciary. She must manage trust assets for the sole benefit of the trust beneficiaries. She must be fair and not engage in self-dealing. She must also strive to preserve the property in the trust and make the assets as productive as possible. Sheri must also invest trust assets prudently and be impartial when making decisions regarding trust assets and beneficiaries. At this time, Sheri is not considered a fiduciary under CFP Board rules. However, when she enrolls in a CFP Board-registered academic or certificate program, and when she becomes a CFP® professional, she will be considered a fiduciary under CFP Board rules in her role as a trustee.

A financial planner's long-time client stopped by the planner's office today to talk about his older widowed mother. Her health has been declining for several years. The client just learned that his mother is unable to get in and out of bed on her own. Additionally, his mother is no longer able to walk; she must use a wheelchair. The client would like to know if his mother should file a claim against her long-term care insurance policy.

In this case, the client's mother would not qualify for long-term care coverage. At this time, she is unable to perform just one activity of daily living (i.e., transferring from bed to chair). Generally, LTC is needed as a result of disability, chronic illness, cognitive impairment, or Alzheimer's disease. It is possible, however, for LTC services to be used as a bridge from an illness to nondisability status, although most individuals who require LTC assistance remain in need of services for the remainder of their lives.

Knowton recently inherited a sizable estate. He is looking to hire a financial planner to help him create a retirement plan and manage the estate assets. Knowton met with a financial services professional who indicated that she provides planning services through the sale and management of life insurance products. When he asked, the professional indicated that she is paid a commission on the sale of products. Is the financial professional in this case an agent or an employee of the insurance company? To whom does the financial professional owe a fiduciary duty?

In this case, the financial professional is an agent. Knowton knows this because the financial professional charges a commission on products sold. Given her agency status, the financial professional's fiduciary obligation is to the insurance company, not to Knowton. Agents generally are allowed to follow a best interest standard of care, meaning that an agent must act in the retail customer's best interest and cannot place its own interests ahead of the customer's interests. A fiduciary must recommend products and services that are the best available in meeting a client's needs.

Nakia has been investing since she was a young woman. She has used the same brokerage account to hold her investment assets for nearly 30 years. Based on a combination of regular savings and investment performance, she has accumulated nearly $1,400,000 in assets in the account, of which $450,000 is held in cash. What will happen to Nakia's assets if the brokerage firm declares bankruptcy or begins a liquidation process?

It is likely that the firm will follow liquidation procedures outlined in SIPA, but it is possible that the firm could file for bankruptcy protection. In either case, Nakia's assets are protected up to $500,000; however, the SIPC insures her cash holdings only to $250,000. This means that there is a possibility that she could lose $200,000 of cash: Total cash−SIPA protected cash amount=$450,000cash−$250,000protected=$200,000 And she could potentially lose $700,000 from her securities: Total balance−Total cash−SIPA protected securities amount=$1,400,000−$450,000−$250,000=$700,000 The SIPC will also work to transfer Nakia's securities to another brokerage, if possible. At this time, Nakia does have some liability exposure should the firm need to liquidate.

A CFP professional's client has not set up a 529 plan for his child, David, who has already started college. Can she start one now and take advantage of the fact that computers are considered a qualified expense for tax-free 529 distributions?

It is true that a client could start a 529 plan anytime. The real benefit, however, comes with the tax-free withdrawal of earnings that build up in the plan over time. Thus, it would be more difficult to accrue enough earnings to be of immediate benefit given the short time horizon. This student could still benefit if postsecondary education continues, particularly if he attends graduate school. Setting up a 529 plan is also an investment decision, which means both the risks and potential rewards should be considered, along with alternative ways of accomplishing the same objective. This client could benefit even without substantial investment return if she participates in a state-sponsored plan that offers a state tax deduction for residents.

Lamar is a CFP® practitioner in good standing. Lamar has held the CFP® marks for over 20 years. During that time, he has developed an expertise in retirement plan administration. Other CFP® professionals typically call Lamar when they have complex questions about the appropriateness of establishing a retirement plan for a small business. As Lamar's practice has grown, he has been asked by some clients to provide advice and counsel on very complex estate planning topics. The last time that Lamar reviewed estate planning in depth occurred when he was studying for the CFP® examination. Lamar is reluctant to refer his clients to anyone else because he is fearful that his competitors will see his clients as prospects. Has Lamar violated any aspect of CFP Board's Code of Ethics and Standards of Conduct? If yes, which principle?

It turns out the Lamar has violated several principles within the Code of Ethics. Lamar lacks the competence to provide high-level estate planning advice. Under the Code of Ethics, Lamar should have recognized his technical limitations related to estate planning and referred his clients to an expert. Additionally, Lamar should immediately make a commitment to increasing his knowledge and capabilities related to complex estate planning issues.

Jacob is a real estate investor. Jacob owns several properties through a limited liability company (LLC). As a way to increase his returns, Jacob started flipping houses 18 months ago. He has accumulated a large amount of personal debt used to finance home purchases. Unfortunately, few of the homes he has purchased and renovated have sold. In fact, Jacob has been experiencing a significant negative cash outflow. He is essentially out of options at this point. His income from the properties has declined to almost nothing (he has no one renting at this time). He is considering filing for bankruptcy. He would like to know what his best option is in order to obtain a quick discharge of his debts so that he no longer needs to pay his outstanding loans. Jacob would also like to know what the impact of filing will have on his credit rating.

Jacob's best bankruptcy option, at this time, is to file for Chapter 7 bankruptcy. He will need to pass the means test; however, this should not be an issue because he has very limited income sources. If he were to fail the means test, he would be required to file for Chapter 13 bankruptcy. Before deciding to file for bankruptcy, Jacob needs to remember that the action will negatively affect his credit score for 7 to 10 years. The length of the negative effect is based on when the final debts are discharged. A Chapter 7 filing will have the shortest effect, whereas a Chapter 13 filing can adversely affect a filer for a longer period of time. (Under federal law, Jacob can receive a free copy of his credit report once every 12 months from each of the primary credit reporting agencies—Equifax, Experian, and Transunion—by going to www.annualcreditreport.com.)

Jarvis is a single 69-year-old male. He began receiving period payouts from an annuity this year. He will receive $18,000 per year from the insurance company. If Jarvis paid $75,000 into the annuity contract before taking distributions, how much of this year's annual distribution will be excluded from ordinary income taxes?

Jarvis can exclude $5,294 from ordinary income taxes this year. This estimate is based on the exclusion ratio and his IRS life expectancy of 210 months.

Joel has come to you for a debt management plan, as he has a lot of high-interest credit card debt. He is looking for the best strategy to pay down the debt. How should Joel choose which card to pay first?

Joel should pay off the highest-interest debt first. He should make the minimum payments on the remaining debt items. Once the highest-interest debt is paid off, he can move to the next highest-interest debt. He should continue this strategy until all the credit card debt is paid off. This is the most efficient use of cash flow and the fastest way to increase cash flow that can be directed toward other goals.

John has been a CFP professional for over 20 years. He advertises his financial planning services as offered on a fee-only basis. While over 95% of his current business is based on fees earned managing client assets, John still maintains his securities licenses as a registered representative, even though he rarely charges a commission for his services. Is John allowed to use the term "fee-only" to describe his business model?

John may not use the term "fee-only" to describe his practice or compensation method. Generally, anyone who retains a securities license, acts as a registered representative of a broker/dealer, is dually registered, or is an employee of an insurance firm may not use the term "fee-only."

Jose, a new client, has completed his new client information-gathering survey. He has a baseball card collection that he thinks is worth $15,000. He also has $10,000 of U.S. savings bonds that mature in 10 years. He enjoys collecting baseball cards and involves his son in the activity. Jose has a CD for $20,000 that matures in six months. The early withdrawal penalty is 5% of the balance. Jose's home was purchased 10 years ago for $250,000, and it is currently worth $400,000. How would these items be reported on Jose's financial statements?

Jose's baseball card collection is a hobby. As such, it would be included in the personal use assets (also referred to as the household assets) section of the balance sheet. The U.S. savings bonds would be reported at their fair market value ($10,000) in the investment assets section of the balance sheet. The CD is a current asset because it matures within 12 months. The early withdrawal penalty is listed simply as a distraction. Jose's house is a household asset (personal use asset) and should be reported at its fair market value of $400,000 on the balance sheet.

Lalinda just purchased her first home. She is meeting with her financial planner to determine the most appropriate form of insurance she should buy. She is considering HO-2, HO-3, and HO-5 policies. If she wants her personal property to be covered for all risks of physical loss, except those risks that are specifically excluded, which policy should she purchase?

Lalinda should buy an HO-5 policy. This is the only policy that covers her personal property for all risks of physical loss, except those risks that are specifically excluded.

Lamar is 50 years old and considering purchasing an accumulation deferred annuity. He is concerned that if he makes the purchase, he will be forced to annuitize the contract at a future date. He is unsure if he will need the income payout later in life. What are Lamar's payout alternatives if he does purchase the annuity? What are some of the advantages and disadvantages associated with the different alternatives?

Lamar can either take distributions directly from the accumulation account or convert the account to a payout annuity. An advantage associated with taking periodic withdrawals instead of annuitizing is that Lamar will retain access to and control over the account. He can make partial withdrawals as he needs funds, and if the distributions are equal to or less than 10% of the account value, he will not pay a surrender charge. Also, by maintaining the account with the insurance company, Lamar will continue to be credited interest or earnings on the amount still in the account. The primary disadvantage associated with not annuitizing is that Lamar could end up depleting the account during his lifetime, which could result in an income shortfall later in life.

When meeting with his financial planner, Larry indicated that when it comes to his short-term liquid assets, he must have a 100% guaranteed rate of return with no risk of loss. During a discussion about investment alternatives, his financial planner indicated that Larry would be equally served using an account at a bank, credit union, or money market mutual fund. Is Larry's financial planner correct?

Larry's financial planner is incorrect. Investments held in money market mutual funds can go down in value even though fund managers attempt to keep the net asset value of the funds at $1.00. If a money market mutual fund loses value, it is up to the fund manager to make up any losses. At this time, federal or state insurance does not exist to insure fund holders.

Latrell, a CFP professional, has a successful brokerage practice. He is considering establishing his own investment advisory firm that will charge an assets-under-management fee to all clients. Latrell knows that he will need to register with the SEC because he plans to manage several hundred million dollars. What process does he need to undertake in order to register his new firm with the SEC? Additionally, what FINRA licenses will Latrell need to obtain in order to become an investment adviser representative?

Latrell must submit the nine elements of registration listed under the heading "General Firm Registration Requirements" in order for this firm to become a Registered Investment Adviser. Latrell must also complete paperwork with the SEC to become an investment adviser representative. Because he is a CFP certificant, all examinations will be waived. Had he not been a CFP professional or not held a similar credential, he would have been required to take and pass the Series 65 or both the Series 66 and 7 licensing examinations. Keep in mind that Latrell will need to submit Form U-4 and ADV Part 2B.

Marcel is a financial planner who is registered with SEC as an investment adviser. When developing a privacy disclosure, what must Marcel include in the policy statement?

Marcel must describe the following, in detail, in his privacy statement: • Nonpublic information collected • How he secures and protects current and prior client information • How information is shared with any affiliated/nonaffiliated parties

Molly, a CFP professional, is advising her client, Ryan, who became the legal guardian of his younger brother a couple years ago when their parents passed away. Ryan just graduated from college himself and is making a very low income and has very little in terms of savings to help his younger brother pay for college. Ryan asks Molly if she knows of any financial aid programs that might help. What educational planning strategies, related to need-based financial aid, should Molly consider in the development of the education plan?

Molly, as a CFP professional, and if utilizing the six-step financial planning process, should gather additional data regarding the current financial situation and specific education goals of Ryan and his brother. With that said, Molly could easily list several need-based financial aid opportunities that Ryan's brother would likely qualify for, including the Pell Grant, FSEOG, Federal Work-Study Program, Federal Perkins Loan, and Subsidized Direct Stafford Loan. Remember, unsubsidized direct loans are based on the cost of education but are not considered need-based aid. In other words, even someone with a very high EFC can take out an unsubsidized direct loan. Ryan's family experienced a tragedy with the loss of their parents, but Ryan would be incorrect to assume that his brother needs to forgo college due to financial constraints. With the tragic loss of the parents, Ryan's brother may be eligible for various scholarship opportunities as well.

Nancy's mortgage payment is causing a strain on her monthly cash flow. She thinks she would be able to put more toward savings if her payment was lower. Nancy is currently in an increasing interest rate environment and wants to avoid an ARM. What are some other options Nancy has available to reduce her monthly payment?

Nancy can refinance her debt and extend the term of the loan. By extending the term, her monthly payment will be lower, allowing her to save more. The interest rate on a fixed mortgage, which is also deductible, is often lower than the long-term return offered by an equity investment. This is a good strategy for Nancy to consider that could lead to greater wealth accumulation for her retirement years.

Narod is age 45 and is currently paying $1,000 per year in premiums on a nonparticipating whole life policy. The policy does not pay dividends. The cash value in the policy at the beginning of the year was $8,000. The end-of-year cash value was $8,250. If the face value of the policy is $100,000 and market interest rates are 4.50%, how much is Narod paying per thousand for coverage? How does this compare to industry benchmarks? Based on your analysis, should Narod retain or replace this policy?

Narod is currently paying approximately $12.59 per $1,000 of life insurance coverage. YPT=[[(1000+8000)×(1.045)]−(8250+0)(100,000−8250)×(0.001)]=$12.59YPT=[[(1000+8000)×(1.045)]-(8250+0)(100,000-8250)×(0.001)]=$12.59 The recommended rate for someone his age is $6.50 per thousand. However, given the rules for policy replacement that state the cost should be two times more than the benchmark before replacing the policy, Narod may retain the policy. He should continue to shop for a policy that has a lower cost per thousand.

John, a CFP professional, was asked by the client during a prospect meeting how he would be paid. His compensation method is 100% commission, so he told the client that she could put her checkbook away since his "financial planning services wouldn't cost her anything because he receives his compensation from both the investment and insurance companies he uses to implement her financial planning recommendations." Is John's statement considered ethical according to CFP Board's Practice Standards and Code of Ethics?

No. John's limited explanation of payment is not understandable by the client. In addition, implying the services will not come at a cost to the client is misleading and thus inconsistent with the Code of Ethics.

Jane invests $100,000 in the stock of a Chilean corporation. According to current exchange rates, $1 = 675 Chilean pesos. If her investments denominated in Chilean pesos go up 25% during the period but the exchange rate changes to $1= 700 Chilean pesos, what is Jane's overall return in this investment after adjusting for changes in the exchange rate?

Note that although Jane's investments went up by 25%, the value of the Chilean peso fell from $1 = 675 Chilean pesos to $1 = 700 Chilean pesos. This accounts for a drop of 3.7% ((700 - 675) / 675). Therefore, the net return for Jane's investment when adjusting for the rising value of dollar (and fall of the Chilean peso) is calculated as shown next. Step 1 Converting dollars to Chilean pesos based on the dollar to Chilean peso exchange rate: Amount in Chilean pesos = Initial dollar amount × Chilean peso exchange rate Initial investment: $100,000 = 675 × $100,000 = 67,500,000 Chilean pesos Step 2 The new value after the investment increases by 25%: Initial value × (1 + R) Where R = Rate of return or increase in the value of the investment = 25% The value in Chilean pesos after the 25% increase = 67,500,000 × (1 + .25) = 84,375,000 Chilean pesos Step 3 Converting Chilean pesos to dollars = Amount in Chilean pesos / Exchange rate in Chilean pesos: When converting this to dollars, the new value will be: 84,375,000 Chilean pesos / 700 = $120,535.71 Step 4 Overall return on the investment adjusting for changes in exchange rates = (New value (Dollars) - Initial investment (Dollars)) / Initial investment (Dollars) Adjusted net return = ($120,535.71 - $100,000) / $100,000 = 20.54%

Peyton wants to know how much college will cost when her newborn begins college at age 18. The current tuition is $14,000 and is expected to grow at 6% annually. What will the cost be for the newborn's first year of school?

PV = -14,000 N = 8 I/Y = 6% PMT = 0 FV = 39,961 The current cost of tuition is $14,000 per year. If the tuition grows at 6%, in 18 years tuition will cost $39,961.

Dan wants to begin saving for his son's education. He would like to fully fund four years of college. Dan recently spoke with a financial aid counselor at a local university that he thinks his son will attend. The counselor told Dan that tuition is growing at 5% annually and will be $23,000 when Dan's son begins college in seven years. Dan comes to you and asks how much he will need to have saved by the time his son starts college. Assuming he can earn an average annual return of 7%, what do you tell Dan?

PV = 89,453 N = 4 I/Y = ((1.07 / 1.05) - 1) * 100 = 1.905% PMT = 23,000 FV = 0 • Dan should save the money by the time his son begins college. This should signal that this is an annuity due problem. In this question, the payment represents the cost of tuition for each year the child is in college. The payment will need to be adjusted for inflation and earnings, so the inflation-adjusted rate of return is necessary. Since Dan wants to fully fund four years of school, the payment will be made only for four years. Note: Dan's investment earnings are greater than inflation. Therefore, he will owe less than the gross amount over four years. That is a good check to make sure you get the right answer. The PV of $89,453 is less than four years at $23,000, which is $92,000. The third step is to determine the amount your clients will need to save on a consistent basis (usually monthly or annually) to fund their child's education.

Paula has determined that she fits the definition of an investment adviser, as outlined by the SEC. She just took on her 100th client and now manages $125 million in assets. What forms must Paula complete to register as an investment adviser with the SEC?

Paula must file Parts I and II of Form ADV with the Investment Adviser Registration Depository (IARD). She may be required to submit financial documentation if she elects to take custody of client assets. (Few independent advisory firms act as a custodian.) At the state level, if appropriate, she needs to file Form U4. Remember too that she will be required to sit for and pass a series of FINRA examinations, unless she is a CFP certificant or holds another recognized designation.

Mackenzie is a CFP professional. She is in the process of reviewing a client's current homeowner's policy. Under what section of the policy can she find information about the client's responsibilities in case of a claim?

Property and casualty insurance policies share at least five common elements: 1. A declarations section 2. A definition section 3. An insurance agreement section 4. A conditions section 5. An exclusions section Mackenzie can find information about her client's responsibilities in the conditions section of the policy. Generally, the client must maintain the property prior to a loss. When a loss does occur, the client must take steps to notify the insurance company, protect the damaged property, and provide access for evaluation and repair. The declarations section provides details about the type and amount of insurance as well as who is insured. The definitions section provides the insurance company's definition of terms such as insured, disability, deductible, and so on. The insurance agreement section describes whether the policy is an all-risk or a named-perils agreement. The exclusion section outlines what is specifically excluded in the policy. Typical exclusions include losses due to flooding and earthquakes.

Calculate the return and risk of this two-asset portfolio: • Asset 1: Weight = 50%; return = 10%; standard deviation = 20% • Asset 2: Weight = 50%; return = 5%; standard deviation = 15% The covariance between the two asset classes is 0.01.

Return • Rp = (0.5 × 0.10) + (0.5 × 0.05) = 0.075 or 7.5% Risk • Step 1: σp2 = (0.5 × 0.2)2 + (0.5 × 0.15)2 + (2 × 0.5 × 0.5 × 0.01) = 0.021 • Step 2: σp = 0.021−−−−−√0.021= 0.144 or 14.4%

Ruby, a Certified Financial Planner professional, is working with a young client who is just starting her working career. The client has a good job with outstanding promotion opportunities. The client has seen the statistics that she is more likely to become disabled than to die over her working life. She wants to purchase a long-term disability policy. Ruby has identified several possible policies, but each one is costly, especially when compared to the client's annual salary. What can Ruby recommend that will help reduce the policy premiums?

Ruby can provide at least five recommendations that can help reduce premiums for a long-term disability policy: 1. Extending the elimination period. 2. Purchasing a split-definition policy over an own-occupation policy. (Keep in mind that the coverage may not be sufficient to meet the client's needs.) 3. Reducing the income replacement ratio in the policy. 4. Integrating the policy with Social Security. 5. Purchasing a policy through a group plan rather than the individual marketplace.

Ben holds the following two stocks in his brokerage account. Calculate standard deviation and variance of both stocks. The 6-year returns for these stocks are listed. • Stock X: 5%, −25%, 33%, 27%, 14%, −4% • Stock Y: 43%, 9%, −16%, −4%, 4%, 24

SD X = 0.2128, Variance 0.045 SD Y = 0.2094, Variance 0.044

Conceptually, Sam understands the reason that financial institutions, such as banks, exist. A bank, for example, provides a safe and secure place for an individual or business to keep savings. Besides providing accounts that can be used to manage savings, what other role do financial institutions, such as banks, play in the financial markets?

Sam is correct in describing banks as offering a safe place to store savings. Banks and other financial institutions play another important role in the financial system. Essentially, banks and other financial intermediaries channel funds from savers and investors to borrowers, governments, or firms in an efficient manner. The price for this service is the spread between what a financial intermediary must pay for a deposit or investment and what the intermediary can earn lending or investing assets.

Laverne is a single 32-year-old female. She has no dependent children. Laverne is slightly overweight and a smoker. When evaluating her risk exposures, should her financial planner conclude that Laverne's primary need is life or disability insurance?

Several factors come into play when evaluating Laverne's situation. First, as a young female, her life expectancy is longer than that of a male of a similar age. This means she will need replacement income for a longer period of time, making a compelling case for disability insurance coverage. Second, she is single. Third, she is a smoker, and fourth, she is slightly overweight. The last two personal factors increase Laverne's chances of needing disability coverage sometime in her lifetime. Given her situation (she has no dependents) and her health factors, the financial planner should recommend disability coverage as a top priority.

Portfolio A has the following characteristics: R = 10%; standard deviation = 20%; beta = 1.2. The risk-free rate is 4%. Calculate the Sharpe and Treynor ratios for this portfolio.

Sharpe=(0.1−0.04)/0.20=0.3 Treynor=(.1−0.04)/1.2=0.05

Space Lab Company would like to provide a future retirement benefit for its senior executives. The company is willing to set aside annual contributions into a trust in the name of key employees. The business plan is to indirectly fund the future compensation of the key employees from a combination of assets held in the trust and through the cash value built up in life insurance policies. Given the firm's plan, what type of trust should it establish to ensure that the key employees are not taxed on current contributions to the plan? Also, what type of insurance policy would be most appropriate in this case?

Space Lab Company should use a rabbi trust arrangement within a deferred compensation plan. A rabbi trust provides some protection for the key employees that assets will be available to fund future benefits. The key employees will not owe tax on firm contributions to the trust; however, trust assets will be subject to firm creditors. Universal life insurance policies (universal life (UL), indexed universal life (IUL), variable universal life (VUL)) are ideal products for use by Space Lab Company. Universal life insurance is flexible in terms of changing the premium and face value of the policy. This flexibility will allow the firm to adjust the insurance contract over time while providing the key employees security and a guarantee that their benefits are tied to an insurance contract.

Stephen has recently told you that he intends to make some risky investment decisions and try his luck with a large portion of his life savings that are invested in his brokerage account. You caution Stephen about the potential risk of loss, which may happen if he makes poor investment decisions. Stephen thinks that his investments are protected by the Securities Investors Protection Act of 1970 (SIPC). Therefore, he believes that even if he makes a few mistakes in his investment decisions, the SIPC will protect his investments from losses regardless. Is Stephen's interpretation of the SIPC protection correct?

Stephen's interpretation of the SIPC protection is not correct. The SIPC does not protect against bad investment decisions. The Act does protect investors' wealth within brokerage accounts in the event the broker goes out of business or if the broker is unable to return the invested money back to the investors.

Recall from Vignette 4 that TJ was involved in an accident. Because her liability split-limit coverage was 25/50/25, she ended up paying for damages out of pocket. What type of coverage should TJ have purchased originally to avoid this possibility? What might the insurance company have required TJ to do at that time?

TJ should have purchased a personal umbrella liability insurance policy (umbrella policy). This policy would have paid the expenses her automobile policy did not pay. However, the insurance company likely would have required TJ to increase the liability limits in her automobile policies plus the liability limit in her homeowner's policy. This requirement would have increased her total insurance premium expense; however, the added coverage would be useful in protecting her assets from a lawsuit.

TJ was recently divorced. Her current income is low, but her net worth, which consists of two vehicles, a home, and retirement plan assets, is relatively high. Because of her cashflow situation, TJ elected to purchase the following split-limit liability coverage on her vehicles: 25/50/25. Assume that TJ is involved in an accident in which she is at fault. If three people are in the other car and each has medical bills of $18,000, how much will her insurance pay for medical expenses per person and for the accident? Similarly, if the other car is worth $45,000 and was totaled, how much will her policy pay? Will TJ be responsible for any out-of-pocket expenses associated with this accident?

TJ's policy will pay a maximum of $25,000 per person in bodily injury expenses. Technically, each person in the other car will be covered; however, TJ's policy has a maximum $50,000 limit per accident in bodily injury. This means that TJ is responsible for paying the difference between the medical bills ($18,000 × 3 = $54,000) and the insurance limit ($50,000). TJ is also responsible for paying the difference between the maximum amount the insurance company will pay for property damage ($25,000) and the cost of the other car ($45,000). It is also possible that she could be sued for negligence. In this event, TJ would be liable for all liability expenses because the liability limits in her policy have already been exhausted.

Terrell lives in a two-bedroom cottage on the Gulf Coast in Texas. He is reviewing his homeowner's insurance policy. Terrell wants to make sure that he is covered for losses brought about by a hurricane. When he reviews his policy, he notices that the insurance company uses multiple definitions to refer to different elements of the policy. Under what section of the policy can Terrell find information about hurricane coverage?

Terrell can learn about coverage related to hurricane damage under the policy section titled "Perils." Keep in mind that Terrell's choice to live on the Gulf Coast is a physical hazard. He can expect to pay higher premiums because the severity of losses associated with hurricane damage tends to increase losses.

Ben and his partner, Cody, are interested in saving for the college education of their children, a two-year-old and a newborn. Ben and Cody both have incomes in the top 1% of earners in the United States and therefore correctly assume they will not qualify for any need-based financial aid. They are very insistent that their highest-priority goal is to save enough to pay the full cost of attendance to any Ivy League school. If their children do not go to college, they would like to use the savings for their expected grandchildren or other family members, such as nieces or nephews. What are the important factors for the CFP® professional to consider in communicating the best vehicle for college savings and which vehicle(s) should be recommended?

The CFP professional should consider myriad factors in recommending a specific savings vehicle for Ben's and Cody's college savings goal. Given their very high incomes, a 529 plan should be recommended. Which state's plan they should acquire depends on the state residency of the clients (many states offer state tax deductions up to a certain contribution level when made by residents of that state), quality of investment options, and costs associated with all the different plans available. Remember, they can contribute to any state's plan and benefit from tax-free earning regardless of where their children attend college. All 50 states offer at least one plan.

The PFC Company is a small business that manufactures electronic components. The company was established as a limited liability company (LLC) with six owners. The owners are working to establish a business continuity plan. They are trying to decide whether to use a cross-purchase agreement or an entity-purchase agreement. Which plan offers the greatest ease of implementation and ongoing management?

The PFC Company owners should consider establishing an entity-purchase buy-sell agreement. This method will reduce the number of life insurance policies that must be purchased, which will make managing the plan easier.

John Sample, CFP, is creating a new website. He plans to run the following description on the front page of the site: "John Sample, CFP®, RIA, is the founder of Sample Planning Group." Will the SEC allow this statement?

The SEC will not allow John to use the phrase because he is prohibited from using RIA as a description of his practice. He may state: "John Sample, CFP®, Registered Investment Adviser [or Advisor], is the founder of Sample Planning Group."

Greyson is a young financial planner who is doing everything he can think of to build his practice. Fortunately for Greyson, he was able to make several good connections while in college. It turns out that one of his best friends has a sister who plays professional golf. She is young (age 16) and very successful, and happens to be looking for financial planning help, primarily someone to look after her golf earnings. After meeting with Greyson, she decided that she would like to hire him as her financial planner. Are there any potential roadblocks to this arrangement?

The biggest roadblock to the arrangement is that, in this case, Greyson's potential client is not legally competent to become a party to the contract; she is under the age of majority. The contract generally would need to be between Greyson and the golfer's parent(s) or legal guardian(s).

You are in the process of compiling Maria's financial statements for the year. During the year she purchased a new car. The car is worth $40,000, and she has an auto loan of $35,000 for the car. How would this transaction be reported on Maria's financial statements for the year?

The car loan and purchase would show up on Maria's statement of cash flows. The loan proceeds would be a cash inflow, and the car purchase would show up as a cash outflow. The fair market value of the car would be reported as a personal use asset on the balance sheet, and the auto loan would be a long-term liability. Maria's equity in the car would not be reported separately on the balance sheet but would simply add to her overall net worth.

Calculate the real rate of return if the nominal return of a portfolio is 10% and inflation is 4%.

The real return can be computed approximately by subtracting the inflation rate from the nominal rate (N - I). But it is expected that in the CFP Exam, the correct formula ((1 + Ri) = (1 + Ni) / (1 + I)) is used. An application of this formula is shown in Vignette 5. Ri=(1.1/1.04)−1=0.0577=5.77%

An individual invests $10,000 into a mutual fund. At the end of the year the value of her portfolio increases to $12,000. The next year she invests another $1,000 into the fund. At the end of the second year, the value of the fund increases to $13,100. Calculate the time-weighted return for this investment. • Year 1 return: ($12,000 − $10,000) / $10,000 = 0.20 or 20% • Year 2 return: ($13,100 − ($12,000 + $1,000)) / ($12,000 + $1,000)) = 0.0077 or 0.77%

Time-weighted return = (1.20) × (1.0077) − 1 = 0.2092 or 20.92%

Tom's employer provides him with group term life insurance coverage of $200,000. Tom is 45 years old. He is not a key employee. Tom pays $100 per year toward the cost of the insurance. How much must Tom include as taxable income under Section 79?

Tom's employer must include $170 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 × 150 × 12), and is reduced by the $100 Tom pays for the insurance. The employer includes $170 on Tom's Form W-2.

An investor has $60,000 in mutual fund A that is invested primarily in stocks and $40,000 in mutual fund B that is invested primarily 40% in bonds. During the year, fund A returns 8% and fund B returns 4%. Calculate the weighted average return of this portfolio.

Weight of the investment in mutual fund A as a percentage of the investor's total investment in this two-asset portfolio = $60,000 / ($60,000 + $40,000) = 60% Weight of the investment in mutual fund B as a percentage of the investor's total investment in this two-asset portfolio = $40,000 / ($60,000 + $40,000) = 40% Weighted average R=(0.6×0.08)+(0.4×0.04)=6.4%

Marybelle's client, Tomi, purchased a home three years ago for $200,000. Tomi purchased an HO-3 policy at that time with coverage equal to $200,000. The replacement value of his home is now $300,000. He recently incurred a loss of $50,000 due to a fire. If Tomi's insurance company uses the 80% rule, and his deductible is $1,000, how much will Tomi receive as a reimbursement?

Tomi will receive a reimbursement from the insurance company equal to $40,833. $200,000$300,000×80%×($50,000−$1,000)$200,000$300,000×80%×($50,000−$1,000) The difference between his claim and the amount of reimbursement (before the deductible has been paid) is known as a coinsurance penalty.

Travis provides financial planning services in his local community. He has 50 clients, for all of whom he has written a comprehensive financial plan. He only charges a fee for plan development and an hourly fee for services after the plan has been delivered. Travis has decided that he does not need to register as an investment adviser with his state or the SEC because he does not sell or recommend investment products. Is Travis correct?

Travis is incorrect. He appears to meet the three requirements necessary for registration. 1. Because he is paid, he is considered to have received a fee. 2. He is in business because he "holds himself, herself, or itself out as an investment adviser or as providing investment advice; the person or firm receives separate or additional compensation for providing advice about securities; or the person or firm typically provides advice about specific securities or specific categories of securities."7 Although Travis does not manage client assets, he presumably provides advice about securities and investments as an element of his financial planning practice. 3. He is providing advice on securities. The SEC will conclude that Travis is providing advice if he does any of the following: provides "advice about market trends; advice in the form of statistical or historical data (unless the data is no more than an objective report of facts on a nonselective basis); advice about the selection of an investment adviser; advice concerning the advantages of investing in securities instead of other types of investments; and a list of securities from which a client can choose, even if the adviser does not make specific recommendations from the list."8 It would be difficult for Travis to provide even the most basic financial planning advice without engaging in at least one of these actions.

Donald recently sat for and passed the CFP examination. He just met his experience requirement working for a small brokerage firm in New York City. Unfortunately, Donald's firm was shut down by the Securities and Exchange Commission (SEC) for fraud. As an element of the SEC enforcement, each of the brokers working at the firm lost their securities licenses, and each person, including Donald, was barred from serving as a Registered Investment Adviser (RIA) in the future. After hearing Donald's case, the Hearing Panel recommended revocation of Donald's CFP certification. Donald appealed the ruling, but the original recommendation was upheld. How soon can Donald retain the right to use the CFP marks?

Under CFP Disciplinary Rules and Procedures, the revocation of, Donald's right to use the CFP marks is permanent. That is, he can never be reinstated as a CFP certificant. It is important to note that revocation is permanent even if a court or other regulatory body later acquits Donald or reinstates his securities licenses.

Maurice had been working for a large steel manufacturing firm. He was laid off two weeks ago. Unfortunately, he lost access to his group-provided health plan, as did his wife and three children. Maurice just received a letter from his former employer stating that he is eligible to continue coverage through COBRA. If Maurice had been paying $400 per month for coverage while working, with his former employer contributing $1,200 per month for the coverage, how much might Maurice be asked to pay in order to extend coverage through COBRA? Also, will his wife and children be included in the COBRA extension?

Under COBRA, the maximum premium Maurice will pay is 102% of the cost of the coverage. In this case, the cost was $1,600 per month. As such, he could be asked to pay as much as $1,632 per month ($1,600 × 1.02). Because his spouse and children were originally covered, the new coverage will also be extended to them. Each of them will also be eligible to extend coverage individually, although this would not be cost effective.

Sarah works as an insurance agent. She is interested in establishing a sideline business offering retirement planning services. Specifically, she would like to help small businesses establish qualified retirement plans. Sarah is confused about the regulatory status of her role. Will she act as an agent or as a fiduciary once one or more qualified plans are established?

Under ERISA rules, any person who establishes, operates, or performs functions related to one or more qualified retirement plans must act as a fiduciary, regardless of the way they are usually or most often compensated. A fiduciary, under ERISA rules, must act solely in the interest of plan participants and their beneficiaries. Fiduciaries must also be prudent in carrying out their duties and follow plan documentation. They must also diversify plan assets and pay themselves a reasonable expense. As defined, a fiduciary may not receive a commission on the sale of products or services to or for a qualified retirement plan.

Mabel and Frank were married for 12 years before their divorce last year. When they were first married, Mabel purchased a life insurance policy naming Frank as the insured. She named herself as the policy beneficiary. As a couple, they also owned a homeowner's insurance policy on their home. The home was titled joint tenants with right of survivorship (JTWROS). Although Frank gave up his interest in the home when they divorced, they did not change these policies. Unfortunately, a series of negative events has since transpired. Six weeks ago, Frank died. The insurance company paid Mabel the face value of the life insurance policy. Frank's new wife protested the payment by claiming that Mabel did not have an insurable interest in Frank at the time of death and, as such, Mabel was not eligible to receive payment. Around the same time, Mabel's home (the one she owned jointly with Frank) burned down. Frank's new wife filed a claim for Frank's share of the insurance proceeds. In which situation will the insurance company side with Frank's new wife?

Unfortunately for Frank's new wife, the insurance company will rule against her on both issues. First, an insurable interest in a life insurance contract only needs to exist at the time the policy is issued. Second, at the time of the house fire, neither Frank nor his new wife had an insurable interest in the property. For these reasons, Mabel was entitled to receive the life insurance policy payment and reimbursement for the home fire.

An individual invests $100 to buy a share of an exchange-traded fund (ETF). One year later, the investor buys another share of the same ETF for $120. At the end of the second year, the investor sells both shares of ETF for $250. During the first year, the investor received $3.00 in dividends from the investment. In the second year, the investor received $6.00 in dividends from two shares of the stock. If the stock is sold at the end of the second year, calculate its dollar-weighted return.

Using a calculator, enter these values: • CF0 = -$100 • CF1 = -$117 ($120 - $3) • CF2 = $256 ($250 + $6) Then calculate the internal rate of return. IRR = 11.86% Therefore, the dollar-weighted return is 11.86%.

An individual puts $1,000 into an investment. This investment generates an average of 10% return every year. Using the simple interest returns method, how much will the investor have at the end of three years?

Value at the end of 3 years = $1000 × (1 + (.10 × 3)) = $1,300

An individual puts $1,000 into an investment. This investment generates an average of 10% return every year. Using the compound interest returns method, how much will the investor have at the end of three years?

Value at the end of 3 years = $1000 × (1 + .10)3 = $1,331

Veronica is a new client. During the next meeting, you will be reviewing her financial position. You have prepared her financial statements and noted the following: Total Income - 250,000 Annual nondiscretionary expenses - 120,000 Total Retirement Savings Contributions - 24,000 Total Debt Payments - 53,000 Current Assets - 40,000 Total Assets - 800.,000 Current Liabilities - 10,000 Total Liabilities - 330,000 What is Veronica's current ratio, retirement savings ratio, emergency fund ratio, debt payments to income ratio, and debt ratio?

Veronica's current ratio is strong at 4.0, or 400%. Her retirement savings ratio is 0.096, or 9.6%, which is good but less than the recommended savings rate of 12%. Veronica's emergency fund ratio is four months ($40,000 / ($120,000/12)), which is on target. Her debt payments to income ratio is 21.2% and her overall debt ratio is 41.25%. Veronica's debt payments appear manageable; however, her overall debt ratio is slightly high, suggesting that a large portion of Veronica's assets are financed.

Haley is meeting with a CFP professional for the first time but is very unsure of what to expect. She knows some CFP professionals who only sell insurance and others who provide more holistic financial planning services. She wants to have a clear understanding of the financial planning process and the services she should expect to receive. What are the important factors for CFP professionals to consider in communicating their services?

When Haley asks the CFP professional about the financial planning process, if the professional is entering a financial planning engagement, he or she generally should describe the Seven-Step Financial Planning Process and the scope of services offered, including which subject areas of financial planning will be addressed. The scope of the engagement must be mutually defined by the professional and the client before the professional provides any financial planning services.

Imagine a low- or middle-income family with four children. Assume they will likely qualify for some level of need-based grants, scholarships, and interest-subsidized student loans. Given these facts, is it optimal for this family to save substantial funds for their children's college expenses? Consider that these savings will potentially reduce their retirement savings and current standard of living. The savings also will raise their expected family contribution (EFC), which in turn will decrease their need-based aid, including grant money that does not need to be repaid. If their children plan to work in service-related professions, will your recommendation change? What if the income expectation associated with a child's planned occupation is quite low or high?

When providing financial planning services as a CFP professional, you should utilize the six-step financial planning process, including gathering additional data regarding the prioritization of education goals within context of other goals, projected income and assets, and potential eligibility for preferential student loan borrowing or forgiveness programs. Although recommendations should ultimately be based on the values and goals of the client, the financially optimal strategy here may be to prioritize tax-advantaged retirement savings (e.g., 401(k), individual retirement accounts [IRAs], Roth IRAs), as these funds typically are not considered in the EFC. Keep in mind that contributions to a Roth IRA can be taken out at any time, and funds in retirement plans (401(k), 403(b), 457) can be borrowed against to finance education if needed. More important, recognize that most low- and middle-income families are not maximizing the contributions to tax-advantaged savings plans, often even when there is an employer match on contributions. Also, federal student loans allow for extremely flexible student loan repayment programs based on the student's level of income and generous loan forgiveness opportunities, particularly when working in service-related professions. Last, regardless of expected income, when using federal loans, there exist income-driven repayment plans that would protect a client's child from ever paying more than 10% of his or her income toward federal student loan debt, regardless of total debt amount.

Nimi is an entrepreneurial person. He has decided to get involved in two activities that promise to bring in extra income. The first involves renting his condominium out during college football game days. He knows that it is difficult to find hotel rooms in his town when games are being played. This means that people are willing to pay above-average rents for short-term stays. He is also joining a company that provides car rides to people who sign up and request car services online. As Nimi's financial planner, what type of insurance should he purchase before jumping into these activities?

While you may applaud Nimi for being entrepreneurial, you know that he is placing himself in a risky position engaging in these activities. His traditional homeowner's and automobile policy coverage will not cover losses associated with these activities. Nimi needs to purchase host protection insurance. This coverage can protect Nimi when he rents out his home and drives clients for a fee. He should also consider increasing his umbrella liability coverage and possibly purchasing business insurance coverage.

During a recent recession, Wilma received a judgment lien from a mortgage company. The value of her home dropped in value because of two events. First, her husband died, which reduced her household income. Second, a zoning change occurred in her community. After these events, she found that she could not make the mortgage payments in a timely manner. Additionally, the zoning change resulted in the home's value dropping, which created negative equity. Wilma was unable to sell the home and voluntarily vacated the premises. What steps does Wilma need to take in order to petition the Disciplinary and Ethics Commission regarding her situation?

Wilma must write a letter describing her situation and sign documentation allowing the Commission to review her petition. She must then provide all information requested by the Commission in a timely manner. While the Commission may deny her petition, if the petition is granted, the Commission will likely include a time stipulation because the events leading up to the lien did not directly result from her own behavior or financial decisions.

Marnie, a CFP professional, has borrowed money from two different clients; one is a close friend and the other is a family member. When she needed to borrow money for a down payment on a house, both clients were happy to lend the money and felt no pressure to do so. Marnie indicated she would pay each of them back in total within one year. Did Marnie behave unethically according to CFP Board Standards?

Yes, Marnie behaved unethically. She put herself in a situation that would make objectivity quite difficult. A certificant shall not borrow money from a client. There are exceptions to this rule: (a) the client is a member of the certificant's immediate family, or (b) the client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the certificant. Thus, borrowing money from the family may be considered ethical, assuming Marnie is adhering to the Standards. Borrowing money from a client, even if she is considered a friend, is likely to be determined unethical by CFP Board.

Tuma works as a financial planner. His primary responsibilities involve managing client assets through his brokerage firm's managed accounts platform. Tuma offers advice on a wide range of assets, including equities, bonds, options, and other investments. Clients who use his service agree to pay a flat fee. Tuma is paid when the brokerage firm deducts the commissions that the client would have paid from the fee. In this way, clients know exactly what they are going to pay each year in fees, whereas Tuma knows that he can continue to generate income from the sale of products. Does Tuma need a FINRA license? If yes, which one?3

Yes, Tuma needs a securities license because he is an agent for a broker-dealer (registered representative) and he provides investment advice. Given the range of products Tuma uses in his practice, he will need a Series 7 license. He will also need a Series 63 license, although his firm may require him to obtain the Series 66 as well. Tuma will also need to complete continuing education in order to maintain his licenses. Remember that Tuma will need to pass the Securities Industry Essentials (SIE) prior to sitting for the Series 7, 63, or 66 examinations.

If the correlation between a security and the market is 0.90, the standard deviation of the security is 20%, and standard deviation of the market is 16%, calculate the beta for the security.

β=(0.90×0.20)/0.16=1.125

The actual return of a portfolio with a beta of 1.10 is 12%. The risk-free rate is 3% and the return of the market during this period has been 8%. Calculate the alpha for this portfolio.

α=0.12−(0.03+(1.10×(0.08−0.03))=0.035or 3.5%

Ben holds the two stocks in his brokerage account. Calculate the 6-year arithmetic and geometric mean for both stocks. The 6-year returns for these stocks are shown. • Stock X: 5%, −25%, 33%, 27%, 14%, −4% • Stock Y: 43%, 9%, −16%, −4%, 4%, 24%

• Arithmetic Mean Stock X=.05−0.25+.33+.27+.14−.046X=.05−0.25+.33+.27+.14−.046 = 0.0833, or 8.33% • Geometric Mean Stock X = ((1 +. 05) × (1 − .25) × (1 + .33) × (1 + .27) × (1 + .14) × (1 − .04))1/6 − 1 = 0.0645 or 6.45% • Geometric Mean Stock Y = ((1.43) × (1.09) × (.84) × (.96) × (1.04) × (1.24)) 1/6 −1 = 0.0838 or 8.38%