Basics & Fundamentals Flashcards
Calc setup steps?
— 1, downshift, PMT (P/YR) for 1 period per year
— downshift, = (DISP), 4 for four decimals
— upshift, ON (Alg/Chain) for chain mode
— downshift, C (C ALL)
— check Beg/End, adjust as appropriate for question
Examples of annuity due (Beg mode)?
Tuition payments, retirement income, rent payments.
Examples of ordinary annuity (End mode)?
All debt payments, like mortgage, car, credit card.
NPV = ?
NPV = Present Value of the Cash Flows – Cost or Initial Investment
An NPV of zero indicates that the cash inflows and the cash outflows of the investment are identical, and exactly ade-quate to repay the invested capital. Additionally, for mutually exclusive projects one should select the project with the highest NPV. This is the decision rule applied unless capital rationing is a consideration, in which case the most affordable project with the highest NPV should be selected.
Real Rate of Return Formula
Karen, a CFP® professional, is disappointed about the disclosure requirements of the CFP Board Code of Ethics. Karen voices her opinion by publishing a negative article about the CFP® certification on an industry website. Has Karen possibly violated the CFP Board Code of Conduct?
a) Yes, Karen has violated the duty of loyalty owed to CFP Board.
b) Yes, Karen has acted in a manner the does not reflect positively on the CFP® certification.
c) No, Karen’s action is outside the financial planning process.
d) No, only public media outlets are reviewed by CFP Board
Answer: B
The Code of Ethics requires a CFP® Professional to act in a manner that reflects positively on the financial planning profession and CFP® Certification. An article attacking the CFP® certification may be seen as in conflict with this standard. A is incorrect, the duty of loyalty extends to clients, not CFP Board. C is incorrect, the Code of Ethics addresses the professional conduct of a CFP® professional, not only their activity as a financial planner. D is incorrect, the Code of Ethics does not specifically outline or characterize media outlets.
Car Mutual appoints licensed agents to sell proprietary auto and homeowners policies. Car Mutual requires agent exclusivity, pays agents commissions for selling their products and top agents are paid additional bonus compensation and invited for an all expense paid Hawaiian vacation. Which best describes a CFP® Professionals ability to engage Car Mutual?
a) As a fiduciary a CFP® professional is prohibited from selling proprietary products.
b) A CFP® professional must provide holistic financial planning advice and is unable to work exclusively with a property casualty insurance company.
c) With appropriate disclosure and mitigating conflicts of interest, CFP® professional can be appointed as an agent of Car Mutual, but cannot participate in insurance-based reward trips.
d) With appropriate disclosure and mitigating conflicts of interest, a CFP® professional can be appointed as an agent and participate in insurance-based reward trips.
Answer: D
A CFP® professional can participate in commission and reward trip arrangements. They must act objectively and as a fiduciary, manage and disclose the conflicts of interest that accompany a reward trip and disclose their compensation model. A is incorrect, a CFP® Professional is not prohibited from selling proprietary products as long as they disclose compensation model and mitigate conflicts of interest. B is incorrect, a CFP® Professional is not required to offer com-prehensive planning services. C is incorrect, reward-based trips are considered a source of com-pensation. With appropriate disclosure and managing conflicts of interest a CFP® professional could attend. The potential for the trip must be shared as a compensation source with the client.
Stan is a CFP® Professional employed by a federally covered investment adviser. Stan mistyped client information into a financial planning software package; the error resulted in overestimat-ing a client’s insurance need. Once discovered, Stan contacted the client, informed them of the error and adjusted his recommendation. Has Stan violated the CFP Board Standards of Conduct?
a) Yes, Stan has violated his obligation of integrity to the client.
b) Yes, Stan has violated his obligation of competence to the client.
c) Yes, Stan has violated his obligation of diligence to the client.
d) No, an allowance is made for innocent error. Stan has not made a violation.
Answer: D
Standards of Conduct allow innocent error. A is incorrect, the obligation of integrity allows innocent errors without becoming a violation. B is incorrect, competence requires knowledge and relevant skill to apply the knowledge. C is incorrect, diligence requires delivering profes-sional services and responding in a professional manner.
Yu Yan is a CFP® professional and also a state registered investment adviser. She plans an annual luxury cruise for her top clients. While she is on the cruise, Yu Yan will host investment and retirement planning workshops. If more than ten of her clients commit and pay for the cruise, Yu Yan will receive a complimentary suite from the cruise line. If fewer than ten clients attend Yu Yan will have to pay for her room. Which best describes Yu Yan’s obligation to her clients disclosing her arrangement with the cruise line?
a) The conflict of interest is not material and does not need to be disclosed.
b) Yu Yan should disclose the conflict prior to the client’s booking their cruises.
c) Yu Yan is prohibited from accepting a suite from the cruise line.
d) This conflict should be mitigated and Yu Yan consider alternative venues.
Answer: B
Conflicts of interest must be disclosed and managed. Disclosing the arrangement to her client is sufficient mitigation. The clients attending the cruise are not likely to be harmed by attending. A is incorrect, the cruise arrangement presents a conflict of interest that should be disclosed and managed. C is incorrect, the arrangement does not cause harm, but should be disclosed and man-aged. D is incorrect, the arrangement does not cause harm, but should be disclosed and man-aged.
A CFP® professional refers clients to a local accountant with a reputation of aggressively lower-ing client federal income tax obligations. The accountant has clients sign a nondisclosure agree-ment preventing the CFP® professional from understanding the techniques, credits and deductions taken. Which best describes a potential violation of the CFP Board Standards of Conduct.
a) The professional is violating the standard of Complying with the Law
b) The professional is violating the standard of Professionalism
c) The professional is violating the standard of Competence
d) The professional is not violating the CFP Board Standards of Conduct
Answer: A
The CFP® professional cannot recklessly assist in another’s violation of the standards. By not knowing what strategies are taken the CFP® professional should cease recommending clients to the accountant. B is incorrect, professionalism requires the CFP® professional to treat clients and other professionals with dignity, courtesy and respect. C is incorrect, competence requires a CFP® professional to apply sound knowledge. D is incorrect, referring clients to the accountant is reckless, violating the standards of conduct.
Luke is a CFP® professional and also a licensed real estate agent. Luke charges hourly fees for financial planning as a state registered investment adviser and receives commissions for real estate sales from his real estate agency. Luke recently met two new prospects, Ben and Maria, at a cocktail party. Ben and Maria meet Luke at his real estate broker’s office, and talk about downsizing into a newer home. They share that their children have recently left for college and they would like to funnel more resources towards saving for retirement instead of a mortgage. Luke uses a finan-cial calculator to briefly analyze their cash flow and establish their debt service and liquidity ratios. After the meeting Luke sets a second appointment to look at five houses that meet Ben and Maria’s criteria. Which best describes Luke’s relationship to the Financial Planning Practice Standards outline in the CFP Board Code of Ethics and Standards of Conduct?
a) Luke is representing Ben and Maria as a Realtor and is not required to follow the finan-cial planning practice standards, even if he charges a fee for their initial meeting.
b) Ben and Maria are responsible for determining if the engagement falls within the scope of financial planning.
c) Luke is subject to the practice standards because he is providing integrative financial advice.
d) Luke is subject to the practice standards only if he receives a commission from repre-senting Ben and Maria in a real estate transaction.
Answer: C
Luke is subject to practice standards because he integrated financial information and is working towards a meaningful (housing) purchase. A is incorrect, compensation does not dictate if Luke is practicing financial planning. B is incorrect, Luke should determine the scope of the relation-ship and CFP Board is the final arbitrator if financial planning occurred. D is incorrect financial planning occurred well before any commission will be paid.
Mary (55) is currently saving $500 every paycheck (bi-weekly) through her employer retirement plan. Her employer matches 100% of her contribution and Mary is vested in the plan and has selected a life-cycle mutual fund currently invested in 70% stocks and 30% bonds. Mary is a risk tolerant investor. Mary engages Stephanie, a CFP® Professional, to review her retirement journey. Stephanie performs a calculation on her financial calculator and determines Mary should increase her contribution to $600 every paycheck and invest in a less aggressive mutual fund. Is Stephanie possibly in violation of the CFP Board Practice Standards?
a) No, Stephanie gathered information and goals before performing an analysis.
b) No, Stephanie considered qualitative and quantitative data in her analysis.
c) Yes, Stephanie did not consider the advantages and disadvantages of Mary’s current retirement savings plan.
d) Yes, Stephanie used a financial calculator rather than a software tool.
Answer: C
Stephanie should consider a current plan of action as well as a recommended plan. A is not the best answer, while the process was followed elements of each step are not complete. B is not the best answer, the question does not indicate qualitative factors were considered. D is not the best answer, practice standards do not require a specific tool.
When is a CFP® Professional who is also a licensed insurance agent required to review calculations used to determine a death benefit amount with their client?
a) When gathering qualitative and quantitative information.
b) When analyzing current life insurance coverage
c) Before developing a life insurance recommendation
d) Before implementing a life insurance recommendation
Answer: D
Communicate before implementing. A, B, and C are not a correct or appropriate placement of communicating with the client.
Amar, an agent of a regional broker-dealer, has recently been suspended by CFP Board for six months. His suspension is a result of repeatedly incorrectly identifying himself as a fee-only financial planner. Which best describes Amar’s obligation to his employer relating to this sus-pension?
a) Amar must report the suspension, cause and investigation paperwork to his employer within thirty days.
b) Amar can report the suspension to his employer by calling his compliance hotline.
c) Amar must report the suspension promptly in writing to his employer.
d) Amar is not required to report the suspension to his employer as long as he is not paid a regular salary.
Answer: C
Amar is required to promptly notify his employer of the suspension. Amar’s status as an agent paid on commissions does not change his obligation. A is incorrect, Amar is not required to sub-mit additional information to his employer beyond a notice of suspension. B is incorrect, Amar must notify his employer promptly in writing. D is incorrect, Amar is an employee as he is appointed and an agent of the firm.
Which of the following is considered a felony by CFP Board?
a) Class “D” driving reckless driving citation resulting in a fine of $5,000
b) Driving under the influence citation resulting in one month in jail
c) Federal income tax lien of $100,000
d) Charge of Perjury during a federal trial, resulting in a week of detention and $500 fine
Answer: A
CFP Board defines a felony as an offense punishable by one year or more in jail or over a $1,000 fine. B is incorrect, this would be characterized as a misdemeanor. C is incorrect, this would be characterized as a lien. D is incorrect, this would be characterized as a misdemeanor.
Scott is a CFP® Professional and a CPA. He was listed by name in a federal income tax investi-gation for fraud. Which best describes Scott’s obligation to CFP Board?
a) If the investigation is a result of his accounting practice, Scott does not need to disclose the investigation to CFP Board.
b) Scott does not need to disclose the investigation, but will need to disclose the result in writing within thirty days.
c) Scott needs to disclose the investigation within thirty days. He will also need to dis-close any eventual plea deal, conviction or civil outcome to CFP Board.
d) Scott needs to disclose the investigation within thirty days, but by doing so eliminates any requirements to disclose an outcome.
Answer: C
Scott must disclose both the investigation and any negative consequence. Both disclosures must be in writing and made promptly (within 30 days). A is incorrect, accounting is a professional service. B is incorrect, Scott must disclose both the investigation and result. D is incorrect, Scott must disclose both the investigation and result.
Which of the following is the proper use of the CFP® marks?
a) Mark is a CFP®
b) Our firm has 10 CFPs on staff.
c) Sam Jacobs, CFP® works at our firm.
d) Cory is a certified financial planner.
Answer: C
a. The mark is not followed by an approved noun. b. The mark may not be used to refer to a group, but one person directly, and cannot be pluralized. d. If writing out the certification, it should be all caps with the trademark noted. Writing out CFP Board does not require the registered or trademark noted.
A CFP® certificant must disclose compensation:
a) Once, during engagement letter.
b) Annually.
c) Ongoing, as necessitated by services and products provided.
d) Every meeting with the client.
Answer: C
Duties when representing compensation require a CFP® professional to be clear and not make any false statements about their compensation. At the time of engagement a CFP® professional must provide a description of services, compensation description and conflict of interest disclosure. This disclosure is ongoing as new products and services are introduced to a financial planning relationship.
Steve, a CFP® professional, works for a firm which requires any insurance products offered be limited to proprietary products of the firm. Which of the following are true according to the CFP Board Code of Ethics?
I. Steve is prohibited from engaging in financial planning relationships because he is unable to uphold the duty of loyalty and act as a fiduciary.
II. Steve may engage in financial planning and receive sales based compensation. Steve’s propri-etary relationship with his employer is not a material conflict of interest and he is not required to disclose his compensation arrangement to clients.
III. Steve may engage in financial planning and receive sales based compensation. Steve’s pro-prietary relationship with his employer is likely a material conflict of interest and he is required to disclose this conflict to his clients.
IV. Steve is prohibited from engaging in financial planning relationships because he is unable to uphold the duty of care and act as a fiduciary.
a) I Only
b) III Only
c) II and IV
d) III and IV
Answer: B
Steve is required to disclose material conflicts of interest. Constraints limiting Steve to sell pro-prietary products could potential harm his client and is material. Written consent is not required. Steve must act as a fiduciary and can likely do so even with proprietary products.
Conduct Deemed Unacceptable and will ALWAYS bar an individual from becoming certified …
- Felony conviction for theft, embezzlement or other financially based crimes.
- Felony conviction for tax fraud or other tax-related crimes.
- Revocation of a financial professional (registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the revocation is administrative in nature.
- Example of administrative revocation: the result of the individual determining not to renew the license by not paying the required fees.
- Felony conviction for any degree of murder or rape.
- Felony conviction for any other violent crime within the last five years.
Conduct Deemed a Presumptive Bar and is PRESUMED to be unacceptable …
- Two or more personal or business bankruptcies.
- Revocation or suspension of a nonfinancial professional (real estate, attorney) license, unless the revocation is administrative in nature.
- Suspension of a financial professional (registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) license, unless the suspension is administrative in nature.
- Felony conviction for nonviolent crimes (including perjury) within the last five years.
- Felony conviction for violent crimes other than murder or rape that occurred more than five years ago.
Paul recently applied for CFP® Certification. Which of the following would always bar him from certification?
a) Revocation of a financial professional license.
b) Felony conviction for perjury last year.
c) Felony conviction for aggravated assault 7 years ago.
d) Prior revocation of a real estate license.
Answer: A
Revocation of a financial professional license is on the always bar list. All others are on the pre-sumed list.
If a potential client implies that they are unable to confide certain elements of their business to you during the fact finding phase of the interview, what should you do?
a) Continue and hope they will answer your questions later.
b) Fill in the blank spaces using estimates.
c) Call the authorities and report possible illegal activities.
d) Thank them for their time, close up the interview and do not engage them as clients.
Answer: D
If a client does not feel comfortable discussing details which may be pertinent to developing a final plan with a planner, then this is not a relationship that should be pursued.
A husband and wife come into your office to hire you as their planner. After the meeting the husband pulls you aside and advises that he is going to divorce his wife but wants to retain your services for himself. He asks you not to tell his wife. What do you do?
a) Accept current engagement with husband and wife, and don’t tell the wife.
b) Disengage from husband and wife and don’t accept the engagement.
c) Accept engagement and tell the wife about your conversation with her husband.
d) Call a divorce attorney and advise husband and wife of your actions.
Answer: B
Put both clients’ interest ahead of your own. By accepting them both as clients, you will have an inherent conflict of interest, as you cannot serve in the best interest of both of them.
Investment Advisor
An investment advisor knows their ABC’s! -> Advice, Business, Compensation
An investment adviser is defined for purposes of the Investment Advisors Act of 1940 as someone who is: (1) in the business (2) of providing advice about securities (3) for compensation.
Exceptions to Registration with the SEC
The most important rules are the first two exceptions. The exception is that TABLEs are incidental! -> Teachers, Accountants, Brokers, Lawyers, and Engineers.
The following need not register under, and generally are not regulated by, the Advisers Act:
- Any broker/dealer whose advisory services are solely incidental to the conduct of business.
- Lawyers, accountants, teachers and engineers whose advice is solely incidental to their profession.
- Banks and bank holding companies that are not investment companies.
- Publisher of a bonafide newspaper, magazine or periodical of regular circulation.
- Advisors whose advice and services is related strictly to securities guaranteed by the United States.
- Such person not within the intent of the law as the SEC may designate by rules, regulations or order.
Exemptions from SEC Registration
“VIPs are SaFE from exemptions” -> Venture capital, Insurance companies, Private funds less than $150 million, home State, Foreign advisors, and securities not on a national Exchange
The following meet the definition of investment advisor, but are not required to register. They are subject to the anti-fraud provisions of the Act.
- Advisors whose clients reside in their state of business and who do not provide advice, services, analysis or reports regarding nationally listed securities.
- Advisors not providing advice about securities traded on a national exchange.
- Advisors whose only clients are insurance companies.
- Advisors solely to venture capital funds.
- Advisors solely to private funds less than $150 million.
- Foreign advisors without a place of business in the US.
Accredited Investor
To be an accredited investor you must meet the 1, or 2, 3 test! $1 million, or $200,000 of income if single, or $300,000 of spousal income.
CFP Practice Standards for the Financial Planning Process (7 Steps)
U-I-A-D-P-I-M-> Uber is a Drunk Person’s Immediate Motor-vehicle!
- Understanding the Client’s Personal and Financial Circumstances
- Identifying and Selecting Goals
- Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) ofAction
- Developing the Financial Planning Recommendation(s)
- Presenting the Financial Planning Recommendation(s)
- Implementing the Financial Planning Recommendation(s)
- Monitoring Progress and Updating
Life Insurance Benchmark?
10-16 x gross pay
Business Life Cycle
What are the debt ratio percentages?
- Consumer debt payments should not exceed 20% of NET income.
- Housing debt should be less than or equal to 28% of GROSS income.
- Housing plus all other recurring debt should be less than or equal to 36% of GROSS income.
Housing Ratio
Housing & All Other Debt Ratio
