HS 300 - Sample Questions
Which of the following convictions, if any, will always bar a candidate from becoming a CFP® professional? I. Conviction for tax fraud II. Conviction for trespassing A) I only B) II only C) Both II and II D) Neither I nor II
The correct answer is (A). A conviction of tax fraud will always bar a candidate from becoming a CFP® professional. A conviction for a nonviolent crime will not always bar a candidate from being a licensee.
Siobhan met with you recently to make some changes to her insurance needs. You have made several recommendations. Which of these recommendations will have a positive cash-flow impact from an insurance perspective? A) Cancel an insurance policy. B) Change the name of the beneficiary on her life insurance policy. C) Increase coverage on an existing insurance policy. D) Lower the deductible on her auto insurance.
The correct answer is (A).Canceling an insurance policy will result in $0 premiums due. Changing the beneficiary of a life insurance policy will not impact the premium or cash flow. Increasing the amount of coverage will increase the premium and negatively impact the cash flow. Lowering deductibles will increase premium payments thus having a negative impact on cash flow.
Claire and Byron have a gross income of $70,000, monthly housing costs (P&I and T&I) of $1,500, and monthly debt payments of $1,840.33 (excluding monthly housing costs). Which of the following lender thresholds will Claire and Byron meet? A) The 28% benchmark for Housing Ratio 1 B) The 36% benchmark for Housing Ratio 2 C) Both benchmarks D) Neither benchmark
The correct answer is (A).Housing Ratio 1 (basic ratio) is calculated by dividing housing costs (that is, the principal, the interest, property taxes, and homeowners insurance) by gross pay. If the quotient is equal to or less than 28%, it is within the normal range.$1,500 ÷ ($70,000 ÷ 12) = 25.7%Housing Ratio 2 (broad ratio) is calculated by adding housing costs to debt payments and dividing the sum by gross pay. If the quotient is equal to or less than 36%, it is within the normal range.($1,500 + $1,840.33) ÷ ($70,000 ÷12) = 57.26%
Inflation refers to which one of the following? A) The increase in prices without a corresponding increase in productivity B) Declining interest rates C) Poverty D) The opposite of stagflation
The correct answer is (A).Inflation is an increase in prices without a corresponding increase in productivity.
From time to time, a financial planner will refer clients to third-party professionals and otherwise limit engagements with clients to topics with which she has experience and expertise. This behavior is most clearly in line with which duty? A) Competence B) Complying with the law C) Diligence D) Confidentiality and privacy
The correct answer is (A).Limiting engagements and utilizing the services of other experts are examples of the duty of competence.
To identify a client's life-cycle position, a financial planner must know about all the following aspects of a client's life EXCEPT: A) Attitudes and/or beliefs B) Marital status C) Dependents D) Age
The correct answer is (A).Options (B) through (D) are features that the planner must be aware of in order to determine a client's life-cycle position.
Which of the following statements is (are) correct? I. Prepaid tuition plans provide for the prepayment of college tuition at current tuition prices (or current tuition prices plus a small premium) for future enrollment.II. A disadvantage of a qualified tuition plan (QTP) is that the owner-contributor must relinquish control of the account and share control of the funds with the student beneficiary.
The correct answer is (A).Prepaid tuition plans provide for the prepayment of college tuition at current tuition prices (or current tuition prices plus a small premium) for future enrollment. However, the owner-contributor alone controls a QTP.
Using the data in the table below, what is Mike's return on assets (ROA) for the year? Mike Smith's Financial Data: Total Assets at Year-End-$475,000 Total Assets at Beginning of the Year$-392,000 Money Contributed to Savings During the Year by Mike-$27,000 Employer Match to Mike's 401(k) Plan-$5,000 A) 13.01% B) 15.56% C) 18.37% D) 21.17%
The correct answer is (A).ROA = [ending value of assets − (beginning value of assets + savings)] ÷ beginning value of assets[$475,000 - ($392,000 + $27,000 + $5,000)] ÷ $392,000 = 13.01%
You have calculated a client's debt-to-total-assets ratio to be 0.60, or 60%. With absolute certainty, which of the following statements is true? A) Her net worth would be higher if she had the same assets but less debt. B) Her level of debt is too high and must be reduced quickly. C) Her debts exceed her assets. D) She is relatively young.
The correct answer is (A).She has debts that equal 60% of her assets. If she could somehow keep those assets but lower her debt, her net worth would increase. You cannot conclude that her level of debt is too high, and while young people tend to have higher debt ratios, you cannot deduce her age from her ratio.
All of the following statements about certification in financial planning are correct EXCEPT: A) Most certifications are issued by the federal government and state governments. B) Planners with certifications are generally viewed as more trustworthy. C) Several independent financial services organizations offer certifications. D) Certifications help to hold financial planners to higher ethical standards.
The correct answer is (A).Statement (A) is incorrect because all financial planning certifications are issued by self-regulatory non-governmental organizations. Several independent financial services organizations, including the CFP board and The American College of Financial Services, offer certifications. All of the other statements are correct.
Which of the following statements is (are) true regarding front-loading of annual gift tax exclusions in a 529 college savings plan? I. Up to 5 years of annual exclusion gifts may be contributed to a 529 college savings plan.II. The full value of gifts placed in a front-loaded account will be immediately excluded from the donor's gross estate for estate tax purposes. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (A).Statement II is incorrect because if the donor dies within the next 4 years, 5 years (that is the year of the gift plus the next 4 years) of annual exclusions will be brought back into the donor's gross estate. For example, if 5 years of annual exclusion gifts ($75,000) are placed in the 529 plan in 2020 and the donor elects front-loading on the gift tax return and then dies in 2022, he has survived only 3 years of annual exclusions (2020, 2021, and 2022). $30,000 will be included in the gross estate due to the remaining 2 years of annual exclusion gifts previously made.
Often referred to as the truth-in-securities law, the Securities Act of 1933 has the following objective(s): I. It requires that investors receive financial or other significant information concerning securities being offered for public sale. II. This act also established regulations on investment companies and their relationship with the investing public. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (A).Statement II is incorrect because it refers to the Investment Company Act of 1940 and not the Securities Act of 1933.
You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known? A) CFP® B) ChFC® C) EFP D) ICFP
The correct answer is (A).The CFP® certification is the oldest and best-known certification for financial planners.
Rose is employed as a loan officer at a bank. Rose recently sat down and visited with her financial planner Julie, a CFP® professional. Julie was in need of cash and borrowed $15,000 from Rose. Based on the Code of Ethics and Standards of Conduct which of the following statements is accurate? A) Julie is not in violation of the Code of Ethics and Standards of Conduct because Rose is in the business of lending money. B) Julie is in violation of the Code of Ethics and Standards of Conduct because a CFP® professional must never lend money to a client. C) Julie is not in violation of the Code of Ethics and Standards of Conduct since she loaned Rose less than $20,000. D) Julie is in violation of the Code of Ethics and Standards of Conduct.
The correct answer is (A).The Code of Ethics and Standards of Conduct states that a CFP® professional shall not borrow money from a client UNLESS that client is a member of the certificant's immediate family or the certificant is an employee of an institution in the business of lending money. Because Rose is in the business of lending money, Julie is not in violation of the Code.
Which of the following education funding techniques is available to parents with incomes over $300,000? A) An UTMA account B) The Lifetime Learning Credit C) The American Opportunity Tax Credit D) Tax-free growth from Series EE bonds
The correct answer is (A).The Lifetime Learning Credit and the American Opportunity Tax Credit are not available to parents with incomes of over $300,000. The interest on Series EE bonds will not be tax-free to parents with incomes of $300,000. Income earned in an UTMA is taxable to the child and therefore subject to kiddie tax rules, but the parents will have control over the investments and can invest the UTMA funds in tax-advantaged investments, such as growth stocks or municipal bonds
The benefits that accrue to a client from using a financial planner to prepare a financial plan include all the following EXCEPT: A) The financial planner is subjective and knowledgeable. B) A professional planner will include metrics in the financial plan. C) A financial planner will identify risks in the process. D) The use of a financial planner will provide the client with an increased awareness of opportunity costs.
The correct answer is (A).The financial planner is objective, not subjective. All of the other statements are correct.
Which of the following statements correctly describes the regulatory environment of the financial planning profession? A) A comprehensive financial planner may be subject to regulations from many state and federal regulators across a variety of planning agencies. B) The U.S. Securities and Exchange Commission (SEC) is the primary regulatory authority of the financial planning industry and, for most advisors, the only relevant authority. C) Independent advisors must decide whether to be subject to state or federal regulatory authorities. D) The Dodd Frank Act of 2010 unified and centralized regulation of the financial planning industry at the federal level.
The correct answer is (A).The financial planning industry covers areas across a variety of regulatory agencies at both the federal and state level. For example, insurance is generally regulated state-by-state, whereas investing may be regulated at both federal and state levels and certain qualified retirement plans are regulated almost exclusively at the federal level.
All of the following are differences between traditional and behavioral finance theories EXCEPT: A) Only in traditional finance theory is the scientific method applied to understanding investor behavior. B) Only in behavioral finance theory are investors said to make errors and have biases. C) Only according to traditional finance theory are markets assumed to be efficient. D) Only in traditional finance theory are investors said to act rationally.
The correct answer is (A).The scientific method is applied to both behavioral finance and traditional finance theories. The other answers correctly differentiate the two theories.
All of the following factors are strongly predictive of successful financial planning careers EXCEPT A) having exceptional mental math abilities. B) having a college degree. C) holding a certification such as the CFP®. D) having sales skills
The correct answer is (A).The top factors that predict successful financial planning careers are having a college degree, holding a relevant certification, and having strong sales skills. While mental math skills can be impressive at the right cocktail party, they have not been shown to predict successful financial planning careers.
When is the scope of a financial planning engagement typically defined? A) Typically, the scope is defined when establishing and defining the client relationship. B) Typically, the scope is defined when implementing recommendations. C) Typically, the scope is defined after client data has been gathered. D) The scope is continually defined and redefined throughout the engagement.
The correct answer is (A).Typically, the scope is defined before client data is gathered, when the client relationship is established and defined
Which of the following is consistent with the disposition effect? A) Investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks' values to the purchase prices even after market prices have changed. B) Investors acknowledge loss in value, referred to as the paper loss. C) The normal investor considers the stock a loser if it dips in value. D) The sale of the stock is irrelevant.
The correct answer is (A).Under the disposition effect, investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks' values by the purchase prices even after market prices have changed. The investors mark stocks to the market only when the investors sell their stocks and close their mental accounts. Normal investors therefore do not acknowledge the loss in value, referred to as the paper loss, because an open account means that there is still a chance that the stock price will rise. In their mind, the stock is not necessarily a loser; it may still turn into a gain. The normal investor does not consider the stock a loser until the stock is sold, at which time the loss is technically realized in the mind of the normal investor.
All of the following statements about presenting recommendations are correct EXCEPT: A) A lengthy comprehensive written plan is widely regarded as the best presentation modality. B) Planners should adjust their presentations to their clients' learning styles. C) The use of visual aids is generally encouraged, particularly for complex subjects. D) If clients appear to misunderstand a presentation, the planner should adjust their approach.
The correct answer is (A).While comprehensive written plans can be useful, most planners today recognize that they are not the optimal presentation modality for most clients. Rather, when presenting recommendations, a planner should adjust their presentation to the client's learning style and body language. Furthermore, because most people are visual learners, visual aids are strongly encouraged.
Which of the following statements about the cost of education is (are) correct? I. The inflation rate of education tends to outpace the general inflation rate as measured by the CPI.II. The inflation rate of education tends to outpace most investment returns such that the typical education fund has a negative real rate of return. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (A).While the inflation rate of education, currently 2.3% to 3.1%, does tend to outpace the CPI, 1.6%, it is lower than typical investment returns.
Which of the following statements regarding vertical and horizontal analysis of financial statements is correct? A) Most planners analyze their client's cash flow either vertically or horizontally. B) A vertical analysis of income lists each line item as a percent of the total annual income. C) A horizontal analysis of a balance sheet would compare assets (on the left) to liabilities and net worth (on the right). D) A vertical analysis of expenses would compare past expenses (at the top) to current expenses (at the bottom).
The correct answer is (B).A vertical analysis compares individual items on a financial statement to the total. A horizontal analysis compares similar line items over time to identify trends. Most planners use both vertical and horizontal analysis.
According to the three-panel approach, all the following would be considered potentially catastrophic risks EXCEPT: A) A parent of a young child dies prematurely. B) A client has an insufficient emergency fund. C) A business owner has insufficient liability insurance. D) A household's sole breadwinner becomes totally and permanently disabled.
The correct answer is (B).According to the three-panel approach, catastrophic risks include the early death of a parent, disability, and insufficient liability insurance. An insufficient emergency fund would be addressed in the second panel.
Which of the following statements about the employment outlook for financial planners is correct? A) The number of financial planners is expected to decrease in the next few years. B) The mass retirement of Baby Boomers is expected to substantially influence the profession. C) The vast majority of financial planners are dissatisfied with their current occupation. D) The majority of financial planners are self-employed.
The correct answer is (B).Almost all Baby Boomers will retire in the next decade, and many of these people will seek out financial advice. Statement (A) is incorrect because those retiring Baby Boomers are expected to increase the number of planner jobs by 15 percent. Statement (C) is incorrect because over 90 percent of financial planners report being satisfied with their jobs. Statement (D) is incorrect because only about one out of five financial planners are self-employed.
Which of the following is the appropriate standard of conduct for a fiduciary? A) Act in the brokerage firm's best interest. B) Act as a prudent investor. C) Act on a best-effort basis. D) Act in self-interest
The correct answer is (B).Answer choice (A) is incorrect because while acting in the firm's best interest is important, it may not be enough. You must be able to prove in court that you have done what a prudent investor would have done in that situation. Choice (C) is incorrect because acting on a best-effort basis may not be enough if a prudent investor would have done more. Choice (D) is incorrect because it is never appropriate to act in self-interest unless that happens to coincide with the client's interest.
Which of the following correctly describes the difference between "good" and "bad" debt? A) Debt is "bad" when the leveraged asset's economic life exceeds the debt payback period. B) "Bad" debt typically involves high levels of long-term debt with high interest rates. C) There is no such thing as "good" debt, as debt should be avoided whenever possible. D) "Good" debt tends to have interest rates above inflation and investment returns.
The correct answer is (B).Bad debt can involve high interest rates, large amounts of debt, and debt that outlives the economic life of a purchase.
Adam and Eve are a married couple taking graduate school classes in the evening. This year, they incur $5,000 of qualified education expenses each. Eve paid for her expenses from a 529 college savings plan. What lifetime learning credit may they claim this year on their tax return? A) $0 B) $1,000 C) $2,000 D) $5,000
The correct answer is (B).Because Eve paid for her expenses from a 529 college savings plan, only Adam may claim the lifetime learning credit. Adam and Eve can take a total lifetime learning credit of $1,000, or $5,000 x 20%, in the current year.
The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently increased the FDIC limit to what amount? A) $100,000 B) $250,000 C) $500,000 D) An unlimited amount
The correct answer is (B).Dodd-Frank made the FDIC increase from $100,000 to $250,000 permanent.
The developmental, humanistic, and cognitive-behavioral approaches to counseling are commonly applied in the financial planning context. Which of the following skills or behaviors is uniquely found among planners who employ the humanistic approach? A) Active listening B) Emphasizing freedom of choice and personal responsibility C) Identifying environmental causes of behavior D) A focus on childhood experiences
The correct answer is (B).Financial planners who use the humanistic approach are most likely to emphasize a client's freedom of choice and personal responsibility. The other approaches instead tend to emphasize the relative importance of the environment (cognitive-behavioral) or past family dynamics (developmental). All approaches support active listening, reflection, and the supportive challenging of clients' ideas and behaviors.
All of the following are generally true of clients working with financial planners EXCEPT: A) They tend to have more confidence that they can accomplish their financial goals. B) They can go on autopilot while the planner handles everything for them. C) They are better able to establish and prioritize goals. D) They are more aware of their financial risks and the steps to manage those risks.
The correct answer is (B).Generally, clients become more focused on their financial lives when working with a planner, not less. It is rare for clients in financial planning engagements to completely hand off their financial lives to a financial planner. Rather, planners tend to work with clients and instill in clients a greater sense of awareness, accountability, and confidence.
Which of the following statements is (are) correct? I. The revocation of the right to use the CFP® mark may last up to 5 years.II. It is standard for the CFP® Board to publish revocations online. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (B).It is standard to publish revocations online and revocation is always permanent.
Tom and Betty have an AGI of $150,000 and have not planned for their children's education. They have an 18-year-old son and a 17-year-old daughter. The parents anticipate paying $20,000 per year per child for education expenses. Which of the following is the most appropriate plan recommendation to make to Tom and Betty to pay for their children's education? A) A 529 savings plan B) A PLUS loan C) A Pell grant D) Series I bonds
The correct answer is (B).It is too late for these parents to begin saving for their children's education, so that eliminates the 529 savings plan and Series I bonds. Pell grants are need-based, so they would be unavailable to a couple with an AGI of $150,000. The only answer choice that is accessible to Tom and Betty is a PLUS loan.
Which of the following is probably the start of a closed question? A) "How...?" B) "Isn't it true that...?" C) "Why...?" D) "Please explain whether..."
The correct answer is (B).Open questions usually begin with words such as "how," "what," "when," "where," "who," and "why." Closed questions lead with "is," "are," "do," "did," "could," "would," "have," or "is it not true that."
All the following are examples of need-based financial aid EXCEPT A) a Pell grant. B) PLUS loans. C) a work-study job. D) subsidized Stafford loans.
The correct answer is (B).PLUS loans are not need-based aid. The other answer choices are all examples of need-based aid.
A financial planner consistently finds that her clients do not actually implement her recommendations. What might she do to improve this aspect of her practice? A) Purchase new and improved financial planning software. B) Incorporate into her practice principles from counseling psychology. C) Identify more niche and exotic investment opportunities. D) She could implement all of the above.
The correct answer is (B).Planners who study counseling psychology are likely to improve the implementation of recommendations. The other options might improve her overall practice but are unlikely to directly lead to quicker or more thorough implementation of recommendations.
Today Walter is submitting his initial application for CFP® certification with the CFP Board of Standards. Four years earlier, Walter signed a Letter of Acceptance, Waiver and Consent with FINRA, as part of a FINRA arbitration hearing. As part of the arbitration settlement, Walter consented to a 30-day suspension, a fine of $100,000, and 20 hours of continuing education. Which action is most appropriate for Walter to take when completing his initial application for CFP® certification? A) Walter cannot disclose the FINRA arbitration because if he reports the arbitration to the CFP Board, he would be disclosing confidential client information. B) Walter should disclose the FINRA arbitration to the CFP Board. C) Walter may disclose the FINRA arbitration, but he is not required to disclose the arbitration because the matter was settled more than 5 years prior to Walter's applying for initial certification as a CFP® certificant. D) Section F of the CFP Board's Code of Ethics and Standards of Conduct requires Walter to disclose any and all arbitration, civil suits, or criminal suits.
The correct answer is (B).Section E.2 of the current Code of Ethics and Standards of Conduct requires that the CFP® professional refrain from adverse conduct. Section E.3 requires that such conduct be reported to the CFP Board. Option (A) is incorrect because the candidate for CFP® certification is not required to release confidential client information during the initial application for CFP® certification. The only requirement is to advise the Board of the arbitration and findings. Option (C) is incorrect because the candidate for CFP® certification is required to disclose all arbitrations or other civil proceedings. There is no look-back period limited to 5 years for arbitration, civil suits, or criminal suits. Option (D) is incorrect because Section F of the Code Ethics and Standards of Conduct prohibits circumvention; it does not address disclosure requirements.
The supply of coffee has been drastically reduced due to a drought resulting in substantially higher prices. Which of the following statements is (are) correct? I. The supply curve for coffee will shift to the right.II. The demand curve for coffee creamer will shift to the left. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (B).Statement I is not correct. A systematic event like a drought would cause the supply curve to shift to the left. A decrease in supply would cause an increase in the price of coffee. Statement II is correct because coffee creamer is a complementary product. If the price of coffee is increasing, fewer people will purchase coffee and its compliments. Therefore, the demand curve for creamer will shift to the left.
All the following statements concerning educational tax credits and savings opportunities are correct EXCEPT: A) The Lifetime Learning Credit is equal to 20% of up to $10,000 of qualified educational expenses. B) The American Opportunity Tax Credit (AOTC) is only available for 4 years of undergraduate study and 2 years of post-graduate study. C) The AOTC may be taken for as many students as are claimed on the household's tax return. D) The same educational expense cannot be used for multiple tax benefits.
The correct answer is (B).The AOTC is available for the first 4 years of postsecondary education.
The Securities Investor Protection Corporation (SIPC) insures investors under what circumstances? A) The investor lost government securities that were bought through a bank or credit union. B) The investor lost money or stock due to the failure of a securities firm. C) The investor lost his or her investment when the securities became worthless. D) The investor lost his or her retirement fund when the employer declared bankruptcy.
The correct answer is (B).The SIPC covers losses of money or securities when a securities firm fails or when the money or securities are stolen by the investor's broker.
All the following statements are true regarding the step in the financial planning process called "Developing the Financial Planning Recommendation(s)" EXCEPT: A) This step occurs before recommendations are communicated. B) During this step, the client's current financial status is analyzed. C) During this step, the planner devises recommendations for the client. D) This step occurs after all necessary information is gathered.
The correct answer is (B).The advisor develops the recommendations during step 4, Developing the Financial Planning Recommendation(s). All information should have been gathered and analyzed in previous steps. The recommendations are only communicated after they have been developed.
If your financial planning client uses phrases like "see what I mean" or "imagine that," your client's learning style is most likely A) verbal/auditory. B) visual. C) both verbal/auditory and visual. D) neither verbal/auditory nor visual.
The correct answer is (B).The client is a visual learner, as suggested by his choice of verbs.
All of the following are primary responsibilities of the Federal Reserve EXCEPT: A) Facilitate long-term economic growth. B) Facilitate fair practices between securities dealers. C) Maintain price levels. D) Maintain full employment.
The correct answer is (B).The goals of the Federal Reserve are to maintain long-term economic growth, to maintain price levels, and to maintain full employment.
The country's leading brand of chicken feed was recently contaminated. Millions of bags went out before the company was aware of the contamination. As a result, chicken mortality rate has increased significantly. What can you expect to happen? A) The price of other forms of meat will likely decrease. B) The demand for other forms of meat will likely increase. C) The supply curve for chicken will shift to the right. D) The price of compliments to chicken will likely increase.
The correct answer is (B).The higher mortality rate for chickens will cause the supply of chicken to go down and the price of this type of meat to go up. As a result, the demand for other forms of meat will increase. Statement (A) is incorrect because the price of other forms of meat will likely increase. Statement (C) is incorrect because the supply curve for chicken will shift to the left. Statement (D) is incorrect because the price of compliments to chicken will likely decrease; on the other hand, the price of substitutes for chicken will likely increase.
Phyllis had three credit cards stolen. Before she realized they were stolen, the following amounts were already fraudulently charged: -American Express®: $2,000• -VISA: $500 -MasterCard®: $40 How much is Phyllis's expected liability for the fraudulent charges? A) $50 B) $140 C) $150 D) $2,400
The correct answer is (B).The maximum liability is limited to the lesser of $50 or the actual charges incurred. Since more than $50 was charged on both her American Express card and her VISA card, Phyllis will only need to pay $50 for each card. However, since only $40 was charged on her MasterCard, Phyllis will need to pay the total amount for that card.(2 × $50) + $40 = $140
Sally has the following transactions: Transaction 1: She purchases $5,000 worth of a mutual fund with cash from her savings account. Transaction 2: She spends $6,000 on vacation with cash from her money market account. Transaction 3: She spends $10,000 on new furniture and uses her credit card to make the purchase. What is the combined impact of these transactions on her net worth? A) A $21,000 decrease B) A $6,000 decrease C) A $15,000 increase D) A $6,000 increase
The correct answer is (B).Transactions 1 and 3 were net washes in terms of Sally's net worth. By trading savings for a mutual fund in transaction 1, she was simply changing the nature of the assets. By obtaining furniture by incurring a liability in transaction 3, Sally was increasing her assets and her liabilities by the same amount. Transaction 2 reduced her assets without providing any corresponding financial gain, resulting in a decrease in net worth.
Two of your clients just told you that they cut up all of their credit cards and closed all of their credit accounts. Based on this information, which of the following statements is (are) true? I. Their credit score is likely to increase in the next month II. Their ability to meet financial hardships has decreased. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (B).Without access to easy credit, their ability to handle financial hardship has decreased. Also, their credit score is likely to decrease, making it more difficult for them to find new, affordable credit.
Claire and Byron are married. Based on the data in this table below, what is Claire and Byron's current ratio? Their Current Cash and Cash Equivalents-$9,243 Their Current Liabilities-$6,921 Their Monthly Nondiscretionary Expenses-$4,693 Their Annual Combined Income-$70,000 Their Annual Debt Payments (excluding monthly housing costs)-$22,084 A) 0.7958 B) 1.3355 C) 1.9695 D) 5.0387
The correct answer is (B).current ratio = cash and cash equivalents ÷ current liabilities$9,243 ÷ $6,921 = 1.3355
Ivan and Samantha are married and have a net worth of $20,000 and total assets of $150,000. What is the amount of their total liabilities? A) $122,000 B) $130,000 C) $138,000 D) $150,000
The correct answer is (B).liabilities = assets − net worth$150,000 − $20,000 = $130,000
An example of internal data is A) The current tax rates. B) The expected inflation. C) The client's goals. D) The planner's education.
The correct answer is (C). Tax rates and expected inflation rates are examples of external data. A planner's education is neither internal nor external data.
Which of the following correctly describe(s) an action that would be taken by a financial planner using the strategic approach to financial planning? I. Working with a client to develop goals and objectivesII. Drafting a mission statement that captures the big-picture view of the client's philosophy and plan for the future A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (C).A financial planner using the strategic approach will work with a client to develop the client's goals and objectives and then codify them in a mission statement.
All the following describe anchoring EXCEPT: A) Anchoring involves attaching one's thoughts to a reference point even though the reference point may not be logically relevant or pertinent to the issue in question. B) Anchoring is also known as conservatism or belief perseverance. C) Anchoring is fairly common in situations in which decisions are being made that are repetitive and customary. D) Anchoring is fairly common in situations in which decisions are being made that are novel to the decision maker.
The correct answer is (C).Anchoring, also known as conservatism or belief perseverance, involves attaching one's thoughts to a reference point even though the reference point may not be logically relevant or pertinent to the issue in question. Anchoring is fairly common in situations where decisions are being made that are novel, not repetitive, to the decision maker.
All the following statements concerning guidelines on risk assessment are correct EXCEPT: A) Objective measures, such as job and income history, can help determine a client's risk tolerance. B) The assessment should begin by examining the client's demographic characteristics and personality makeup. C) The client's level of risk tolerance should be ascertained without involving him or her in the assessment. D) Biases that distort the client's true level of risk tolerance may be influenced by his or her risk perceptions.
The correct answer is (C).Assessing the client's risk tolerance is a cooperative venture. The advisor should use the information he or she collects to start a dialogue with the client about risk tolerance.
All the following are limitations of balance sheets EXCEPT: A) Balance sheets do not show how assets were acquired. B) Balance sheets do not show changes in net worth over time. C) Balance sheets do not show a client's liquidity. D) Balance sheets do not show why an asset line item increased in value.
The correct answer is (C).Balance sheets do generally reveal how much of one's assets are in cash or cash equivalent (liquid assets). All the other statements are limitations of a balance sheet.
Tom, a CFP® professional, has developed a financial plan for his client. Based on the CFP Board's practice standards, which of the following should Tom do next? A) Review the plan with the client's CPA and attorney. B) Implement the financial plan. C) Present the financial plan to his client. D) Monitor financial planning recommendations.
The correct answer is (C).Based on the CFP® practice standards, the next step for a CFP® professional after developing the financial plan is to present the plan. Option (A) is incorrect because reviewing the plan with the client's CPA and attorney is not required in the practice standards. Option (B) is incorrect because Tom must first present the plan to the client before implementing the plan. Option (D) is incorrect because monitoring is the last step in the financial planning process.
Which of the following is (are) premises in traditional finance? I. Markets are efficient.II. Investors are rational. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (C).Both are premises of traditional finance.
Which of the following are securities under the Investment Advisers Act of 1940? I. Mutual funds II. Variable life insurance policies A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (C).Both of the financial products listed fall within the definition of security contained in the Act because the definition of "security" is broadly construed.
Decreasing inflation, or deflation, and decreasing interest rates tend to correspond with which phase in the business cycle? A) Expansion B) Peak C) Recession/Contraction D) Trough
The correct answer is (C).Decreasing prices and interest rates tend to correspond with recessions/contractions.
A fee-based CFP® professional may receive compensation from which of the following sources? I. Fees paid directly by clients II. Commissions on the sale of insurance or investment products A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (C).Fee-based planners may be compensated by both client fees and by commissions. Fee-only planners may only be compensated by their clients' fees.
All the following statements are true about savings rates EXCEPT: A) When calculating the savings rate for a family, any contributions to retirement made by the employer should be included. B) The required savings rate for retirement tends to increase with age. C) Any income generated by the portfolio is added to the numerator when calculating the savings rate. D) A couple with many goals will have a higher required savings rate than a couple with fewer goals.
The correct answer is (C).Income generated by the portfolio is NOT added to the savings rate; rather, it increases the value of the portfolio itself. The numerator of the savings rate only includes savings and employer contributions made to the account. The required savings rate also tends to be higher for older clients with many goals.
Which of the following correctly compares parent PLUS loans with graduate PLUS loans? A) Parent PLUS loans are not need-based, while graduate PLUS loans are need-based. B) Graduate PLUS loans are awarded to graduate students, while parent PLUS loans are awarded to undergraduate students. C) Both parent PLUS loans and graduate PLUS loans are awarded based on the credit history of the borrower. D) Parent PLUS loans are made only by the federal government, whereas graduate PLUS loans may be made by private lenders.
The correct answer is (C).Neither parent PLUS loans nor graduate PLUS loans are need-based aid. Both are made by the federal government, and both are awarded based on the credit history of the borrower. Graduate PLUS loans are made to graduate students, and parent PLUS loans are made to the parents of students.
According to the cash-flow approach, each of the following recommendations will have a positive cash-flow impact EXCEPT: A) Raise insurance deductibles. B) Reduce insurance coverage. C) Increase insurance coverage. D) Cancel insurance coverage.
The correct answer is (C).Of the options listed, the only one that will not have a positive cash-flow impact is increasing insurance coverage.
One of the most-reported interruptions or disruptions in passive listening is when A) a seminar moderator interrupts the presentation. B) a friend asks you questions about the presenter's speech. C) instead of actively listening, the listener is thinking about what he or she may say in response to what is being discussed. D) the speaker takes too many breaks.
The correct answer is (C).One of the most reported interruptions or disruptions in passive listening is when, instead of actively listening, the listener is thinking about what he or she may say in response to what is being discussed.
John, a CFP® professional, works for a firm that requires that any investment products offered to a client be proprietary products of the firm. His client Jack is 55 years old and has a moderate risk tolerance. John's firm has an S&P 500 index fund with a reasonable fee structure. John has discussed the fund's performance and costs with Jack, and they have agreed that 60% of his equity portfolio will be allocated to this index fund. Which of the following is true according to the Code of Ethics and Standards of Conduct? A) John is prohibited from providing financial planning because he may not be able to offer the client the best available option. B) John may provide financial planning as long as the limitations concerning the proprietary products are discussed with Jack. C) John may provide financial planning, but the limitations concerning the proprietary products must be disclosed in writing to Jack. D) John could enter into a limited engagement related to Jack's specific insurance needs next year with no written disclosures other than those required by regulatory bodies.
The correct answer is (C).Option (A) is not correct because the Board's definition of "best available options" in connection with the fiduciary standard associated with a financial planning engagement allows for limitations on the certificant's recommendations (such as proprietary products) so long as those limitations are disclosed to the client. Option (B) is not correct because Section A.10.b. of the Code of Ethics and Standards of Conduct requires that the disclosure be in writing when the professional is engaged in financial planning; this would make option (C) correct. Option (D) is not correct because once a client becomes a financial planning client, subsequent limited engagements would be considered a part of the continuing financial planning engagement.
All the following statements about financial ratios are true EXCEPT: A) Debt ratios measure how well a client manages debt. B) Liquidity ratios indicate the ability to meet short-term obligations. C) Ratios for financial security determine the progress that the client is making toward achieving short-term financial security goals. D) Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.
The correct answer is (C).Ratios for financial security determine the progress that the client is making toward achieving long-term financial security goals. Liquidity ratios measure the ability to meet short-term obligations. Debt ratios indicate how well a client manages debt. Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.
All of the following are associated with the cognitive-behavioral school of counseling EXCEPT: A) It is important to understand the underlying environmental and social causes of behavior. B) Human behavior follows the same general principles as animal behavior. C) There is a focus on one's inherent value as a person. D) Planners can help change client behavior by assigning them "homework."
The correct answer is (C).Statement (C) better describes the humanistic approach to counseling.
Which of the following is (are) requirements of the fiduciary duty under the Code of Ethics and Standards of Conduct? I. Under the duty of loyalty, the CFP® professional must place the interests of the client ahead of the interests of the CFP® professional or the CFP® professional's firm.II. Under the duty of care, the CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise considering the client's goals, risk tolerance, objectives, and circumstances. A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (C).Statements I and II are both requirements. The duty of loyalty also requires that the CFP® professional avoid or disclose and manage conflicts of interest, and act without regard to the financial or other interests of the CFP® professional, the CFP® professional's firm, or any other individual or entity other than that of the client.
What is the total amount of American Opportunity Tax Credit and of Lifetime Learning Credit that the Jones family can take, given the following information? • Adriana is a sophomore in college and incurs $5,000 in education expenses.• Carlos is in graduate school and incurs $7,000 in education expenses.• Their mother, Juana, who has a 4-year degree, goes back to school and incurs $4,000 in education expenses. A) The American Opportunity Tax Credit is $1,650; the Lifetime Learning Credit is $2,200. B) The Lifetime Learning Tax Credit is $1,650; the American Opportunity Tax Credit is $2,200. C) The American Opportunity Tax Credit is $2,500; the Lifetime Learning Credit is $2,000. D) The Lifetime Learning Credit is $2,500; the American Opportunity Tax Credit is $2,000.
The correct answer is (C).The American Opportunity Tax Credit allows families to claim up to $2,500 per student per year for the first 4 years of qualified education expenses incurred during a student's postsecondary education. The credit is calculated as 100% of the first $2,000 of qualified education expenses plus 25% of the second $2,000 of qualified education expenses. Since only Adriana is in her first 4 years of college, the family can only receive the credit based on Adriana's expenses.(100% × $2,000) + (25% × $2,000) = $2,500The Lifetime Learning Credit provides a tax credit of up to $2,000 per family for up to $10,000 of qualified education expenses, or 20% of up to $10,000 of qualified education expenses. There is no restriction in terms of years for which this credit may be received. Because one cannot claim both the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student in the same year, the family can only claim the credit on Carlos's expenses and Juana's expenses.20% × 10,000 = $2,000
All of the following economic activities represent governmental fiscal policy EXCEPT: A) The government increases the amount of purchases of goods and services by cutting taxes. B) The government cuts taxes to expand the economy. C) The government cuts the federal funds rate. D) The government uses higher taxes to reduce the public's rate of consumption and private investing.
The correct answer is (C).The Federal Reserve sets the discount rate upon which the federal funds rate is based. The Fed will lower the discount rate when it wants to increase the money supply. Options (A) and (B) represent expansionary fiscal policy, while option (D) represents restrictive fiscal policy.
One of your clients has a back-end housing ratio, or a Housing Ratio 2, of 40%. Based on this information, which of the following statements is true? A) Her equity in the home on the date of purchase will be 60%. B) If she can qualify for a home mortgage, she will have a relatively low interest rate. C) She can lower this ratio by paying off other debts. D) This ratio can be lowered by cutting home expenses such as utilities, lawn care, and other maintenance.
The correct answer is (C).The back-end housing ratio is the total of all housing costs and other debt divided by gross pay. A ratio above 36% will require a buyer to pay relatively high interest rates and a large down payment—if the buyer can qualify for a mortgage at all. It can be lowered by paying off other debt. Utilities and maintenance costs are not part of this ratio; while lowering them is good for cash flow, that won't help lower this ratio.
All of the following are considered to be in line with the developmental paradigm, or the developmental school of thought, EXCEPT: A) Human development occurs in stages over time. B) Humans develop and progress in a predictable sequence. C) Results of disruptions in any stage of an individual's development are completely unpredictable. D) Being mindful of a client's age and life situation can help inform a planner's recommendations and communication style.
The correct answer is (C).The developmental paradigm assumes that all humans develop and progress in a predictable sequence. Regardless of their cause, disruptions at a particular stage of that individual's development will result in predictable problems, symptoms, and behavior.
In what order should the steps in the financial planning process occur? I. Understanding the Client's Personal and Financial Circumstances II. Presenting the Financial Planning Recommendation(s) III. Developing the Financial Planning Recommendation(s) IV. Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action V. Monitoring Progress and Updating VI. Implementing the Financial Planning Recommendation(s) VII. Identifying and Selecting Goals A) VII, II, I, IV, III, VI, V B) VII, I, II, III, IV, V, VI C) I, VII, IV, III, II, VI, V D) I, II, III, IV, V, VI, VII
The correct answer is (C).The order of the steps is as follows:I. Understanding the Client's Personal and Financial Circumstances II. Identifying and Selecting Goals III. Analyzing the Client's Current Course of Action and Potential Course(s) of Action IV. Developing the Financial Planning Recommendation(s) V. Presenting the Financial Planning Recommendation(s VI. Implementing the Financial Planning Recommendation(s) VII. Monitoring Progress and Updating
During which step of the financial planning process would a planner prepare and analyze financial statements? A) Identifying and Selecting Goals B) Understanding the Client's Personal and Financial Circumstances C) Analyzing the Client's Current Course of Action and Potential Course(s) of Action D) Developing the Financial Planning Recommendation(s)
The correct answer is (C).The planner would prepare and analyze financial statements in step 3 of the financial planning process, Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action.
Which of the following approaches helps the client articulate and reach goals by covering the risks and savings and investing? A) The pie chart approach B) Ratio analysis C) The three-panel approach D) The strategic approach
The correct answer is (C).The three-panel approach involves the client covering the risks and saving and investing in order to reach goals. The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.
Which of the following approaches involves the client covering the risks and saving and investing in order to reach goals? A) The pie chart approach B) Ratio analysis C) The three-panel approach D) The strategic approach
The correct answer is (C).The three-panel approach involves the client covering the risks and saving and investing in order to reach goals. The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.
One of your clients has a habit of quickly buying and selling obscure investments to try to "get rich quick." When you ask how he decides what to buy and sell with such a large portion of his assets, he replies that he just relies on his gut instincts. Which bias is this client likely exhibiting? A) The disposition effect B) Anchoring C) Overconfidence D) Hindsight bias
The correct answer is (C).This client is clearly exhibiting overconfidence. He makes snap decisions without consulting others or conducting thorough research. You could help this client avoid financial ruin by teaching him to slow down and make more reasoned decisions.
The behavioral asset pricing model considers which of the following risk factors when predicting investment returns? I. The systematic and unsystematic risks that affect the stock or company.II. Investors' feelings about the stock or the company. A) I only B) II only C) Both I and II D) Neither
The correct answer is (C).When predicting investment returns, the behavioral asset pricing model considers a wide array of factors, such as an investment's risks, a company's market capitalization ratios, investors' likes or dislikes about the stock or company, status factors, social responsibility factors, and so on.
A client in the asset-accumulation phase has A) low cash flow and a low debt-to-net-worth ratio. B) high cash flow and a high debt-to-net-worth ratio. C) high cash flow and a low debt-to-net-worth ratio. D) low cash flow and a high debt-to-net-worth ratio.
The correct answer is (D).A client in the asset-accumulation phase has low cash flow and a high debt-to-net-worth ratio.
Which of the following stated goals of a client is the most workable for financial planning purposes? A) To have adequate insurance protection B) To enjoy vacations at various locations outside of the U.S. C) To get out of debt D) Of greatest importance, to save enough to pay $10,000 per year for 4 years of college tuition expenses for each of my three children
The correct answer is (D).A workable goal for financial planning purposes should be specific, prioritized, measurable, achievable, and realistic. Option (D) is the only choice that meets these criteria.
Bill is paid the same no matter how wealthy a particular client is. Which of the following forms of compensation is Bill LEAST likely to use? A) An hourly rate or fee B) A flat subscription or retainer fee C) Commissions on the sale of financial products D) A percentage of the assets managed
The correct answer is (D).Bill is unlikely to be compensated based on a percentage of assets under management (AUM). Under this compensation model, his fee would be higher for wealthier clients. Under the other forms of compensation, it is possible that Bill could charge the same fee to each client regardless of their wealth.
Which of the following factors is critical in determining the appropriate benchmark for the investment-assets-to-gross-pay ratio? A) Investment assets and cash equivalents B) Gross pay C) Retirement time horizon D) Age
The correct answer is (D).Calculating the ratio itself requires dividing the sum of investment assets and cash equivalents by gross pay. However, to determine the appropriate benchmark, you must compare the ratio to the age of the client.
Annie is a Certified Financial Planner™. In which of the following instances would she be held to the fiduciary standard? I. When she provides general financial planning information during a radio interviewII. When acting as a broker and executing a stock trade A) I only B) II only C) Both I and II D) Neither I nor II
The correct answer is (D).Certified Financial Planners™ are only held to the fiduciary standard when providing financial planning or advice to clients.
In which of the following situations is the family least likely to need help with budgeting to meet its living expenses? A) The family's cash-flow statement reveals frequent borrowing to meet normal expenses. B) The family's cash-flow statement reveals that assets are being liquidated frequently. C) The family's cash-flow statement reveals large amounts being spent on miscellaneous expenses. D) The family's cash-flow statement reveals a regular pattern of periodic saving.
The correct answer is (D).Choices (A), (B), and (C) suggest that the family may be living beyond its means and may need help with budgeting. A regular, reasonable pattern of saving, on the other hand, suggests that the family is already living within its means.
Updating responsibilities, checking goal progress, and gathering up-to-date client information are part of which step in the financial planning process? A) Understanding the Client's Personal and Financial Circumstances B) Identifying and Selecting Goals C) Developing the Financial Planning Recommendation(s) D) Monitoring Progress and Updating
The correct answer is (D).During the "monitoring progress and updating" step, planners will update client and planner responsibilities, check on goal progress, and gather up-to-date client information.
All of the following statements regarding NPV and IRR are true EXCEPT: A) A positive NPV indicates the present value of the cash flows exceeds the initial investment. B) A negative NPV indicates the present value of the cash flows is less than the initial investment C) An NPV equal to zero indicates the present value of the cash flows is equal to the initial investment. D) The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows.
The correct answer is (D).IRR sets the initial investment equal to the present value of the cash flows.
All of the following are part of identifying and selecting goals EXCEPT A) prioritizing goals. B) discussing whether a goal is realistic and attainable. C) understanding a client's wants and needs. D) monitoring goal progress.
The correct answer is (D).Monitoring goal progress is part of the "monitoring recommendations" step in the financial planning process. All other statements are part of identifying and selecting goals.
Sally is the custodian of her daughter June's Section 529 plan. If Sally withdraws funds from the 529 plan to pay for plane tickets for Sally and June to tour colleges, which of the following is true? A) The withdrawal amount is fully tax-free. B) The withdrawal amount is fully taxable. C) The withdrawal will be partially taxable earnings and partially tax-free withdrawal of principal. D) The withdrawal will be partially taxable earnings and partially tax-free withdrawal of principal, plus a 10% penalty will apply to the taxable portion.
The correct answer is (D).Nonqualified distributions from a Section 529 plan are a partial return of principal and a partial distribution of earnings. The portion that represents earnings is taxable and is also subject to a 10% penalty. A penalty exception applies if the distribution is made due to the beneficiary's death, because the beneficiary has become disabled, or due to the beneficiary's receipt of a tax-free scholarship or fellowship grant.
Which of the following debts are dischargeable in bankruptcy? A) Child support B) Student loans C) Alimony D) Personal loans
The correct answer is (D).Of the listed debts, only personal loans are dischargeable in bankruptcy.
Jonathan, a CFP® practitioner, filed for bankruptcy as a result of financial difficulties related to a divorce. Which of the following is required under the CFP Board's Code of Ethics and Standards of Conduct? A) Jonathan must disclose the bankruptcy to the CFP Board but he is not required to disclose it to clients. B) Jonathan is not required to disclose to his firm any public discipline by the CFP Board related to the bankruptcy. C) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial advice or financial planning. D) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial planning but not when providing only financial advice.
The correct answer is (D).Option (A) is incorrect because Jonathan is required to disclose the bankruptcy to both the CFP Board (within 30 calendar days of filing) and his clients. Option (B) is incorrect because Section E.3 of the Code of Ethics and Standards of Conduct requires Jonathan to promptly advise his firm of any public discipline by the CFP Board. Option (C) is incorrect because the disclosure can be made orally or in writing when providing financial advice but must be in writing when providing financial planning. Option (D) is correct because by providing financial planning, Jonathan is required to provide written disclosure of the bankruptcy to clients.
Tricia is a new client for Stephan, a CFP® professional, and has asked for Stephan's help with her financial planning. Specifically, she wants a complete analysis of her retirement situation, including retirement projections, and wants Stephan to evaluate the type and amount of investments that she should purchase. Which of the following is correct according to the Code of Ethics and Standards of Conduct? A) Stephan is not providing financial advice and should ensure that any products recommended are suitable for the client. B) Stephan is engaged in financial planning only if he performs all seven steps covered in the practice standards. C) Stephan is not engaged in financial planning, but he should still put the client's interest first. D) Stephan is engaged in financial planning and should act in the best interest of the client.
The correct answer is (D).Option (D) is correct because according to the CFP Board's Code of Ethics and Standards of Conduct, Stephan is providing financial advice and financial planning. This requires him to act as a fiduciary to the client. The fiduciary standard requires the CFP® professional to act in the best interest of the client. Tricia clearly asked for help with financial planning, and Stephan is integrating multiple financial planning subject areas. These two factors make it clear that a financial planning engagement exists. Option (A) is incorrect because according to the CFP Board's Code of Ethics and Standards of Conduct booklet, communications that are specific to a client's individual goals and circumstances are financial advice. Financial planning engagements and financial advice require a fiduciary responsibility to act in the best interest of the client. Option (B) is not correct because according to the CFP Board's Code of Ethics and Standards of Conduct, it is not necessary for all seven steps to be followed for a financial planning engagement to exist. Option (C) is incorrect because Stephan is in a financial planning engagement, which requires a fiduciary responsibility to act in the best interest of the client.
When would a financial planner analyze alternative courses of action as part of the analysis step of the financial planning process? A) The planner should only do this when a client does not appear on track to meet a particular goal. B) The planner should only do this when the planner is uncertain about a particular assumption. C) The planner should only do this when a client specifically asks for alternative recommendations. D) Analyzing alternative courses of action is part of every financial plan.
The correct answer is (D).Planners must always analyze not only the client's current course of action, but also potential alternative courses of action.
Which step in the financial planning process comes before "Monitoring Progress and Updating"? A) Presenting the Financial Planning Recommendation(s) B) Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action C) Understanding the Client's Personal and Financial Circumstances D) Implementing the Financial Planning Recommendation(s)
The correct answer is (D).The final step before "Monitoring Progress and Updating" is "Implementing the Financial Planning Recommendation(s)."
Which of the following is NOT considered a critical element of an engagement letter? A) The agreed-upon scope of the work B) The time horizon for the completion of the work C) A description of the fees and costs D) A summary of the planner's assumptions
The correct answer is (D).The scope of the work to be performed, the time horizon for the completion of the work, and a description of the fees and costs are all considered to be critical elements of an engagement letter.
All of the following are treated as assets of the parent for financial aid EXCEPT A) a 529 Savings plan. B) prepaid tuition. C) cash and cash equivalents. D) UGMA accounts.
The correct answer is (D).UGMA accounts are considered assets of the child for financial aid purposes because the child has access to the account at age 18.
All the following behaviors would be considered part of step 6 in the financial planning process, Implementing the Financial Planning Recommendation(s), EXCEPT A) selling a client a life insurance policy. B) buying or selling securities to adjust a client's asset allocation. C) agreeing upon an implementation schedule and responsibilities. D) updating a client's goals after a follow-up meeting.
The correct answer is (D).Updating a client's goals after a follow-up meeting is part of step 7, Monitoring Progress and Updating. All other options are considered implementing recommendations.
All of the following occur when a planner is establishing and defining the client relationship with a prospective client EXCEPT: A) The planner discusses their background and investment philosophy. B) The planner discloses any conflicts of interest. C) The planner provides relevant and required disclosures. D) The planner analyzes client data.
The correct answer is (D).When establishing and defining the client relationship, the planner has not yet collected detailed client information and therefore cannot analyze client data. All of the other activities are part of establishing and defining the client relationship.
Using the information in the table below, calculate Arthur's emergency fund ratio in months. Arthur's Expenses and Account Balances: Arthur's Annual 401(k) Plan Contribution-$16,500 Arthur's Annual Salary-$100,000 Current Liabilities-$24,000 Monthly Housing Costs (P&I and T&I)-$2,167 Cash and Cash Equivalents-$18,000 Monthly Nondiscretionary Cash Flows-$6,000 Monthly Debt Payments Other Than Housing-$500 Arthur's employer makes a dollar-for-dollar match of up to 3% of Arthur's salary in his 401(k) plan. A) 0.25 months B) 1 month C) 2 months D) 3 months
The correct answer is (D).emergency fund ratio = (cash + cash equivalents) ÷ monthly nondiscretionary cash flows $18,000 ÷ $6,000 = 3 months
Mina's annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan, and her employer contributes a 5% match of Mina's salary to a profit-sharing plan. Mina also contributes $2,500 per year to an IRA. What is Mina's approximate savings rate? A) 5% B) 10% C) 15% D) 18%
The correct answer is (D).savings rate = (savings + employer match) ÷ gross pay($8,000 + $4,000 + $2,500) ÷ $80,000 = 18.125%
Using the information in the table, calculate Marie's savings rate. Marie's Expenses and Account Balances: Marie's Annual 401(k) Plan Contribution-$16,500 Marie's Annual Salary-$100,000 Current Liabilities-$24,000 Monthly Housing Costs (P&I and T&I)-$2,167 Cash and Cash Equivalents-$18,000 Monthly Nondiscretionary Cash Flows-$6,000 Monthly Debt Payments Other than Housing-$500 Marie's employer makes dollar-for-dollar matching contributions of up to 3% of Marie's salary in Marie's 401(k) plan. A) 16.5 B) 17.5 C) 18.5 D) 19.5
The correct answer is (D).savings rate = (savings + employer match) ÷ gross pay[$16,500 + (3% × $100,000)] ÷ $100,000 = 19.5%
