Book 1 (continued) Flashcards
Describe the steps for initial registration to be able to sell certain equity-based products
1) Associate w/ a broker-dealer
2) Register w/ FINRA on Form U-4
3) Pass exams
4) Receive a CRD number
What does “Business Activity Ages” mean?
Economy is at a PEAK.
The public stops buying because they have enough of everything they need
Fiscal Policy Activities
Congress
1) Gov’t expenditures
2) Taxation
3) Debt management
When a question only indicates one expense (tuition), only use one of the four programs as an answer
Only 1 of these 4 can be in the answer:
AOC
Lifetime Learning
Coverdell distribution
529 distribution
What is a “qualified expense” for AOC and LLC programs
Tuition, Fees, Supplies, Books & Equipment
NOT Room & Board
What are the steps to calculate educational funding TVM?
Diagram:
Solve for FV
FV becomes negative PMT (4yr)
Solve for PV
PV becomes FV
Solve for PV
IRR > Required rate of return
NPV is positive
=> the investment will earn more than the client’s required rate of return
IRR = Required rate of return
NPV is 0
For questions about net worth changes, what keywords should you look for?
1) “From cash flow…”
2) “Investments grew…”
3) “Reduced mortgage principal…”
These would be increases in net worth
Think logically for decreases in net worth
Housing Expense
PITI
Principal
Interest
Tax (Property)
Insurance (Property)
PITI < 28% of gross income
Emergency Fund
3mo vs. 6mo of $$ needed to cover Fixed & Variable expenses
Ex) If monthly expenses are $8,000 and the client only has $6,000 in their checking account, then the checking account can’t be allocated for the emergency fund.
Effective method for implementing a savings plan
“pay yourself first”
(allocate money away before you spend it each month)
Total amount of savings & investments formula
Savings & Investments = Inflows - Outflows - Taxes
Priority of savings
According to CFP Board…
1) Life Insurance (if none)
1.1) Have a proper emergency fund (unless you have way too much debt to even establish it)
2) Reduce debt
TVM
Keywords to look for in unequal CF scenarios
Find PV = start with 0 CF0
Find IRR = Solve for I/YR
Find NPV = start with initial investment CF0
IRR < Required rate of return
NPV is negative
The investment will generate less than the client’s required rate of return
What keywords are used when a TVM problem wants you to use a real rate of return?
“in today’s dollars”
Synonym for IRR
Dollar weighted rate of return
What is an aggressive investor unlikely to have?
Liquid cash equivalents for an emergency fund
TVM
When are PMTs considered negative?
When money is moved out of clients checking account.
1) Investments into mutual funds, stocks, bonds, or IRAs
2) A repair is made to investment property
3) Pension or 401(k) contributions made by employer (not considered positive because the money isn’t going to the client’s account until he take a distribution)
Besides…
Checking acct
Savings acct
Money Market Deposit Acct (MMDA)
CD’s
…what other investment is likely to be insured?
Securities held in a brokerage account.
The SIPC insures investors against losses arising from a failed brokerage firm.
Investment Company Act of 1940
Advisor Act was also in 1940
Authorized SEC to regulate Unit Investment Trusts (UITs), investment companies, and mutual funds
For insurance company regulations, how does the Fed have any influence?
3 ways
1) HIPAA related to health coverage continuation
2) Standardization of Medicare policies
3) Taxation of various insurance policies
State handles remaining regulations, including determining the meaning of a policy’s terms
What goes into an UGMA/UTMA account?
UGMA
Cash-type investments
UTMA
Cash-type investments
+
real estate or limited partnerships
Qualifying Alimony:
Required to pay $1,000/month until child reaches 18. Then, payments reduced to $400/month.
$400 = Qualified alimony (assuming this is pre-2019)
$600 = tied to child support which is nondeductible no matter what
Acronym for the important leading economic indicators
Stock prices (S&P 500)
New private housing units
New manufacturing orders
Index of consumer expectations
Initial claims for unemployment insurance
When can an individual satisfy the “means test” for Ch. 7 bankruptcy?
When debtor’s average monthly net income for 60mo. is <$6,000
(still required to complete consumer credit counseling program prior to filing)
SOFR
Secured Overnight Financing Rate
Benchmark rate used for adjustable-rate mortgage loans (ARMs)
FHA
Federal Housing Administration:
loans from insurance companies that are guaranteed by the gov’t.
- Helps individuals from low-middle class
TVM
When is the PV of a mortgage value entered as a positive
ONLY IF
1) The money is borrowed
2) You are calculating the amortization of the loan
What are some advantages of a reverse mortgage?
- No income qualifications
- Retain title
- No monthly mortgage payments
- Proceeds are tax-free
What are “points” in mortgages?
“Points” are extra fees that you pay upfront to a lender to get a lower interest rate on the loan (makes loans cheaper over time)
When refinancing, what is the difference between “adding a fee” and “paying points”
“Adding a fee” = to the new loan would increase the mortgage principal balance
Ex) 381k + 2k fee = 383k new principal balance
“Paying points” are paid upfront, not refinanced
Mortgage Calculation
Facts:
* $80k mortgage
* 30-year term
* 9.75% interest
* Monthly payments
PV = 80,000 (enter as positive)
N = 30 x 12mo = 360
I/YR = 9.75/12mo = 0.8125
FV = 0
PMT = calculated (make sure to calc this before amortization!)
1 INPUT 120 (the 10th year)
GOLD -> AMORT
=
=
Financial Planning
VS
Financial Advice
Financial Planning = more holistic (more parts are taken into account to understand the bigger picture)
FHA Mortgage range to qualify
Range 489k - 1.1 million mortgage maximum
VA Mortgage
Must be a veteran
Reportable matters to the CFP Board within — days
30 days
Is a CFP allowed to restrict the scope of an engagement?
Yes, if he is unable to obtain sufficient and relevant information from the client
If a client provides me with his CPA’s info, can I call?
No, that would be a violation of Duty of Client Confidentiality and Privacy (must obtain permission)
Will the CFP Board automatically publish a suspension?
Yes
Following a CFP suspension, what should you do?
Inform all of your clients
How many days to appeal after a suspension OR revocation?
30 days to appeal, otherwise it becomes permanent
- Maximum home equity loan you can take out?
- Can you deduct any of this loan?
- FMV - Current mortgage principal
- If used for home improvements, you can deduct the interest only (on up to 375k [750k])
Synonym for The Fed
FOMC (Federal Open Market Committee)
Ch. 7 Bankruptcy
Non-Cancellable items
“BISAC”
- Back taxes (up to 3 yrs)
- Illegal debt (fraud, embezzlement, intentional tort claims)
- Student / Government loans
- Alimony and Child Support
- Consumer debt (luxury goods <$650 per creditor)
Synonym for government loans (in context of bankruptcy)
Student Loans
Disclosing & Managing Conflicts of Interest
Verbal or Written
If verbal, you should make sure it won’t come back to haunt you
How does a client’s health determine estate tax consequences?
The client’s longevity has an impact on the estate tax consequence
Qualifying alimony (for Divorces finalized before 2019)
- Payment of ex-spouse’s rent, mortgage, tax, tuition, or life insurance premiums
(UNLESS the payor owns it)
Exceptions to filing as an Investment Advisor
“BLATE”
Bank or holding company
-
Lawyer (if solely incidental)
Accountant(if solely incidental)
Teacher(if solely incidental)
Engineer(if solely incidental)
also “intrastate” and “dealing w/ insurance companies only”
CFP Board’s Discplinary and Ethics Commission (DEC):
Private Discipline
Vs
Public Discipline
Private = additional CE and/or private censure
Public (in order of severity) (“PSP”)
1) Public letter of Admonition
2) Suspension (up to 5 years)
3) Permanent Revocation of the marks
Synonym for Statement of Financial Position
Balance Sheet
Yield Curve:
Explain UPS
Explain FAL LEN
When interest rates are expected to…
Go up = UPS = Shorten duration / maturities
Fall = FALLen = Lengthen duration / maturities
If a bank is Federally or Nationally charted, it is subject to authority of:
I. The Comptroller of Currency
II. Federal Deposit Insurance Corporation (FDIC)
III. The Federal Reserve
Functions of depository financial institutions (banks, S&L, credit unions, 501(c) orgs.)
1) Make home mortgage loans
2) Make auto loans
3) Similar interest rates
all FDIC insured
only credit unions can make commercial loans
