1
Q
The Financial Planning Process - 7 Steps
(Acronym)
A
Acronym: Uber Is A Drunk Persons Immediate Motorvehicle
- Understanding
- Identifying
- Analyzing
- Developing
- Presenting
- Implementing
- Monitoring
2
Q
Eight Principal Knowledge Categories
A
- Professional Conduct and Regulation
- General Financial Planning Principles
- Psychology of Financial Planning
- Risk Management & Insurance Planning
- Investment Planning
- Tax Planning
- Retirement Planning and Income Planning
- Estate Planning
- Just the 6 modules + psychology of financial planning & profession conduct & regulation
2
Q
Under the Code of Ethics, a CFP must:
A
- Act with honesty, integrity, competence and diligence
- Act in the client’s best interest
- Exercise due care
- Avoid or disclose and manage conflicts of interest
- Maintain the confidentiality and protect the privacy of client information
- Act in a matter that reflects positively on the financial planning profession and CFP certification
3
Q
Standards of Conduct
A
- Duty of Loyalty
- Duty of Care
- Duty to Follow Client Instructions
- The Integrity Standard
- The Competence Standard
- The Diligence Standard
- The Standard to Disclose and Manage COI
- The Sound and Objective Professional Judgement Standard
- The Professionalism Standard
- The Standard to Comply with Law
- The Confidentiality and Privacy Standard
- The Fiduciary Standard
4
Q
Standards of Conduct: Duty of Loyalty
A
- Balance Conflicts of Interest
- The CFP is required to:
1. Hold the interests of the client above those of the planner and the firm
2. Balance COI
5
Q
Standards of Conduct: Duty of Care
A
- Prudence
- CFP is required to act with the skill, prudence and diligence of a prudent professional in consideration of the client’s goals, risk tolerance, and personal circumstances.
6
Q
Standards of Conduct: The Integrity Standard
A
- Honesty
The CFP professional may not either directly or indirectly:
- Deceive or defraud clients and the public in general
- Make untrue statements of material facts
- Omit a material fact in order to mislead a client or the public in general
- Encourage any business at that would operate as a fraud or deceit upon anyone
7
Q
Standards of Conduct: The Competence Standard
A
- Knowledge & Skill
8
Q
Standards of Conduct: The Diligence Standard
A
- Respond in a timely manner
9
Q
Standards of Conduct: The Standard to Disclose and Manage COI
A
- Disclose COI and obtain consent of the client BEFORE providing any financial advice. The consent of the client is NOT REQUIRED to be in writing.
- Before; Not in Writing
10
Q
Standards of Conduct: The Professionalism Standard
A
- Treat others with dignity, courtesy, and respect
11
Q
Standards of Conduct: The Confidentiality and Privacy Standard
A
- CFP is required to maintain confidentiality regarding any non public personal information pertaining to current, former, or prospective clients
12
Q
The Standard to Provide Information to a Client: When Providing Financial Planning
A
- Engagement letter in writing
- Encompasses everything (i.e. develop comprehensive financial plans)
13
Q
The Standard to Provide Information to a Client: When Providing Financial Advice
A
- The advisor is paid to help with one or several financial matters
14
Q
Duties When Communicating with a Client
A
- Don’t use jargon
A CFP is required to:
- Provide the client with accurate information realting to the engagement, and
- Respond to client requests in an understandable way
15
Q
Misrepresentations by a CFP Professionals Firm in regards to Compensation and Sales-Related Comp
A
- Any CFP who controls the CFP professionals firm may not allow the firm to represent its compensation method in any way that could be false or misleading.
- He/she must correct any misrepresentations of sales-related compensation made by the firm
16
Q
Duties when Recommending Other Professionals
A
- Must have reasonable BASIS & CARE
- CFP must disclose to the client before the recommendation if the recommended professional will or intends to provide economic benefit to the CFP
17
Q
The Standard of Refraining from Borrowing or Lending Money & Commingling Financial Assets
A
Borrowing/Lending to a client: Generally prohibited
Exceptions:
- Client is a member of the CFP’s family or
- The lender’s normal business entails the business of lending money
Commingling: Always prohibited
18
Q
What should you do if the client does not agree to engage the CFP professional to provide process driven financial planning?
A
- Decline or terminate engagement or
- Limit the scope of engagement
- Provide requested services following a clear explanation of how financial planning would benefit the client
19
Q
Practice Standards for the Financial Planning Process (What should the CFP consider when determining what information should be preserved in writing?)
A
In determining what information should be preserved in writing, the CFP should consider:
- The obligation to act in the clients best interest
- The CFPs policies
- The firms procedures
-The significance of the information
20
Q
Qualitative data vs Quantitative Data
A
Qualitative: Subjective (wiggle room)
Examples: Risk tolerance, Health, Financial goals, Priorities
Quantitative: Factual
Examples: Age, Dependents, Risk capacity
21
Q
Addressing Unrealistic Goals
A
If the client has unrealistic goals, the CFP would not agree to such goals and should discuss the situation with the client
22
Q
Charges or convictions of misconduct must be reported to the CFP Board within ____ days of the charge or conviction
A
30
23
Q
Public Disciplinary Actions include
A
*In order of severity
- A public letter of admonition
- Suspension for up to 5 years
- Permanent revocation of marks
24
The CFP Board's DEC is responsible to investigate and take appropriate action regarding alleged violations of the
Code of Ethics and the Practice Standards
25
The CFP may appeal any ruling from the DEC by filing, within ____ days of the notice of the adverse ruling by mail. The CFP professional gets ____ opportunity to appeal
30, 1
26
The CFP must disclose Material COI _________ (before/after) providing any financial advice to which COI could apply. The consent of the client is _________ (not required/required) to be in written form.
before;not required
27
Privacy Policy requirements
- A privacy disclosure document that conforms to FINRA and/or SEC requirements will generally satisfy the CFP Board's requirement for the content of a firms privacy statement
- Always need to give privacy policy in writing
28
Fee-Based Planner vs Fee-Only Planner
Fee-Based: Comp through fees and commissions
Fee-Only: Fee only
29
Balance Sheet Equation
NW = A- L
A = L + NW
L = A - NW
30
Cash Flow Equation
Savings = Inflows - Outflows
31
Cash/Cash Equivalents
- Cash
- Checking/Savings accounts
- MM Deposit Account
- MM MF
- CDs close to maturity
- Laddered CDs
Note: LI CV is not included
32
Book Value
Reflects the corporate BS.
NW of Biz = BV of Assets - BV of Liabilities
33
Proforma Statement
- Projects the expected profitability or return of the next year or longer
34
Ideally a family should save at least _____ - _____ % of gross income
5-8%
35
Emergency Fund Vehciles
- Checking/Savings Accounts
- Government Money Market accounts
- CDs if close to maturity (<90 days)
- Laddered CDs < 6 months
36
Financial Infidelity Definition and Example
Couples or partners with shared money or finances being dishonest with each other.
Example: One partner hiding excessive spending, debt, etc. from the other person.
37
Financial Emeshment
Happens when the finances of parents and children are inappropriately commingled.
38
Real Rate of Return Equation
ROR = (1+ After Tax Return / 1 + Inflation Rate)*100
39
What deposit products are Insurable?
- Checking/Savings accounts
- Money Market Deposit Accounts (MMDAs)
- CDs
40
What deposit products are not Insurable?
- Stock investments
- Bond investments
- Mutual Funds
- US Treasury Bills, Notes, Bonds
41
Answer the following for Broker Dealers:
Purpose
Function
Regulation
Purpose: Most BD's facilitate OTC trading
Function:
Brokers match buyers and sellers
Dealers act as a principal in a securities transaction
Regulation: The SEC regulates BD's through FINRA
42
Answer the following for Insurance Companies:
Purpose
Function
Regulation
Purpose: Insurance Companies provide a mechanism for risk sharing and risk transfer
Function: Marketing products, rate making, underwriting policies, investing assets, reinsurance, claims adjusting
Regulation: Insurance Companies are regulated at the state level
43
Which agency regulates brokerage companies?
The SEC regulates brokerage companies through FINRA
44
Definition of a Financial Advisor
- A person who provides Advice or issues reports or analysis regarding securities
- A person who is in the Business of providing such services
- A person who provides such services for Compensation
* Must meet all 3 criteria (ABC) (Advice, Business, Comp)
45
What sort of information does Form ADV Part 1 contain?
General Information
- Applicant
- Background of applicant
- Locations
- Disciplinary action
- Form of business
- Investment philosophy
46
What sort of information does Form ADV Part 2 contain?
Brochures
- Describes nature of RIAs business structure and relationships, along with the following information:
- Fees
- Services
- COI
- Methods of analysis and investment strategies
- Risk of loss
47
When do you have to give a client a new FORM ADV Part 2 Brochure?
When there has been a material change
48
When does the RIA have to deliver a current Brochure to any client?
Before or at the time the RIA enters into the advisory agreement with the client
49
To sell variable contracts, the rep must hold both of the following:
1. A series 6 or 7 representatives license
- A variable state life insurance license
50
What agency should be notified first if a CFP decides he wants to become an RIA?
The SEC
51
Investment Advisers Act of 1940
Requires that persons or firms advising others about securities investments must register with the SEC
52
Agent vs Brokers
Agent: Work for a company
Brokers: Represents client
- A broker can not make insurance effective
53
Hierarchy of Authority
1. Expressed Authority
2. Implied Authority
3. Apparent Authority
54
Conditional Receipt
If the applicant were to die before a policy is issued, the company must pay the death benefit if the policy would have been issued
55
Law of Agency
Compliance with the rules of the insurance company falls under the Law of Agency
56
Chapter 7 Bankruptcy
- Wipe out/cancel debt entirely
- Must satisfy a "means test"
The filer must provide the following information:
- Proof that he has completed consumer credit counseling within 6 months of filing
- Tax returns & detailed earnings projections
- Info on retirement accounts (IRAs over $1m)
- Info on Education Savings Accounts/529s (opened within 2 years or non-child/grandchild bene)
57
Fair Credit Reporting Act
- Allows consumers 1 free report per year
- If consumers are denied credit, they have a right to know why
58
Consumer Credit Protection Act
- Lost or stolen credit cards have a limited liability of $50/card
59
Credit Scores
- Consumers are not entitled to receive a free credit score
60
Income Tax Considerations Regarding Divorces Finalized Before 2019
1. Payor can deduct alimony
- Payment must be received by or for the benefit of the payee spouse
2. Receiver reports it as income
Example: As part of the divorce instrument, Mr Govan must provide Mrs Govan with a $1m life insurance policy on his life. If he owns the policy, and she is the beneficiary, no alimony deduction is allowed.
61
Child Support
Never taxable / Never deductible
62
Dependency/Personal Exemptions
0 - Never allowed
63
In regards to the exam, what is the best transfer arrangement for unmarried domestic partners?
Revocable trusts and TIC
64
COBRA
- Under COBRA, employers providing group or self-funded health coverage are required to offer terminated employees the right to buy continued health coverage.
- Small companies (under 20 employees for at least half of the prior year) are exempt from federal legislation
65
COBRA Coverage
- Employee Fired/Quits/Moves from Full Time -> Part time = Up to 18 months of coverage
- Non-Job Related Event (Divorce, Death) = Up to 36 months
- Loss of Dependent Status (Marriage, Reaching Dependency Age Limit) = Up to 36 months
66
Compensatory Damages
- Compensatory Damages received because of physical injuries or physical sickness are generally tax-free. However, interest paid is taxable.
- Damages received in discrimination or other non-physical injury cases are taxable with one exception: damages up to the amount of actual medical care expenses attributable to emotional distress like psychiatric care are tax-free.
Example: Fred was injured at work. He is awarded compensatory damages of $1m. He invests the money and makes 5% this year ($50k) in dividends and capital gains. The amount taxable to Fred this year is $50k because this was not part of the original compensatory damages.
67
Punitive Damages
- Generally taxable
- Exception: Damages paid to a beneficiary in conjunction with a wrongful death are received tax free
68
Fiscal Policy
- Set by Congress
- Taxation and Spending
- Does not work with Monetary Policy
69
Monetary Policy (DORM)
- Money supply
- Set by the FED
DORM Acronym:
Discount Rate
Open Market Operations
Reserve Requirements
Margin Rates
70
Leading Economic Indicators
1. Initial claims for unemployment insurance
2. New manufacturing orders
3. New private housing units
4. Stock Prices (S&P 500)
5. Index of consumer expectations
71
Coincident Indicators
1. Industrial production
2. # of employees on non-agricultural payrolls
3. Personal income less transfer payments (SSN, Welfare)
72
GDP
- GDP measures the US economy's total production of goods & services
- Counts economic activity without regard to yearly price fluctuations (inflation)
Made up of:
1. Consumption
2. Investment
3. Government spending
4. Net Exports
73
Durable vs Non Durable Goods
Durable: Cyclical (cars, appliances, home furnishing & fixtures)
Non Durable: Defensive / People always need them (Cosmetics, cleaning products, food, fuel, clothing & footwear)
74
If rates are going to go up, you should ________ (Buy/Sell) ______ (Long/Short) term bonds
If rates are going to go down, you should ________ (Buy/Sell) ______ (Long/Short) term bonds
Short
Long
FAL | LEN: Rates Fall = Lengthen
75
Prizes & Awards
The winner of a contest (lottery)
76
Short Term Debt vs Long Term Debt
Short Term Debt: Consumer & auto
Long Term Debt: Home equity line of credit, 30 yr mortgage
77
Determining whether to Buy or Lease/Rent a Home
- The biggest considerations are:
1. Time Horizon (Longer time horizon = Buy)
2. Tax brackets (Higher marginal rate = Buy)
78
Fixed Rate Mortgage
- Payments and interest are fixed (typical repayment time of 15 or 30 yrs)
79
ARM
- Interest Rates fluctuate with interest rates in the economy
80
Biweekly Payments
- Payments due every 2 weeks resulting in mortgage being paid off faster with less total interest
81
Balloon Payments
- Payments are based on a long-term mortgage at a given interest rate.
- For example: After a 5 year period, the unpaid balance must be either paid off or refinanced
- Uncertainty is a buzzword
82
When evaluating whether a client should refinance a mortgage, the financial planner should consider 2 key issues:
1. Length of time expected to stay in the home
2. Cash Flow capacity
83
Reasons to refinance a mortgage
1. To obtain a lower IR
2. To consolidate debt
3. To change the term of the loan
4. To raise extra cash
84
General Rules for Reverse Mortgage
- Tap into equity of home for CF
- The home does not have to be owned free and clear to qualify
- Available to homeowners 62+ (in condos or single fam homes)
- No income qualifications
- No monthly mortgage payments during life of loan
85
Funding Years (Options)
- UGMA/UTMA: Not tax advantage, subject to kiddie tax for children under 24
- EE Education Bonds: Parents own bonds, so does not work in UGMA/UTMA
- Coverdell ESA: Limited to $2k/yr contribution total / Qualified expenses are broad
- 529s: $85k/ lump sum tax free gift
86
Wealthy vs Poorish Grants/Loans
Wealthy (>$70k income): PLUS
Poorish: (>$70k income): Pell Grants, Supplemental Edu Opp Grant, Subsidized Stafford Student Loans
87
Transfer of Credits (529s)
- A transfer of credit for the benefit of the same designated beneficiary from one qualified tuition program to another is not considered a distribution.
- Only one transfer w/n a 12 month period is allowed
88
Prepaid tuition plans are generally counted as _______ (Donor/Student/Parental) assets to qualify for financial aid
parental
89
Coverdell ESAs
- Individuals may contribute up to $2k/yr per kid
- Contribution is not deducible
- Earnings accumulate tax deferred
- Qualified expenses are broad
- All funds must be used before the child reaches age 30
90
UGMA/UTMA
- In certain states, an UGMA/UTMA may be transferred to a 529. The child is still the beneficial owner
91
EE Bonds
- Normally purchased in the parents name
- Bonds can't be issued in the name of the child or custodial accounts
- Bonds musty ne redeemed in a year in which the owner pays expenses
- Interest exempt from federal income tax only
- $149k - $179k MAGI
- Savings bonds can be held in an UTMA, but then they cannot qualify for the edu expense exclusion. If redeemed for college, interest is taxable
92
Pell Grants
- Not paid back
- For poor people (<$70k income)
93
PLUS Loans
- Only choice if you are wealthy
94
Subsidized Stafford Student Loans
- Gov pays interest while in school
