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CFP Exam Review Prep > Book 1 - General Financial Planning Principles, Conduct, and Regulation > Flashcards

Book 1 - General Financial Planning Principles, Conduct, and Regulation Flashcards

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1
Q

What is Financial Planning?

A

A collaborative process that helps maximize a client’s potential to achieve life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.

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2
Q

What is Financial Advice?

A

Communication, that based on its content, context, and presentation, would reasonably be viewed as either a recommendation to act or refrain from acting in a particular course of action.

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3
Q

Items that are NOT Financial Advice

A
  1. Communication that would not be considered a recommendation
  2. Responses to direct orders
  3. Items that another CFP would not deem as Financial Advice (Ex. General marketing materials)
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4
Q

Three questions that determine whether or not a Financial Planning Engagement has been established

A
  1. Has the planner agreed to provide or provided Financial Planning?
  2. Does the client have reason to believe that Financial Planning will take place?
  3. Does the Financial Advice provided take into account relevant personal and financial circumstances of the client?
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5
Q

What are the 5 Integration Factors that determine whether Financial Advice requires Financial Planning?

A
  1. Risk Exposure
  2. Relevant Elements
  3. Time
  4. Barriers
  5. % and $ if Assets Affected
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6
Q

What can a planner do if the client does not agree to move forward with the Financial Planning Services?

A
  1. Only provide the requested services but explain to the client that a decision to not enter into a Financial Planning Engagement may limit Financial Advice
  2. Not enter into the engagement
  3. Limit the scope of engagement to services that do not require Financial Planning
  4. Terminate the engagement
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7
Q

When is a planner required to provide the client with disclosure information regarding the Financial Planning Engagement?

A

At or before the time of the engagement

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8
Q

What are the 7 steps within the Financial Planning Process?

A
  1. Understanding the clients personal and financial circumstances
  2. Identifying and selecting goals
  3. Analyzing the client’s current course of action and potential alternative courses of action
  4. Developing the financial planning recommendations
  5. Presenting the financial planning recommendations
  6. Implementing the financial planning recommendations
  7. Monitoring progress and updating
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9
Q

Age range of the Asset Accumulation phase?

A

20-45

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10
Q

Age range of the Conservation/Protection phase?

A

45-60

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11
Q

Age range of the Distribution/Gifting phase?

A

60+

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12
Q

What are leading responses?

A

Responses made by the planner that persuade the client to give more detail (meeting of the minds)

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13
Q

In what order should assets and liabilities be listed on a client’s statement of financial position (balance sheet)?

A

Assets: In order of liquidity

Liabilities: In order of maturities (shorter maturities on top)

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14
Q

Formula: Current Ratio

A

= Current Assets ÷ Current Liabilities

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15
Q

What is an appropriate target for a client’s Current Ratio?

A

Between 1.0 and 2.0

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16
Q

Formula: Current Debt Ratio

A

= Non-Housing Monthly Debt Payments ÷ Monthly Net Income < 20%

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17
Q

Formula: Housing Ratio

A

= All Monthly Non-Discretionary Housing Costs ÷ Gross Monthly Income < 28%

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18
Q

Formula: Debt-To-Income Ratio

A

= All Monthly Debt Payments + Housing Costs ÷ Gross Monthly Income < 36%

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19
Q

Formula: Savings Ratio

A

= Savings Per Year ÷ Gross Income

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20
Q

How much should be in an emergency fund for a single income household?

A

6 Months of Nondiscretionary expenses

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21
Q

How much should be in an emergency fund for a dual-income household?

A

3 Months of Nondiscretionary expenses

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22
Q

What debt does the Snowball Technique pay off first?

A

Lower balance debt first

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23
Q

What debt does the Avalanche Technique pay off first?

A

Highest interest rate debt first

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24
Q

Can ARM’s cause negative amortization? How?

A

Yes; Occurs when the monthly payments are not high enough to cover all the interest due on the mortgage

25
Q

Characteristics of FHA Loans?

A
  1. PMI is required if equity is less than 20%
  2. Lower down payment on the house
  3. Sometimes a lower interest rate
  4. Guaranteed by the Federal Government
26
Q

Characteristics of VA Loans?

A
  1. Only allowed for veterans
  2. Guaranteed by the Federal Government
  3. No PMI is required
  4. No down payment is required
27
Q

How much credit can be applied for The Lifetime Learning Credit?

A

20% of qualified education expenses up to a limit of $10,000 (Max Credit = $2,000)

28
Q

What is the age requirement for someone to qualify for a reverse mortgage?

A

Age 62 or older

29
Q

What is known as a reduction in the rate at which inflation rises?

A

Disinflation

30
Q

Are unsubsidized Stafford loans needs based?

A

No; Only Subsidized Stafford loans are needs basded

31
Q

When is FINRA registration always required for a CFP professional?

A

When a sale or attempted sale of publicly traded securities occurs

32
Q

Is a an investment advisor required to competent?

A

No; Being an investment advisor does not imply competence alone

33
Q

Will alimony or child support be discharged in bankruptcy?

A

NO

34
Q

What items need to be disclosed to investors in a prospectus?

A
  1. The fund’s investment objectives
  2. Any fees and expenses the investor will pay
  3. The composition of the board of directors
  4. The composition of the investment portfolio
35
Q

How can a lender pay a homeowner in a reverse mortgage?

A

The lender can make either a lump-sum payment or monthly payments to the homeowner

36
Q

What compensation arrangements are based on the earnings of a client’s portfolio?

A

Incentive or performance arrangements

37
Q

Are back taxes discharged in bankruptcy?

A

There is a 3-year look-back, but if the back taxes are a result of a failure to report income (purposely), the will not be discharged (regardless of the look-back period)

38
Q

What is the economic and resource approach?

A

The economic and resource approach focuses on obtaining and analyzing quantitative data, such as cash flow, assets, and debt

39
Q

What is the classical economics approach?

A

In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures.

40
Q

What is the strategic management approach?

A

In the strategic management approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant.

41
Q

Does a planner have to provide clients his firm’s letter of engagement prior to the implementation stage of their financial plan?

A

YES

42
Q

Formula: EFC Calculation For Financial Aid

A

= Annual cost of college - (22%-47% of parent’s income + 5.64% of parent’s assets + 50% student’s income + 20% of student’ assets)

43
Q

What is an investor most concerned with if they follow prospect theory?

A

Avoiding losses is the biggest driver

44
Q

Are banks and/or bank subsidiaries required to register as investment advisors?

A

The bank is not required to register, but the subsidiary is required if they offer securities

45
Q

What does the adjustment process in a competitive market move towards?

A

Equilibrium

46
Q

What are reasons for change in supply?

A
  1. Changes in the cost of inputs
  2. Changes in productivity
  3. Changes in technology
  4. Changes in taxes
47
Q

Does a child need to be a full-time student in order to receive a PLUS loan?

A

YES

48
Q

When does a registered investment advisor have to deliver Part 2A of Form ADV or a separate brochure?

A

At least 48 hours before entering into an investment advisory contract and the client has the right to terminate the contract without penalty for a period of 5 business days

49
Q

Are funds invested in mutual funds covered under FDIC?

A

NO

50
Q

When is a financial planner liable for damages to a third person?

A

Although financial planners don’t normally owe contractually duties to third parties, an exception exists when the third parry relied on statements prepared by the financial planner

51
Q

Can a financial planner rely solely on the client’s objectives to determine their risk tolerance?

A

NO; The planner must always attempt to assess their actual risk tolerance (not just based on their objectives)

52
Q

When can financial planners find themselves liable for damages under common law?

A
  1. Breach of contract
  2. Negligence
  3. Fraud
53
Q

Is a CFP allowed to prepare a financial plan without all the necessary information?

A

NO

54
Q

Does periodically reviewing a written financial plan lessen the liability exposure for a financial planner?

A

YES

55
Q

What is the Myers-Briggs assessment used for?

A

The Myers-Briggs assessment is used to determine whether a person is introverted or extroverted, driven by senses or intuition, influenced by thinking or feeling, and apt to perceive and/or judge. This assessment is not used to assess a person’s risk tolerance.

56
Q

Are retirement assets excluded from assets for the EFC calculation?

A

YES, but any distribution will be treated as income and will subjected to the income calculation for EFC (2-year lookback)

57
Q

What is the limit an employer can reimburse an employee per year under the Employer’s Educational Assistance Program?

A

$5,250 per year

58
Q

What is the cognitive-behavioral approach?

A

It involves replacing clients’ negative beliefs that lead to poor financial decisions with positive attitudes that lead to better results

59
Q

What is the strategic management financial counseling approach?

A
  1. Uses SWOT analysis (identifying strengths, weaknesses, opportunities, and threats) early in the financial planning process.
  2. Uses the client’s goals and values to drive the client-planner relationship.

CFP Exam Review Prep (2 decks)

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