CFP Flashcards
Financial planning process
7 steps
Understand clients personal/financial circumstances
Identify goals
Analyze course of action and alternative
Develop recommendations
Present recommendations
Implement
Monitor
3 panel
3 panel 2
Shift demand curve
Anything that causes disc income to increase will shift demand curve up and to right
Inelastic demand curve
Demand changes little with price- milk, gas,
Curve almost vertical
Business life cycle
Recession/Depression
Recession 6 months/ 2 quarters
Depression 18 months/ 6 quarters
Consecutive decline GDP
Measures of inflation
Monetary policy
Fed reserve maintain economic growth, price levels, full employment
Ease- increase money supply, (open market ops) lower interest rates
Tighten - opposite
Fed tools
1) Reserve requirement for banks -% they have to maintain
2) Discount rate - overnight interest rate for banks to borrow from Fed
Fed Does Not Control prime lending rate!
3) Open Market ops- Fed buys or sells govt securities- when buying money supply increases and rates decrease
4) Excess reserves interest rate
Money that a banks holds at fed in excess of requirement/ raise rates to encourage banks to hold excess
Fiscal policy
Yield curve
Bankruptcy
30 days to CFP board 90 to clients
Disclosed public by CFP for 10 years
Investor protection
Life cycle
Age, marital status, dependents, income, net worth
This determines clients goals . needs, strength and weakness
Balance sheet
Statement of financial position, net worth statement
Assets - Liabilities = Net Worth
Statement of Income and Expenses
Statement of cash flows
Current ratio
Ability to meet short term obligations
Current assets / current liabilities
Emergency fund
Current assets/monthly non discretionary expenses
Debt ratios, use gross income
Mortgage ARM
Savings ratio
Employee + Employer contributions/
Annual gross income
Education planning
Pell grant - need based only for bachelor or other professional degrees
Stafford-
Subsidizes- needs base
Unsubsidized - not subsidized but for any degree
Parent loans PULS- not needs based, depends on credit score
Grad PLUS- same for grad or professional students
Tax benefits education expenses
-lifetime learning credit (20% of cost )
Max tax credit per family $2000 -
-American opportunity tax credit - 1st 4 yrs of college
Max tax credit per student is $2500
-
$2500 student loan interest
Above the line deduction- taken to get to AGI
Insurable Risks
Are not catastrophic to insurer, based on homogeneous exposure units, are accidental, measurable, and detrimental
Legal contracts require
Competent parties, offer and acceptance, legal consideration, and lawful purpose
4
Life Contracts
Characteristics of insurance contracts
Insurance regulators
At state level not by NAIC
Risk management steps
CFP code of Ethics
Professional marks
Fiduciary duty
Confidentially
Information to client privacy vs. conflict of interest
Financial advice vs planning docs
Updating material info
CFP board 30 days
Clients 90 days
Financial planning process
Felony
At a year imprisonment or fine of 1k
Notice to CFP within 30days
relevant misdomeanor
Fraud, theft, misrepresentation, moral, violence, 2nd DUI
Notice to CFP within 30days
Fitness standards
Unacceptable conduct
Presumed unacceptable Conduct
Adverse conduct
Client needs
Always place biggest financial risk as first priority and move down accordingly
CFP responsibility to client
Whole life (participating) divided options
Dividends are treated as return of capital - non taxable
Life insurance nonforfeiture options
Cash surrender
Reduced paid up insurance - paid up policy with small face amount
Extended term insurance- paid up term for specific period with same face amount as originally
Life insurance accelerated death benefit
24 months
Universal life
Recognition on life contracts
Non direct- dividends not adjusted with a contract loan
Direct- dividends reduced by any outstanding loans
Group term insurance
Calculate group life if over 50k
Group whole life
Insurance surrender
Premiums
Calculation
Taxation of annuity payments
Use exclusion ratio
Amount paid / current value
Viatical settlements
Taxation of annuities before annuitized
Major medical out of pocket
If question says maximum out of pocket, insured pays no more than that
HSA accounts
Catch up is 55 and older not 50 as with IRA’s
Contributions deductible
HSA distributions for non qualified medical expenses
20% penalty until age 65
HIPPA insurance rules for job changes
Cobra
Disability income insurance
Plus taxation
Taxation of insurance products
Stop loss on medical insurance
Does not count In deductible
Decreasing term insurance
Used as mortgage insurance… the death benefit decreases with time
Universal life insurance
Flexible, premiums , face value, cash value
Does not direct the investment portion
Unless is a variable universal
Universal A vs Universal B life insurance
A- bene receives death benefit or cash value whichever is higher
B- bene receives death bene and a specific cash value- costs more than A
Universal benefit advantage/disadvantage
Advantage -Flexible , death benefit may increase
Disadvantage- death benefit may decrease- poor market performance
Whole life insurance
Pay whole life up to 120yrs
Or single premium or
Increasing premiums
Has a savings or investment component - unless variable, component controlled by insurance company
Can take loans
Pro- tax differed growth, perm protection
Con- expensive set premiums, gradual cash growth , may not be able to purchase as a much as needed due to high premiums
Ex first or second to die
Life Policy comparison
MEC
If premiums within 7 years pay for all insurance fails 7 pay test and is considered a MEC
Ex- single premium policy or 6 year pay policy
Income from policy is taxable LIFO and 10% penalty
Taxation of life benefits received during life
Big three legacy doc
Will
Durable POA for healthcare
Advanced medical directive
Basic, broad, and open peril homeowners insurance
Calculate amount covered on home policy
Personal property calculations
Auto coverage part D
FICA taxes
6.2% wage base up to $160,200
1.45% on all wages
Paid by employee . 9% Medicare over thresholds
Categories of social security benefits
Retirement bene
Disability bene
Death bene
Survivors bene
Medicare
Reduced retirement benefit
Delay retirement bene
Social Security Taxation
Combined income:
AGI
Nontaxable interest
Foreign earned income
1/2 retirement benefit
Social security survivor eligibility
Social Security survivor child
Medicare A
Medicare B
Medicare C and D
Applying for Medicare
Number of quarters of coverage to be fully insured for Medicare
40
Limit order
Price of trade execution more important than timing
Stop Order
Price hits a certain level then becomes a market order
Risk- may receive less if market moves quickly
Stop limit or stop loss order
Investor sets 2 prices
First stop loss - once price reached becomes a limit order
Limit price- if reaches limit, will not sell
Risk- if market moves quickly may not sell all, and left with stock at a lower value
Short selling
Margin
Margin position
Research reports
Divideds
Securities regulations
Continued
Money Market Securities
Investment Policy Statement
Establishes risk, return, taxes, timeline, liquidity, legal, and unique circumstances
Dow Jones
Price weighted average
S&P 500
Value weighted index
Russell 2000
Value weighted of smallest cap in Russell 3000
Wilshire 5000
Value weighted
Broadest index of over 3000 stocks
EAFE
Value weighted index tracks stocks in Europe , Australia, Asia , and Far East
Standard deviation
Measure of risk and variability of returns
Determines total risk of undiversified portfolio = systematic and unsystematic risk
Standard deviation
Also need to compute
Probability of return
Coefficient of Variation
Determines which investment has more relative risk
Tells the probability of experiencing rerun close to average return
Higher the coefficient more risk per unit of return
Calculate
Standard deviation/average return
Kurtosis
Leptokurtic- high peak fat tail- higher chance of extreme event
Playtokurtic- low peak thin tail- lower chance of extreme event
Covariance
Measure of 2 securities combined and their interactive risk. A measure of relative risk
Correlation
Beta
Measures systematic risk
Is a comparison of a portfolio or individual securities to a benchmark (ex. S & P 500)
Beta of one is perfect correlation- as benchmark goes, so does portfolio. If less than one, less movements, if great than 1, more movement
Think of beta as “benchmark”
Beta
Coefficient of determination, R squared
Correlation (r) of 1 is perfect market correlation, -1 opposite market correlation
R squared is amount attributed to market in a portfolio. If r square is .8,
80% of portfolio attributed to market and 20% to unsystematic risk
R squared less than .70 not good may need to use another benchmark or beta is not an appropriate measure of risk in this Situation
Portfolio theory
Portfolio Rick risk calc
Systematic vs. unsystematic risk
Systematic risks
PRIME
Purchase power risk
Reinvestment risk
Interest rate risk
Market risk
Exchange rate risk
PRIME
Unsystematic risks
ABCDEFG
Accounting risk
Business risk
Country risk
Default risk
Executive risk
Financial risk - leverage
Government/regulation risk
ABCDEFG
Modern portfolio theory
I
Efficient frontier
Capital market line
Specifies relationship between risk and return in all possible portfolios
-may be asked what measure of risk CML uses- which is standard deviation
Capital asset pricing model
CAPM
Or security market line SML
Calculates relationship of risk and return of an individual security using beta as measure of risk
CAPM
Treynor Index
Treynor question
I
Treynor index
Sharpe index
Sharpe ratio
Standard deviation use is measure
Sharpe and Treynor
The higher of either the more return for each unit is risk
Jensen’s model or alpha
Portfolio comparison
Sharpe, Treynor, Alpha
Summary of performance measures
Holding period return
Selling price - purchase price + or - cash flow / purchase price
Weighted average
Weighted average portfolio return
Weighted average portfolio beta
Net present value
If zero or greater make the investment
Use cash flows on calc to find NPV
Internal rate of return
Use cash flows on calculator
Dollar weighted return
Time weighted return
Mutual fund historic return
Uses security’s cash flow which is
time weighted return
RIA
RIA filing
Exceptions to registration
Continued
Exemptions to Registration
Cont
Brochure Rule
FINRA
Business life cycle
Fed funds rate
Not controlled by Fed
Answer D
Bankrupt laws
Students are considered independent if
Over age 23
Have legal dependents other than spouse
Married
Orphan or ward of court until 18
Working on masters or doctoral
Veteran of us armed forces
Dividend discount model
Expected rate of return
Peg ratio
Divided payout ratio
Return on equity
Earnings per share/stockholder’s equity
Divided yield
Fundamental analysis
Technical analy
Effective market hypothesis
Random walk theory
3 forms of efficient market theory
Continued
Strategic vs Tactical asset allocation
Weak form of efficient market hypothesis
P/e multiplier
Used to determine value in a growth stock that pays no dividends
Peg ratio
Provides insight whether or not P/E is ahead of earnings growth rate
EE bonds
Not marketable securities
Marketable US treasuries
GNMA mortgage backed securities
Only federal agency security (have a moral obligation) that is backed by full faith and credit of US government
“ G “ for government
Bond ratings
Municipal bond types
Fixed income risk
Tax equivalent yield
Series I bonds
Non marketable securities that adjust for inflation
Bond value and pricing
Current bond yield vs. actual coupon
Yield to maturity
Bond holding period return
Yield to call
Bond duration
Zero coupon will have a bond duration equal to its maturity
Calculate duration
Estimating bond price
Bond strategies
Preferred stock
Convertible bond
Calculate net operating income
Bond trading at premium
Yields lowest to highest
YTC-YTM-CY-CR
Discount bond
Yields lowest to highest
CR- CY- YTM- YTC
Unit investment trust
Passively managed and self liquidated
Options
Option values
Call option intrinsic value
Put option intrinsic value
Options in the money, at the money, or out of money
Calculate gain or loss on options
Continued
Option trading strategies
Continued
Options pricing models
Taxability of options
Warrants
Futures
Hedging a commodity position
Pricing of bonds
Valuation of stock options
Premium = intrinsic value or fundamental value + time value
Intrinsic value = in the money
Players in futures may
Hedgers and speculators
All assets are capital assets except
ACID
Accounts / notes received
Copyright and creative work
Inventory
Depreciable property for trade /business
Section 1231 assets
Cost basis of property
Property adjusted basis
Inherited property
Always considered long term gains
Basis of gifted property
Double basis rule
Wash sale rule 30 days
Treatment of gains and losses for different assets
Net capital loss max deductible for AGI
$3k per year
Net gains
Net gains continued
Loss on small businesses stock
Gifting asset to related party
Long term loss max of 3k
B correct answer not C
1231 property
Depreciable property such as:
Buildings, machinery and equipment
Real property- land and buildings used in business
Leasehold improvements
Livestock held for draft, breeding or dairy
Unharvested crops sold with farmland
1231 taxation on gains
Treated as a LTCG- lower tax rate Than ordinary income rate
1231 taxation of loss
Can be deducted as a loss on ordinary income - better tax treatment than capital loss
Exceptions to 1231- depreciation recapture
Section 1245
Personal property used in trade or business for income held more than one year- not considered real estate
Section 1250
Depreciable business real estate
Any gain within amount of depreciation recaptured as ordinary income
Section 1245
When sold at a gain, gain at ordinary income up to depreciation amount , remainder is capital gain
Section 1250
Business real estate
When sold at a gain, straightline depreciation taxed at 25% , excess depreciation subject to tax at ordinary income, remaining gain is capital gain
Section 1245
Section 1250
Property - adjusted basis formula
Purchase price - depreciation
Section 1250 example continued
Property that is gifted have both a carry over basis and holding period with 2 exceptions
Loss on property and when gift tax paid
MACRS is a method of
Depreciation
Get more depreciation in earlier years and less in future years
Basic tax formula
Qualified person for taxes
Qualified widow
File for 2 years if
Stand ARS deductions
Old and blind standard deductions
Itemized vs Standard deduction
If married file separate and one itemized, other had to as well… cannot get standardized deductions and itemized at same time
Nonresident alien cannot use standard deductions
Individuals filing tax returns of less than 12 months cannot use standard deduction
Taxpayers claimed as a dependent of another taxpayer has limited standard deduction
Qualified child test
Relationship test
Abode test
Live with taxpayer more than half the year
Military service considered temporary absence, will count towards abode test
Age test
Under 19 or
Student under 24- full time during 5 months of calendar year
Support test
Qualified if child doesn’t provide more than half support during year
Scholarships not considered support
Tie breakers
Qualified relatives
Defendant Gross income test
Less than personal exemption amount $4,700
A qualified child cannot cannot be claimed as a qualified relative
Joint return test for qualified child/ relative
+ citizen or residence test
Estimated tax penalty if
Social security tax hurdles
Continued
Below market loans interest income
Exclusions from income
Chronic ill
Unable to perform 2 activities of daily living
Bathing, toilet, transfer, eating, dressing, continence
For at least 90 days
Gain on sale of property exclusion for single and married
250k
500k
Owned as principle residence 2 out of 5 years (for married use rule applies )
A reduced exclusion applies if sale is due to job change, change in health, or other unforeseen circumstances
Qualified Roth distribution
Fringe benefits
Fringe benefits continued
Foreign earned income
Above the line deductions (for or to calculate AGI)
Continued for / to calculate AGI deductions
Alimony no longer income to payee or deductible by payor after
12/31/2018
Deductions from AGI (below the line )
Medical expenses deducted
Itemized public and private charitable deduction
Public charities include church, school, hospital and government
Cont
Qualified charitable distributions form IRA must be
Paid directly to charity
Owner is a 70.5 years
Cannot exceed $100k per year
Counts as RMD
Casualty Losses
Only deductible in f declared a natural disaster
Mortgage indebtedness
Adoption expense credit
Max $15,950
Child tax credit
$2,000 per under age 17
Married must file jointly to get credit
Child and dependent Care credit
Education credits
Kiddie Tax
Applies to unearned income greater than $2,500
Kiddie continued
Alternative minimum tax
AMT continued
Preference items for AMT -3
Loss limitation’s
Example
At risk limitations
At risk limitations
Material participation in passive investment activity
Student loan interest only deductible up to
$2,500
Loan less than 100k and investment income less than 1000 interest not imputed
Mixed use property
If renting more than 14 days, property not considered personal. If use exceeds more than 10% of rental then it’s considered mixed use property
Employer meal deductions
50% deduction even if not reimburse employee expenses
State use tax can be deducted as an itemized deduction
Charitable deduction options
Basis election of 50% AGI
Or
Fair market value
election of 30% AGI
At risk investment example
EE savings bonds
Employer education assistance
Not included in income up to $5,250
Cross purchase equation
Capital goods and consumer durables are cyclical and fluctuate with economy and GDP
EE bonds tax exempt for education
T bills , zero coupon and GNMA all taxable
Consumer debt ratio
20% Net income
3 year window for taxpayer to claim refund
No statute for IRS to collect past tax if no return filed
If return filed 3 year statute on audits and 10 year on collecting tax from that return
Statue does not apply in case of false return
Interest penalty on tax returns
Tax courts
Private letter ruling - for a proposed transaction
Determination letter- after transaction
Half year convention for personal property placed into service (ex. Machine)
Mid month for real property (ex. Rental property)
Sole proprietor
Partnership
Limited Partnership
Family limited partnership
LLC advantages
Ownership Dividends received deductions
C corporations
S corp requirements
S corp
Income from a S corp not considered self employment income so no self employment tax due
Personal property liability insurance
Answer asks TOTAL tax, so add employer tax also
Reduction -fraction of 1%
/
F for futures
Answer is C
Solve for next present value
Dividend on a whole life policy are a return of basis up to amount of premiums paid. Any dividends over amount paid is taxable as income .
Exam breakdown
Exam prep
Homeowners
Return on equity
Dividend payout ratio
Tax equivalent yield
Calculate duration
Modified duration
Preferred stock
Property Valuation
Options
Short straddle is an income strategy
Intrinsic value
Margin
Fed reserve sets margin requirements
Qualified plans
Pension vs profit plans
Defined benefit plans vs. contribution plans
Safe harbor test
Qualification test- has to pass at least one of the 3- safe harbor is one of 3
Ratio test
50/40 test
Defined contribution plan Vesting
Defined benefit plan vesting
Top heavy plan
Must provide non key employees 3% of compensation
1031 exchange
Personal property no report income if rented 14 days or less
Rented for 15 days or more and used less than or equal to the greater of 10% of rental or 14 days
Mixed use property
AMT formula
Sources of tax law
Admin of tax system for appeals
Basis with gift tax paid
Tax rates LTCG and qualified dividends
Gain loss personal residence
Tax formula
Social security hurdles
Below market loans
Deductions for AGI- above line
Below the line deductions-from AGI
Casualty loss
Below the line charitable contributions
Pension plans
Permitted Disparity
Permitted cont.
401k entities
ADP
Is
Stock bonus vs profit share
ESOP
Covered comp limit $330k
Defined benefit vs defined contribution plan numbers
Retirement plans tests
Pass at least one year test
Defined benefit plans must also pass
50/40 test
Plan must cover lesser of 50 employees or 40% of employees
Secure Act
RMD calculations
RMD continue
IRA distributions
Sep contribution formula
Trust differences
ISO’s
Non qualified Stock options
Fringe benefits numbers
COBRA
Tax due on gift of $1 mil
$345,800
AGI limits for charitable donations
Deferred comp
Estate tax credit
Gift tax calculation
Decedent estate in ax deduction
Estate taxes to be paid
