November 2022 CFP: Fundamentals
Which of the following items listed in a client's financial statements is incorrectly identified or categorized? A) Money market fund dividends appear in inflow on the cash flow statement B) Installment note is listed in cash on the balance sheet C) Annuity appears in investments on the balance sheet D) Rent is listed on the cash flow statement
B
Traditional retirement includes all of the following descriptions except: A) Extreme savings or sacrifice to achieve financial independence. B) An individual leaving the workforce in their 60's. C) Exiting the workforce with an average retirement life expectancy of 20-25 years. D) Working until one qualifies for a company pension and or Social Security Retirement Benefits.
A
Alice Salerio is 66 years old and was hospitalized for a fall last winter when she slipped on the ice. While in the hospital her daughter borrowed Alice's silver and crystal glassware for a party. Alice has recovered now and would like to get her silver and glassware back from her daughter. Alice's daughter has responded to Alice by saying that she wanted to keep them for an inheritance for her children. Alice has attempted to resolve the matter but her daughter will no longer meet with her. Alice has now decided that she will tell her daughter that the 529 plan Alice set up for her daughter's son will not be available to him until the silver and glassware are returned. Alice's grandson is supposed to start college next year. Alice has met with a CFP® practitioner for a review of her financial plan. The plan was prepared two years ago, and Alice needs additional money for her living needs. Which of the following statements can the CFP® practitioner tell Alice? A)Alice can use the money from the 529 plan without her daughter's or grandson's consent but it will be taxable in part. B) Alice cannot use the 529 plan assets without the agreement of her grandson. C) Alice can rollover the 529 plan to another beneficiary at any time but cannot take distributions for herself. D) Alice will be able to use money from the 529 plan at any time but distributions will be fully taxable.
A Alice set up the 529 plan so she controls the distributions and can take money at any time without the consent of the beneficiary. Distributions used for Alice's living expenses will not be for qualified educational expenses so Alice will need to report a portion of any distribution as taxable income. A 10% additional tax also applies.
Your client, Angelique, is a 55-year-old independently wealthy fashion diva with a special affinity for furs. She drops by your office one day on the way to a charity function and mentions that she is donating one of her less valuable fur coats to a charity auction and she believes it will bring in about $10,000 in donations. You have strong feelings regarding ethical treatment of animals and don't believe in wearing furs. In reviewing Angelique's financial plan, which of the following is most important? A) Review her homeowner policy and endorsements to see if she has adequate coverage for her furs. B) Suggest some other charities that she may want to help in a similar way. C) Discuss the ethical issues around wearing real fur and suggest that she consider faux fur instead. D) Advise her that she has no coverage for theft of the furs if she leaves them in her car while attending various functions.
A Answer B is incorrect, the client did not ask for recommendations to continue gifting. Answer C is incorrect because the planner should not project his or her own values on the client. The planner may, in situations of extreme values differences, determine that he or she cannot continue to work with the client; however, the planner should not try to change the client's values. Answer D is incorrect because the homeowner policy may provide limited coverage for items in the car that are not permanently attached to the vehicle.
Which of the following statements regarding a client's resistance to change is false? A) If a client does not implement the financial plan recommendations it generally means that the financial planner did not fulfill the client's stated goals or objectives. B) High levels of psychological stress regarding a financial decision may indicate that a client has little intent to change. C) Breaking though a comfort zone can cause anxiety and stress related to feelings of judgement or isolation. D) Money beliefs will often shape the client's perception on the purpose of money and how it should be used.
A Choice A is a false statement, there are many reasons that a client may not implement recommendations from a well designed financial plan including resistance to change, not understanding the long term benefits, feeling that they have time, being in a comfort zone, etc.
Sheila Brisbane, CFP® recently underwent a hearing conducted by the Disciplinary and Ethics Commission in which the sanction is a Public Letter of Admonition. Under the Disciplinary Rules and Procedures, which of the following is correct? A) Sheila may appeal the decision of the DEC within 30 days after notice is sent. B) The certificant's appeal must be filed in a court of competent jurisdiction, generally within her home state. C) The letter of admonition can be made public only in Sheila's home town newspaper. D) For a Public Letter of Admonition, no appeal is allowed.
A In Article 15 of CFP Board Procedural Rules, the certificant may make an appeal within 30 days. CFP Board is the relevant party to which the appeal is made, not a court. Public letters are not limited to the certificant's home town newspaper.
A CFP® professional is working with a client to select the securities to purchase for the fixed income portion of the client's investment portfolio. Which of the following types of investment risks can the CFP® professional substantially reduce or eliminate by diversification of the securities selected? A) Liquidity risk B) Interest rate risk C) Reinvestment risk D) Purchasing power risk
A Liquidity risk is the risk that the investor will be unable to convert an investment to cash quickly without loss of value. Liquidity risk is an unsystematic risk because it can vary substantially for different securities and issuers. An unsystematic risk can be reduced or eliminated by means of diversification. Buying different kinds of fixed income securities of different issuers and different industries can greatly reduce the liquidity risk. Interest rate risk, reinvestment risk, and purchasing power risk are systematic risks and cannot be substantially reduced or eliminated by diversification.
Social media has allowed Bella's Cake Bake LLC business to explode. The orders are getting to the point where it is difficult to keep up, Bella is reviewing her options for expansion. Bella meets with her accountant and is informed that her current revenue will raise her into the next tax bracket and she will no longer be eligible for the tax incentives offered through the city for small businesses. Bella is relying on the incentives and does not want to lose the business connections that she has made through the program. Bella frequently bakes for one of the businesses, a local restaurant called Eats. As she prepares to deliver their order, she realizes that Eats has not paid the last couple of invoices. Bella tells the owner not to worry and that she will invoice them at the start of the new year. Bella then contacts her bakery supply distributor and preorders flour and other supplies to last for the next 6 months. Bella also decides to send her workers $5,000 and will call it a year end bonus. Which one of the following does not describe Bella's attempts to reduce income: A) Tax evasion B) Income shifting C) Tax avoidance D) Tax deferral
A Tax evasion is the illegal methods to reduce taxable income, the methods used by Bella are not illegal.
A prospective client has contacted a CFP® certificant for investment advice. The prospective client asks for a recommendation for a six-figure investment that will not require reporting to the IRS and that can be purchased for cash. The client offers to pay all fees up-front and in cash, but she declines to provide any financial statements or other information. The client does not want to have complete planning; she only wants a recommendation for one investment. Which of the following actions should the CFP® certificant take? A) Refuse to advise the client. B) Report the client to the IRS. C) Proceed to advise the client for the one transaction but insist on more information for future transactions. D) Advise the client only after obtaining a waiver from the client.
A The CFP® certificant cannot report the prospective client to the IRS or any other authority because there has been no wrongdoing yet. The proposed arrangement is impermissible for a CFP® certificant, so the relationship should be declined. The CFP® certificant cannot advise the client of suitable investments, without financial information. The CFP® certificant should not accept employment that will place him or her in such a dangerous situation. A waiver would not really help much and may show that the CFP® certificant was aware of the potential for problems and, nevertheless, accepted the risk.
Harry Kunz who is 45 and his wife Barbara who is 43 have been married for 15 years and have one child age 12. The Kunzes obtained a comprehensive financial plan two years ago and have returned for their annual review. As in the previous annual review, they handed the CFP® professional a file of documents with reports from their brokerage accounts and other investments and retirement plans. They then advised the CFP® professional that they were planning to separate and to obtain a divorce. What should the CFP® professional do first? A) Prepare and discuss with the Kunzes a new engagement document B) Advise the Kunzes that if either of them objected, the CFP® professional could not provide financial planning services for either of them C) Explore with the Kunzes whether their financial planning goals and priorities had changed. D) Proceed to make the annual review as in the previous year
A The CFP® professional needs to discuss with the clients whether he or she can continue to provide financial planning services to the Kunzes together or individually. The change in their circumstances needs to be documented, and their agreement to proceeding as before or under different arrangements needs to be resolved. There may be conflicts of interest that need to be identified and resolved. The review and any financial planning services should await the documentation of the engagement that will be put in place. Then the CFP® professional can inquire concerning any changes in their goals and priorities.
A CFP® professional has been engaged by a client to help with budgeting and investing for retirement. The client has had difficulty saving money for investments even though he has an adequate income. The CFP® professional began to collect information on income and expenses for the client and then decided to look at the client's income tax returns. When the CFP® professional asked for income tax returns, he learned that the client had not paid income taxes for the past 4 years. What should the CFP® professional do under these circumstances? A) Refer the client to a CPA B) Contact the IRS about the problem C) Begin working with the client to figure out a payment schedule and budget for the taxes D) Terminate the engagement
A The CFP® professional should refer the client to a CPA who will have experience and expertise with handling income tax problems such as non-payment of the tax. The principle of Competence includes "the wisdom to recognize the limitations of that knowledge and when consultation with other professionals is appropriate or referral to other professionals necessary. "The CFP® professional should not contact the IRS at this time because the client has not authorized such contact. Working on a budget or payment schedule is also premature because the amount owed has not been determined. The planner will not be able to work on the budget and cash flow until the additional information regarding the amount of taxes and penalties is determined.
George Sunono has contacted a CFP® professional for a meeting with two of the shareholders in his company. George is a client, and recently the CFP® professional recommended that George arrange a buy-sell agreement with the other shareholders in the company. After talking with the other shareholders, George suggested that they meet with the CFP® professional to discuss an agreement. At the meeting with the three shareholders, the CFP® professional described the kinds of buy-sell agreements that could be adopted and the benefits of having an agreement for the business. One of the shareholders mentioned that his shares were jointly owned with his wife. The other shareholder stated that his shares were held by a trust that he had set up for his family. They were all interested in setting up some kind of buy-sell agreement and wanted to meet again with the CFP® professional. After the meeting was over, George called to say that the shareholders were inclined to set up an entity buy-sell agreement through their company. What should the CFP® professional do next? A) Identify the client or clients B) Discuss the client's responsibilities and those of the CFP® professional C) Gather information necessary to fulfill the engagement D) Contact a lawyer to arrange for referral of the matter
A The first step required is to identify the client. It is not clear yet whether the CFP® professional will be working on behalf of the company or one or more of the stockholders. The CFP® professional will need to know whether the shareholders will have conflicts of interest and whether they need separate advisors. The shareholder who has placed shares in trust may need to have the trustee involved in the meetings. The CFP® professional and George may decide that the other stockholders should have separate advisors and that the CFP® professional will only advise George in this matter. The CFP® professional cannot start discussing responsibilities or gather information at this time without knowing who the client is. Similarly, the CFP® professional cannot arrange to refer the matter without knowing who the client will be.
When must an investment adviser deliver a disclosure brochure to a prospective advisory client? A) Before or at the time of entering into an advisory contract with the client B) At least 3 days before entering into an advisory contract with the client C) Within 48 hours after entering into an advisory contract with the client D) Within 5 business days after entering into an advisory contract with the client
A Under the brochure rule, the disclosure statement must be a written narrative containing all of the information found in Part II of Form ADV and must be delivered before or at the time the prospective client enters into a written or oral advisory contract.
A CFP® professional has provided financial planning services for Sam and Margery Davis for a number of years. Sam is 78 and Margery is 76 years of age and they have been married for 52 years and have two children. The couple has brought their daughter Megan to the CFP® professional's office on some occasions, and she has brought documents to the office for her parents a few times. Sam is in a nursing home so he has not been attending meetings at the office. The CFP® professional has noticed that recently Margery has been showing more signs of dementia. Megan Davis has asked that the CFP® certificant make some changes to her parents' account so she can help her mother and keep her mother from being taken advantage of unexpectedly. What can the CFP® professional do for the daughter? A)Meet with Sam at the nursing home to determine whether he would be able to give his daughter a power of attorney B) Meet with Margery and determine whether she would be able to give her daughter a power of attorney C) Prepare documents for Sam and Margery to sign to make Megan a joint tenant in their account D) Place a hold on the account so Margery cannot make improvident decisions without consulting Megan
A Even though Sam is in a nursing home, if he is mentally aware of his financial affairs and has the mental competence to execute a power of attorney, the family can arrange for a power of attorney to be prepared so Megan can take charge of their financial affairs. Due to her increasing dementia, Margery may not be able to sign an effective power of attorney and even if it were signed it might be subject to challenge. The CFP® professional should not prepare a POA or title documents but refer the family to an attorney. If Megan is made a joint owner of her parents' account, the new titling may require filing of a gift tax return and could affect their estate planning, so the power of attorney would be preferable. The CFP® professional will not be helping the daughter or the Davis family by putting a hold on the account.
You are meeting with Blane to review his financial plan for the fifth time. Blane begins the meeting with a list of questions for the investment choices. Thirty minutes into the meeting he has managed to ask 6 more questions concerning the investment options. Blane is reviewing the projected performance of the portfolio and starts to discuss the prospects of retiring and the lifestyle that he envisions. At the conclusion of the meeting, Blane says that he'd like to schedule the next meeting to continue the review. Which of the techniques will likely be the least effective when trying to help Blane reach a decision and execute on the recommendations? A) Developing investment goals. B) Framing the investment options. C) Create default options for the investments. D) Limit the review to the investment analysis.
A The client will least likely benefit from creating investment goals, this step was previously completed before creating the financial plan. Choices B, C, and D are techniques to limit the clients choices and focus on making a decision.
Going somewhat against the trend, Chuck Vicara, CFP® transitioned his practice from fee-only to fee-based this month. According to the CFP Board Code and Standards, which of the following is correct? A) For those clients who received the original disclosure document, no additional disclosure is required. B) Chuck must provide all current and prospective clients new disclosure documents that detail his compensation structure, ensuring it is clearly stated he and/or the firm earn fees and commissions. C) As long as clients have access to Chuck's Form ADV, no additional proactive disclosure is required. D) At the time of his transition to fee-based, Chuck has lost the opportunity to act with clients in a fiduciary relationship.
B According to the Code and Standards Section A.10.c. of the Rules of Conduct, Chuck must provide new disclosure documents to all current and prospective clients. The reason is the change in the method of compensation. Mere access to the Form ADV is inadequate. He will continue to serve in a fiduciary capacity regardless of method of compensation.
Raleigh, age 46, plans to retire in the next 20 years. She has consistently saved at least 20% of her income towards retirement and also has a substantial investment portfolio outside of her retirement accounts. She is making great progress towards her retirement goals but her financial planner recommended that she needs to increase savings by at least 8% to meet her retirement income objective. She has been categorized as an aggressive investor and has mentioned several times that she'd like to remove companies that use animal testing on their products or have not reduced their carbon footprint. She does not have children of her own and is very close to her brother's five children. During their family meeting, it was revealed that since the family moved to the United States, Raleigh's brother's dental business is not doing well and may cause his retirement to occur later than he planned. Raleigh is meeting with her financial planner and has concluded from the family meeting that she will contribute 12% of her income towards the children's 529 accounts. Which of the options should the financial planner first consider? A) The financial planner has a fiduciary duty to keep Raleigh on track with her financial plan and should advise against the 529 savings. B) Multicultural psychology plays a role in the decision making process and the financial planner should explore it with the client. C) The relationship should be terminated as the client has not followed the financial plan recommendations. D) The financial planner needs to consider social consciousness and recreate the financial plan.
B Choice A is incorrect because the financial planner needs to understand the client's goals and objectives Choice C is incorrect as the relationship does not have to end because an alternative or new goal was presented by the client. Choice D is incorrect, social consciousness addresses a clients concerns and biases in dealing with social issues and how the portfolio is invested.
Which of the following does not describe aspects of the F.I.R.E. movement? A) Extreme saving and working hard towards an early retirement. B) Disciplined savings throughout working years to achieve financial independence in your 60s. C) Being able to retire early and lavishly because of extreme savings and sacrifice. D) Target goal of 25 times spending and exiting the workforce at that point regardless of age.
B Choice B does not describe aspects of the F.I.R.E. movement, it describes a traditional retirement of saving and retiring once one is in their 60s. Options A, C, and D all describe aspects of the F.I.R.E. movement.
Which of the following statements is true in relation to money beliefs? A) An individual's attitudes, values and beliefs about money are frequently inherited from parents not other family members. B) Everyone has ingrained financial beliefs that they may not be aware exists. C) There are generally clear indicators of how childhood influences about money manifest into adult beliefs. D) A child is generally not able to process the economic events that occur during their childhood and are therefore unaffected.
B Choice B is a true statement, individuals develop beliefs about money from childhood and carry them into adulthood. Choice A is a false statement, attitudes, values and beliefs about money are inherited from parents and other family members. Choice C is a false statement, there aren't set patterns of how influences as a child manifest into adult beliefs. There are examples from both ends of the spectrum of individuals acting in an opposing manner to the beliefs, while some respond by mimicking the behaviors or beliefs. Choice D is a false statement, children may not fully process the economic events as an adult would, but they develop and carry beliefs from the environment into adulthood.
Assume that your client puts $10,000 into a credit union account now, plus five annual deposits of $2,000, beginning in one year. All deposits earn 6.75% interest per year. How much will be in the account at the end of 10 years? A) $25,307 B) $35,081 C) $37,203 D) $39,111
B END MODE 5, n 6.75, =, i 2,000, +/-, PMT 10,000, +/-, PV Solve for FV
Hari Srivasen is 68 years of age and has consulted a CFP® professional to help with planning for his retirement. Hari has enjoyed working in his business that he started 20 years ago. He has been slow to recognize the need to plan for a successor and has no exit strategy. Hari is the sole owner of the business that he has operated as an S-corporation. The business operates out of a building that the company purchased a few years ago. Hari has reinvested in his business over the years and has only a modest 401(k) plan. The CFP® professional would like to develop some alternatives that he might recommend to Hari for providing retirement income. Which of the following is not an alternative that the CFP® professional should recommend? A) Separate the building from the operating business, transfer the building to Hari, and have the business pay rent to Hari B) Recapitalize the corporation to have common and preferred stock, so Hari can sell the common stock and retain the preferred stock for income C) Plan for Hari to continue working as a consultant to the business with reduced hours D) Sell the business in an installment sale
B Hari's business is an S-corporation, and it can have only one class of stock. Hari cannot recapitalize it into common and preferred stock. The other choices are possible alternatives to recommend to Hari.
Joseph Polasky, CFP® was the subject of a FINRA hearing in which he was cited for failure to become properly registered in an adjacent state prior to soliciting investment business. No fines or suspensions were imposed, but Joseph's FINRA record (his U-4) showed the infraction. CFP Board discovered the notation on Joseph's record in a routine investigation, and sent Joseph official notice of its investigation. Under the Disciplinary Rules and Procedures, which of the following is correct? A) CFP Board and its Disciplinary and Ethics Commission have no legitimate jurisdiction in this case. B) Joseph must acknowledge the notice of investigation within 30 calendar days. C) Joseph's certification will automatically be suspended due to the FINRA sanction. D) CFP Board can impose a fine on the basis that Joseph failed to obtain registration prior to offering securities in the other state.
B In Article 1 (1.1), the certificant must acknowledge the Notice of Investigation within 30 calendar days. If CFP Board does not receive acknowledgment, another notice will be sent out and acknowledged within 14 calendar days. If no answer is received, the CFP Board may deliver a Notice of Failure to Cooperate (Article 1.3). CFP Board has jurisdiction in that the certificant has agreed to abide by the Standards of Conduct. The FINRA action does not warrant an automatic suspension, but in some cases, conduct may warrant an Interim Suspension if serious. CFP Board does not issue fines.
Under the Candidate Fitness Standards, if a person who wants to achieve CFP® certification has been convicted of embezzlement, which of the following is correct? A) If the conviction was more than 10 years prior to the application for CFP® certification, the candidate may become certified. B) The candidate is permanently barred from certification. C) Certification is possible, but may be delayed for as long as the jail or prison time served. D) The candidate can achieve CFP® certification immediately, because the criminal penalty had already been assessed and double jeopardy would otherwise apply.
B In this case, the rules are clear: the candidate is permanently barred from certification. The time period expired since the conviction is immaterial. Delay of certification for jail time is not possible; double jeopardy does not apply because this relates to a certification body; and an appeal is not allowed. In rare instances that a conviction is overturned, the individual could appeal to CFP Board.
For several years, Gloria Mitsuo has consulted a CFP® certificant for financial planning services. The CFP® certificant has provided continuing management of her investments in her brokerage account and recommended investments for her retirement accounts. Gloria has told the CFP® certificant many times that the certificant can discuss the account with her brother and husband and execute any trades that they direct in her account. If the brother calls to discuss the account and the husband calls to tell the CFP® certificant to make a trade, what should the CFP® certificant do? A) The CFP® certificant can discuss the account with the brother and execute the husband's trade. B) The CFP® certificant can discuss the account with the brother but cannot execute the husband's trade. C) The CFP® certificant cannot discuss the account with the brother but can execute the husband's trade. D) The CFP® certificant cannot discuss the account with the brother and cannot execute the husband's trade.
B The CFP® certificant can discuss the account with Gloria's brother because she has given permission to the CFP® certificant for such discussion. Confidentiality will not be breached since Gloria has given oral permission to the CFP® certificant to discuss the account with the brother. The CFP® certificant cannot execute the husband's orders for trades in the absence of a written power of attorney or discretionary authority in the account.
Turk McMann is 47 years of age and has consulted you for financial planning for several years. Turk worked as a surgeon until recently when he was injured in a fall while ice skating. Turk has not been able to work and expects to be unable to return to work due to the injury. Turk has disability insurance through the hospital where he has worked but expects to readjust his budget and may need to sell his home to move into a residence that will be easier to take care of. He is also considering using money in his IRAs and retirement plan. What should you do first? A) Prepare a cash flow statement and budget under the client's new situation B) Explore with the client his personal and financial needs, priorities, and goals C) Recommend substantially equal distributions from the IRAs based on the client's life expectancy D) Obtain a copy of the client's retirement plan to check for the availability of loans
B The change of circumstances in this case requires a reexamination of the client's financial needs, priorities, and goals. The goals may have changed due to the disability, and the financial needs may be different. You need to perform the data-gathering and evaluation steps again before you can proceed with developing and presenting recommendations. The preparation of the cash flow statement and budget will require data gathering of the client's income and expenses. This data gathering should include the cash inflows and outflows as well as potential benefits.
Edward and Susan McDyer set up 529 plans in July two years ago for their five grandchildren and contributed the maximum amount permitted for each child without gift tax consequences. This July, during their annual review, they were discussing their estate planning with a CFP® certificant, and the planner said that he would calculate the gross estate for Edward and Susan as though they died on the day of their meeting. How much should the CFP® professional include in Edward's gross estate for the 529 plans if the annual gift tax exclusion was $15,000 in the year the gifts were made? A) $0 B) $150,000 C) $225,000 D) $375,000
B The maximum contribution that can be made to a 529 plan without gift tax consequences is 5 times the annual exclusion amount or $75,000. A married couple can split gifts and make total contributions of $150,000 per child. When a gift to a 529 plan of the maximum contribution of 5 times the annual exclusion amount is made, the estate tax rules provide that a pro rata share of the gift will be included in the donor's gross estate in the event the donor dies within 5 years of the gift. Edward's gross estate is calculated in July, so three years of gift tax annual exclusions can be used for the gift to the 529 plans (two years ago, last year, and this year's annual exclusions were used); therefore the gross estate must include only 2 years of annual exclusions which is 2 × $15,000 = $30,000 × 5 grandchildren = $150,000.
A CFP® professional has presented a financial plan to a client and recommended some changes to the client's investments to increase returns. The planner has asked the client for feedback, and the client has expressed some hesitation about the proposed investments in equity portfolios. The client is risk averse and the allocation reflected the client's risk tolerance but the client is uncertain about the added risk of some new investments. The planner proceeded to spend some time explaining the principles of modern portfolio theory and how the changes recommended for the client would help to optimize his portfolio. The client seems to understand but is not yet ready to accept the plan. What additional step should the planner consider taking at this time? A) Making use of a Meyer-Briggs Type Indicator questionnaire B) Applying the concepts of behavioral psychology concerning comfort zone C) Refraining from a recommendation that reflects the planner's values and biases D) Changing from quantitative methods of measuring risk tolerance to qualitative methods
B The planner should consider applying the concepts of behavioral psychology concerning comfort zone because the client may need some encouragement to step outside his comfort zone in investing for financial goals. The Meyer-Briggs Type Indicator might help, but the client appears to understand the recommendation and the principles behind it, so the problem does not appear to require changing the manner of presentation to fit the client's personality. The recommendation is based on principles of modern portfolio theory so the planner's values and biases are not creating the issue. The measurement of risk tolerance is also not the issue since the planner has determined that the client is risk averse and has made a recommendation based on an aversion to risk.
George and June Delaurier have consulted you concerning their son Peter who was injured in a car accident at age 30. Peter was disabled due to a spine injury, but has been making progress with rehabilitation. Peter did not receive any money for his injuries but receives Social Security disability payments. Peter, who is now age 33, has expressed an interest in obtaining additional education for a career in news casting, but he will have no income during the time that he is pursuing his education. The Delauriers are also not sure that he will be successful as a news caster. The Delauriers would like to help him and have inquired for your recommendation. The Delauriers feel they can set aside at least $100,000 to help their son with education and living expenses as well as to help improve his life. What should you recommend? A) 529 Plan B) Special needs trust C) ABLE account D) Irrevocable trust with Peter as the beneficiary
B The special needs trust will allow Peter to qualify for Medicaid assistance to provide him with long-term care. The trust cannot be set up to make distributions to Peter directly because then he would be disqualified for Medicaid benefits. Instead of making Peter the beneficiary, the trustee must be given discretion to make purchases of services and goods. Money from the special needs trust can be used to pay for education and rehabilitation. A special needs trust is not limited as to funding, but an ABLE account is. If the ABLE account balance were to exceed $100,000 SSI payments would be suspended. The ABLE account is also not an option because Peter's disability occurred after age 27. The 529 plan would be limited to education expenses so the special needs trust is a better choice.
Derek Jacobiak has consulted a CFP® professional for investment planning. After entering into an agreement for investment planning services, the CFP® professional met with Derek to explore his investment goals, priorities, and needs as well as his time horizon. Derek completed a risk tolerance questionnaire and described for the planner his level of experience with investments and financial matters. Derek arranged for his broker to send the CFP® professional copies of his investment statements. The CFP® professional examined the types of investments that Derek owned and determined the asset allocation for Derek's investments. Which of the following actions should the CFP® professional take next? A) Discuss with Derek the client's responsibilities for providing sufficient quantitative information B) Select the appropriate financial planning software to use to analyze the asset allocation C) Conduct sensitivity analysis for changing assumptions on rates of return, time horizon, etc. D) Consult with the client's broker on technical issues relating to securities in Derek's portfolio
B When the CFP® professional determined the asset allocation in Derek's investments, the planner had reached the third step in the financial planning process involving the analysis and evaluation of the client's current financial status. The analysis and evaluation also require identifying and using the appropriate tools to conduct analyses such as by means of financial planning software. The software will enable the planner to determine whether the current allocation is at the appropriate risk level and that the returns are commensurate with the amount of risk that Derek is taking. The CFP® professional has not completed the analysis and is not yet ready for the sensitivity analysis or for consulting with professionals that will take place during the development of the recommendation for Derek in Step 4.
Which of the following is NOT exhibiting an example of the F.I.R.E. lifestyle? A) Jai, age 32, leaves his job to travel to 3 countries over a 3 month time frame. He will apply for a job once he returns and resume saving 40% of his salary. B) Kray, age 45, leaves her job to pursue a career of less stress, and saves 15% towards retirement savings. C) Casen leaves the workplace at age 50, after accumulating 25 times her spending need. D) Zion, age 40, is a physician and will work for a non profit as a traveling physician. His estimated spending need is $80,000, and he is able to spend approximately $128,000 per year through life expectancy from savings and investments.
B Choice B is not an example of the F.I.R.E. lifestyle which is described with extreme saving, sacrificing, and reaching financial independence before typical retirement age. Choices, A, C, and D are all examples of the F.I.R.E. lifestyle of extreme savings and or sacrifice to reach financial independence and early retirement.
Sam wants to buy a car for $38,500. He can take a loan from the dealer at 6%. Based on his current budget, he would like the payments to be no more than $7,400 each year for four years. He expects inflation will be 3% over the four years. What down payment must Sam make? A) $10,940 B) $12,240 C) $26,257 D) $27,565
B N=4 × 12, i=6/12, PMT = -7400/12, FV=0, then PV. The result is $26,257.86. We subtract that amount from the purchase price of $38,500, and the answer is $12,242.14.
A CFP® certificant prepared a comprehensive financial plan for a married couple and made arrangements with the clients to meet to present the plan. What should the certificant do when presenting the plan? A) Review current and future tax liabilities B) Review an implementation timeline C) Review assumptions D) Review monitoring responsibilities
C As part of the presentation of the comprehensive financial plan, the CFP® certificant will review assumptions used in preparing the financial plan and review the client's goals. The implementation timeline and monitoring responsibilities will be discussed after the plan is communicated during the implementation and monitoring stages. The current and future tax liabilities are generally reviewed during the analysis and evaluation of the client's current financial plan.
Which of the following assessments should occur during the step in the financial planning process when the CFP® professional is establishing and defining the client-planner relationship (Section A of the Code and Standards)? A) Assess the client's level of knowledge and experience of financial matters B) Assess the client's risk tolerances C) Assess the CFP® professional's ability to meet the client's needs and expectations D) Assess the adequacy of the regulatory disclosures required from the CFP® professional
C Before the first active step in the financial planning process, the CFP® professional is establishing and defining the client-planner relationship, an assessment is required of the CFP® professional's ability to meet the client's needs and expectations. During the first active step of data gathering, the CFP® professional must assess the client's level of knowledge and experience with financial matters, the client's risk tolerance, and the client's risk exposures. No assessment is required of the adequacy of regulatory disclosures but the CFP® professional must provide those disclosures.
Marilyn typically saves 5% of her salary so that she is eligible for the employer 3% match. Every year she sets money aside and is able to take a 2 week vacation to a tropical island or she visits friends. This year she was able to carry over 5 days of unused vacation days and will take a 3 week vacation and visit 2 countries. She will plan to do this every 4-5 years and increase her savings by at least .5-1% until it reaches 10%. The savings and spending behaviors would best be described as: A) Mini vacations or sabbaticals B) Lean F.I.R.E. C) Traditional retirement D) Financial independence
C Choice A is incorrect, mini vacations or sabbaticals typically last an extended time, of at least 2 months and generally beyond one's vacation allotment, and therefore typically requires a leave from work. Choice B is incorrect, lean F.I.R.E. is a description of early retirement where one lives a minimalistic lifestyle. Choice D is incorrect, financial independence is describes when one reaches a state where they no longer have to work to support their spending lifestyle.
Anthony and Erica want to start saving for the college expenses for their son who is 8 years old. They have looked at an expense estimator for the college where they went to school, and it shows the projected cost for the freshman year for their son will be $42,500. They expect that during the time their son is in college his expenses will increase by 4% each year. They assume that they can invest the money they save at a 6% rate of return. They would like to set aside enough money so they can pay for five years of college expenses. How much do they need to save each year for their son's education expenses? A) $12,300 B) $15,232 C) $15,525 D) $18,754
C The cost for the first year of college is given in the question, so we need to make only two calculations: (1) the cost of the five years of college, and (2) the amount to be saved each year. The keystrokes for the first calculation are as follows: (BEGIN mode) n = 5, i = (1.06/1.04 - 1) × 100, PMT = 42,500, FV = 0. Then compute the value for PV which is $204,631 The keystrokes for the second calculation are as follows: (END mode) n = 10, i = 6, PV = 0, FV = 204,631. Then compute the value for PMT which is $15,525. Topic 17; Domain 3
A CFP® professional has been consulted for financial planning by a 62 year old couple who are approaching retirement. The couple has been investing in a Life Cycle mutual fund, and they have accumulated $115,000 in the fund. The couple has worked for the same company for the past 20 years and both are expecting to retire at age 65 with a pension of $30,000 and Social Security benefits of $12,000. The couple owns their own home and has only four years left to pay off their mortgage. They want to retire with retirement income that is 70% of their current incomes. They plan to travel so they can visit their children who live in different countries. Their joint return shows that their income is $170,000. The couple has asked the CFP® professional about changing their investments from the Life Cycle fund, which earned about 9% last year, to a small-cap growth fund, which earned about 28% last year. The husband describes himself as a risk taker and flies a plane, and the wife says that she likes to ride hot air balloons. They both state that their preference is for capital appreciation and that they want to invest in stocks, especially the small-cap growth fund. They want high returns and are willing to take the higher risk of losses to obtain the returns. What action will be most important for the CFP® professional to take for this couple? A) The planner should explain the dangers of the overconfidence bias. B) The planner should explain the need to change the retirement income goal. C) The planner should explain the difference between risk tolerance and risk capacity. D) The planner should explain the advantages and disadvantages of Life Cycle funds.
C The planner should explain to the client the difference between risk tolerance and risk capacity because the client has the risk tolerance to invest in a small cap growth fund but not the risk capacity. The client has a retirement income goal that exceeds the pension and Social Security benefits by about $35,000 annually. They will need a substantial increase in their assets to provide that level of income after they retire. They cannot take increased risk to achieve this retirement fund in the next three years. They may be risk tolerant but they do not have the risk capacity to take this risk at the present time. The planner should explain to them that they have several alternatives to consider including delaying retirement, planning to work after retirement, or changing the retirement income goal. After the planner and clients consider the alternatives, it may be appropriate to talk about the advantages and disadvantages of the Life Cycle fund approach. There is no evidence in this question of the overconfidence bias which is the overestimating of one's abilities such as in picking investments.
Annette, a CFP® professional, is assisting her clients Ben and Jennifer, both age 40, with their retirement planning. Ben is an actuary and Jennifer is a high school math teacher. Both Ben and Jennifer spend a lot of time surfing the internet and reading up on various types of investments. They are concerned about a number of issues including fees, performance, asset allocation, and taxes. As she is preparing to make recommendations to Ben and Jennifer, Annette should do all of the following, EXCEPT: A) Discuss and provide the clients with a prospectus for any mutual fund recommendations, which will include information regarding fees, expense ratios, and historical performance. B) Consider a portfolio of index funds, explaining that they tend to have lower fees than actively managed funds and describe how they can be used in the appropriate asset allocation. C) Recommend that all of their retirement savings go into zero coupon bonds so that they can "immunize" their portfolio. D) Discuss with them various alternatives for funding retirement needs such as traditional and Roth IRAs, qualified plans that may be available through their employers, and nonqualified accounts.
C The planner should provide the clients with several alternatives and provide education on each. The planner should also provide any applicable product disclosures to the client. When communicating recommendations to a client, the planner needs to do more than just state a specific recommendation. In answer choices A, B, and D, the planner is discussing the funds and accounts in which they can be held, providing the required disclosures, and addressing the areas the clients have indicated they are concerned about. This is taking a counseling approach to communication rather than an advising approach in which the planner takes the ultimate decision-making out of the client's hands.
A CFP® certificant serves on the Board of a Shelter for Battered Women. A client would like to make a substantial donation to the shelter and asks the CFP® certificant for advice concerning the gift. Is there a conflict of interest for the CFP® certificant in advising the client on the gift? A) Yes, there is a conflict, and the CFP® certificant must withdraw from the Board. B) Yes, there is a conflict, and the CFP® certificant must withdraw from advising the client concerning the gift. C) No, there is no conflict, but the CFP® certificant should disclose her position on the Board. D) No, there is no conflict.
C There does not appear to be any conflict of interest in the CFP® certificant's roles of advising the client and serving as a member of the Board for the Shelter for Battered Women. The CFP® certificant does not materially benefit from the service on the Board, and the position does not seem likely to affect the relationship with the client or to affect the CFP® certificant's advice concerning a gift. In order to avoid any appearance of misleading the client, however, the CFP® certificant should disclose the position on the Board of the shelter.
A client who is 63 years of age has consulted a CFP® professional about retirement income planning. The client is considering removing the account balance from a qualified plan. What information will be important for the CFP® professional to obtain first from this client? A) The client's expected Social Security benefits and full retirement age B) The client's income tax returns for the past three years C) The basis and current value of employer stock in the client's account D) The client's budget and cash flow statement
C The CFP® professional will need to know if the client has employer stock and if so, the amount in the client's account to determine whether it should be rolled over to an IRA or not. If it is rolled over to an IRA, the employer stock will lose the benefit of being taxed as net unrealized appreciation. If it is not rolled over it will be taxed as ordinary income currently to the extent of the employer's contribution (basis), and the appreciation will be taxed when the stock is sold, but this appreciation will be taxed as long-term capital gain.
Sam and Marsha Carter are 35 years of age and have two children. A CFP® professional has prepared a financial plan for the family including education planning for the children. The Carters have begun to implement the recommendations from the plan about 3 months ago. Marsha called today to say that they have learned that their youngest child who is one year old is autistic. They would like to meet to discuss their financial planning for this child. What should the CFP® professional do first at the meeting? A) Describe the benefits that can be provided by a special needs trust B) Suggest that the client continue with funding their retirement and education plans C) Offer to meet with the client and a specialist on services for autism D) Discuss the services and ability of the CFP® professional to handle the client's needs
D The CFP® professional will need to discuss whether he has the knowledge and skills required for planning for the circumstances of an autistic child.
Your clients of 2 years, Carlyn and Manuel, are coming into the office for a quarterly financial check up. During the conversation on savings progress, Carlyn mentions that Manuel's father will be staying with them longer than originally planned because of some health concerns. Manuel enthusiastically shares how he'd like to modify their home to accommodate his dad being able to function in the home and how he's happy to have three family generations in the home as is often found in his culture. Carlyn interjects to share that she is not happy that their utility bills and food costs have almost doubled during father's visit and the continued expenses are cutting into their savings and spending goals. You quickly review the financial plan and jot a note to yourself that Carlyn is correct and these actions may require them to adjust their retirement goals. The conversation turns into an argument between Carlyn and Manuel, and Carlyn storms out of the office and into the restroom. She returns 5 minutes later. Of the options listed, which would be the best next step for the financial planner? A) Discuss with Carlyn that she should consider the importance of multiculturism for Manuel. B) End the meeting and refer the clients to a therapist before you will meet with them again. C) Show Manuel how the spending will likely cause adjustments to their retirement plans. D) Change the topic because of the impasse.
D The planner has several options as a next step, including addressing the differences between the clients, changing the topic and revisiting it later, or rescheduling the meeting to allow the clients to calm down. The planner will need to determine the next best step based on client feedback and knowledge of their personalities and communication styles. Choice A is incorrect, the planner should not polarize the client for their views. Choice B is incorrect, it is not the best choice as the financial planner should be able to initially address conflict between clients, only if the conflict continues and stays elevated should the planner refer them to a therapist before agreeing to meet with them. Choice C is incorrect, although it is important to discuss the impact to retirement with both clients, the planner should not single out Manuel and the planner should first revisit their goals and priorities to determine if they have changed.
Belinda has consulted her CFP® professional for advice on the purchase of a new car. The car will cost $44,200, and Belinda can take a loan for four years at 6%. Belinda has determined that she cannot make payments of more than $8,400 each year. What down payment should the CFP® professional tell her she needs to make? A) $7,453 B) $11,242 C) $13,271 D) $14,394
D First find the max monthly payment she can make, $8,400 / 12 = $700. The keystrokes will be as follows: 48, n 6/12, =, i 700, +/-, PMT 0, FV Then calculate the PV which is $29,806. This amount is subtracted from the purchase price of $44,200, so the down payment will be $44,200 - $29,806 = $14,394.
