Book 1 Flashcards
Debt Ratios
Consumer - 20 - net
Housing - 28 - gross
Total - 36 - gross
NIA / NW
Should be about 50% - depending on age and life stage. Do not include home equity!
Emergency funds
1 earner - 6 months
2 earners - 3 months
Snowball technique
Move excess payments to smallest amount and slowly accumulate / payoff
Avalanche technique
Prioritize high interest debt and pay that debt off the quickest
Credit score
Payment history and amounts owed are greatest impacts to score
Leases
Closed end - agreed upon amount and time over period and term (cabs adjust to inflation etc)
Open end - lower payment, but lessee may own additional money if product is with more now (often autos)
FHA Loan
Buyers who don’t meet underwriting, low down payment, often needs PMI
VA Loans
Same as FHA, low down - but no PMI
Conventional loans
Under confirming loan limit, above this limit is Jumbo loans (or subprime - require higher rate / down)
Fixed rate mortgages
Fixed rate over life
ARMS
Adjustable interest rates - tied to index. Negative amortization may occur. Good for a short period of stay and low monthly payment
Ballon
30 yr loan payments made for 5/6 years then sold and full amount due
Graduated payment
Payment get higher as loan progresses
Reverse
Often requires little to no debt on home, banks secure lien on property and get it when they die or move out
IA Act of 1940
Fiduciary standards for RIAS
ABC TEST
New registration guidelines
Registration Requirements
Advisor must register under IARD to SEC - they just grant or deny in 45 days. Then just file ADV part 1 annually for SEC
Disclosure requirements
Disclosure for advisors is ADV part 2A (or brochure). Must be given 48 hrs before contract signing or there is a 5 day back out period
Securities act or 1933
Registration of IPOS
Glass steagall act 1933
Prohibited consolidation of financial institutions
SE Act of 1934
Created SEC and required registration - requires all listed securities to keep info current
Maloney act 1938
Brought OTCs under SEC Registration
Macarena Ferguson Act - 1945
Insurance is to be regulated on the state level
SIPC 1970
Provides for $500K securities and $259K cash limit if a broker were to default
Gramm-Leach-Bailey act
Addressed the way institutions handle private information and repealed glass-steagall acts
PATRIOT Act
Requires KYC laws due to money laundering
Sarbanes Oxeley
Toughens the accountability and accuracy of reporting standards for corporations - requires independence of corporate boards and sets stricter auditor rules
Dodd-Frank WSR&CP Act
Created the consumer financial protection bureau and the financial stability oversight counsel - also addressed derivative trading
Changed SEC Registration limits from IA act of 1940
FINRA purposes
Market regulation Member regulation Enforcement Dispute resolution - 90% of security cases Advertising regulations
FINRA Registration
U4 to register
U5 to terminate
Must re-register within 2 years
Series 6
Allows to sell open end investment companies, variable products, and initial UITs
Series 7
Sell any security, including Stocks and ETFs
Series 24
Any person actively engaged in managing members of securities or investment banking business (7 or 62 prerequisite)
Series 63
Required to sell securities within a state - required for state registration
Series 65
Allows providing investment advice within a state - CFP exempts this
Series 66
Provide investment advice and sell securities in any state - series 7 is a prerequisite
Financial Advice occurs when
- The development of FP
- the value or advisability of investing in, holding, or selling an asset occurs
- investment strategies or polices
- the selection or retention of other persons to provide financial or professional services
FA that requires FP
3 Qs
- Has planner agreed to FP
- Does client believe this is FP
- Does FP require integration of relevant elements
Integration factors
Number of relevant elements Portion / amount of client assets Length of time of effect Effect on overall exposure to risk Barriers to modifying actions taken
Code of ethics
- Act with Honesty, integrity, competence, and diligence
- Act in clients best interest
- Exercise due care
- Avoid/disclose MCOI
- Maintain confidentiality
- Act in a way that reflects well for CFP
Fiduciary duty
1 duty of loyalty
2 duty of care
3 duty to follow client instruction
Compensation methods
Fee only - only planning fees
Fee based - planning and sales fees
“Sales related compensation”
Fiduciary duties meanings
Principle based
DOL - strictest standard
RIA - act in best interest
Suitability - something suitable - not the best!
Prudent Investor rule
A Fiduciary of a QP must act with care, skill, and prudence - if a prudent man were acting in capacity”
Duties Under the Fiduciary Duty
Duty of Loyalty Duty of Care Duty to Follow client instruction Duty to disclose Duty to Diagnose Duty to Consult Duty to Keep Current
Disciplinary Process: Respondent
Any person who has agreed to use the CFP Marks and can be put under investigation
Disciplinary Process: CFP Board Counsel
Authority to investigate an issue against a respondent
Disciplinary Process: Hearing Panel
When a formal complaint is filed, a hearing takes place before a panel of (min.) 3 individuals - at least one from DEC and 2 are CFP’s! basically a trial
Disciplinary Process: DEC
Composed primarily of CFP Professionals - has the authority to enter final orders and impose disciplines
Disciplinary Process: Appeals Committee
Composed primarily of CFP’s, and has the authority to issue CFP Boards final decision - composed of 4 people (two of which are first-year members of the board) – CANNOT BE DEC Members
Procedural Rules: 3 actions
CFP Board counsel investigates and must make one of the following actions
- Letter of Dismissal: Dismiss investigation
- Settlement Offer: Present a settlement offer to the DEC
- Complaint: Deliver a complaint against a respondent
Procedural Rules: Interim Suspension
While investigating - the CFP Board may issue an interim suspension
Proof of compliance is mandatory within TEN days
Procedural Rules: Consent Orders
The counsel and respondent may have a settlement and Consent Order that would resolve an issue. This CO is brought to the DEC and they can:
Accept it
Reject it
Reject and Counter-offer (accept w/in 20 days)
Procedural Rules: Filing Document Date requirements
- Exclude the day of the event that triggers the period
- Count every day - including holidays and weekends
- include last day of the period - but if weekend or holiday, go to next day
Procedural Rules: Key Dates
- Respondent subject to an order - 30 Days
- Respondent delivers document in response - 30 days
- Chair of DEC delivers notice of hearing - < 30 days
- Respondent notification of change of address - 30 days
- Response to written complaint - 20 days
- Response to complaint for single bankruptcy - 20 days
- Response to produce documents - 20 days
- Response to amended written complaint - 10 days
- Evidence of compliance with suspension - 10 days
Procedural Rules: Suspension Time limits
90 Days - 5 years
GDP / GNP
Total monetary value of all final goods and services produced within the US over the course of a given year
GDP = C+I+G+NE
GNP Follows goods produced by local companies abroad
Indicators - L/C/L
L: Housing stars, bond yields, orders for durable goods
C: Industrial production, Personal Income, Corporate profit
L: Prime interest rates, Changes in CPI, Amount of business and consumer loans outstanding, Duration of UE
Bankruptcy
Chapter 7: Personal bankruptcy, discharge of most debts (mostly unsecured loans) - challenging to get now and hard to achieve - 8 year hiatus as well as some counseling classes
Chapter 13: Debtor has restructured payments and must pay within 3-5 years, but no assurance anyone will receive anything Wage Earner Plan
Chapter 11: Usually business bankruptcy - allows debtor to maintain control, but is often trustee appointed (REORGANIZATION)
Credit Reporting: CCPA (TIL Act)
Forced lenders to make certain uniform disclosures & Established standard method of interest reporting (APR) - Regulation Z requires disclosure of major credit terms
CC Holder only liable for $50 of unauthorized charges
Credit Reporting: FCRA
Access to information - Consumers who have been denied credit must be notified which credit agency provided info top the creditor - consumer has 30 days to request free copy of credit file
Consumers can argue / request updated reports sent to creditors if there are mistakes
Credit Reporting: Other important Legistlation
Fair Credit Billing Act - Requires consumers to notify creditor in writing of billing errors within 60 days of error - 30 days to respond and 90 days to resolve
EFT Act - recovery by those who lose money due to following EFT rules
CC Reporting Reform Act - requires credit bureaus to include accurate, relevant, and recent info - also restricts info to bona fide users of financial information
Fair Debt Collection Practices Act - prohibits harassments at workplace & In general
CARD Act - established fair practices and to enable consumers to better understand credit transactions
Consumer Protection: Privacy Act
Limited the Govt’s use of personal data and how it can be collected / distributed - also taken measures in CCRRA
Consumer Protection: FACTA
Added new sections to the FCRA that helps consumers prevent identity theft - can get one credit report every 12 months from each three national bureaus
Education Calcs - Serial Payment
- Inflate - END
- Adjust - BEG
- Invest - END USE ED INFLATION
- Set as FV and solve for PMT using IAROR
- Multiply by 1+I to get first year payment
Education: EFC
Parental Income - 22 - 47%
Parental Assets - Max 5.64%
Student Assets - 20%
Student Income - 50% (above protected amount) - 2 year Lookback
Custodial Parent - FAFSA
Whoever the Kid lives with more is the custodian, if the time is split equally, it is whoever pays more!
Student Loan Defaults
Delinquent the first day after missed payment
After 90 days, reported to major credit bureaus
After 20 days - DEFAULT!
IRC Section 162
$5,250 in non-job related expenses given as tax-deductible education. If job related, fully a write-off
