CFP General Principles Flashcards
Financial Advice
A. A communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the client take or refrain from taking a particular course of action with respect to financial plans, investing/selling/gifting assets, investment strategies, and selection/retention of other financial professionals. Think - SPECIFIC
B. The exercise of discretionary authority over the financial assets of a client
Financial Planning
A collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.
3 Aspects of Fiduciary Duty
Duty of Loyalty, Duty of Care, Duty to Follow Client Instructions
Duty of Loyalty (Fiduciary Duty)
- Place interest of the client above interests of the firm
- Avoid conflicts of interest or fully disclose material conflicts to the client, obtain the client’s informed consent, and properly manage the conflict
- Act without regard to the financial or other interests of the CFP professional, professional’s firm, or any individual/other entity other than the client
Duty of Care (Fiduciary Duty)
A CFP Professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.
Duty to Follow Client Instructions (Fiduciary Duty)
comply with terms of the client engagement and follow all directions of the client that are reasonable and lawful
CFP Code of Ethics
- Act with honesty, integrity, competence, and diligence
- Act in the client’s best interests
- Exercise due care.
- Avoid or disclose and manage conflicts of interest
- Maintain the confidentiality and protect the privacy of client information
- Act in a manner that reflects positively on the financial planning profession and CFP certification
The Financial Planning Process
- 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) of action
- Developing the FP recommendation(s)
- Presenting the FP recommendation(s)
- Implementing the FP recommendation(s)
- Monitoring progress and updating
FP Process Step 1
Understanding client’s personal and financial circumstances
- Obtain Quantitative and Qualitative Information
- Analyze Information
- Address Incomplete Information
FP Process Step 2
Identifying and Selecting Goals
- Identify potential goals
- Help the Clients select and prioritize goals
FP Process Step 3
Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
- Analyze the Clients’ current course of action
- Analyze potential alternative courses of action
FP Process Step 4
Developing the Financial Planning Recommendation(s)
- For each recommendation, the CFP® professional must consider:
a. Assumptions and estimates used to develop the recommendations
b. Basis for making the recommendation
c. Timing and priority of the recommendation
d. Whether the recommendation is independent or must be implemented with another recommendation
FP Process Step 5
Presenting the Financial Planning Recommendation(s)
- For each recommendation, the CFP® professional must:
Present to the Clients the selected recommendation(s) and information that was required to consider when developing the recommendation(s)
FP Process Step 6
Implementing the Financial Planning Recommendation(s)
- Address implementation responsibilities
- Identify, analyze, and select actions, products, and services
- Recommend one or more actions, products, and services for implementation
- Select and implement actions, products, or services
FP Process Step 7
Monitoring Progress & Updating
- Establish monitoring and updating responsibilities
- Monitor the Clients’ progress
- Obtain current qualitative and quantitative information
- Update goals, recommendations, or implementation decisions
- Integrity
A CFP® professional must perform Professional Services with integrity
- Honesty and candor
- Integrity cannot co-exist with deceit or subordination of principle
A CFP® professional may not, directly or indirectly, in the conduct of Professional Services:
- Employ any device, scheme, or artifice to defraud
- Make any untrue statement of a material fact or omit to state a material fact
- Engage in any act/practice which would operate as a fraud
- Competence
A CFP® professional must provide Professional Services with competence
- relevant knowledge and skill to apply that knowledge
If not sufficiently competent, the CFP Professional must:
- gain competence
- obtain the assistance of a competent professional
- limit/terminate the engagement
- refer client to a competent professional
- Diligence
A CFP® professional must provide Professional Services
- Responding to REASONABLE client inquiries in a timely/thorough manner
- DISCLOSE AND MANAGE CONFLICTS OF INTEREST
Disclose Conflicts
- When providing FinancialAdvice, a CFP® professional must make full disclosure of all Material Conflicts of Interest with the CFP® professional’s Client that could affect the professional relationship
- Provide sufficiently specific facts that a REASONABLE client would understand
- Sincere belief from professional that they gave notice or are acting in best interest is insufficient
- must make full disclosure and obtain consent of client BEFORE providing financial advice regarding which CFP pro has material conflict
- Can be oral or written
- Sound and objective professional judgment
A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional’s objectivity
- Professionalism
A CFP® professional must treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect.
- Comply with the law
A CFP® professional must comply with the laws, rules, and regulations governing Professional Services.
A CFP® professional may not intentionally or recklessly participate or assist in another person’s violation of these Standards or the laws, rules, or regulations governing Professional Services
- Confidentiality and Privacy
A CFP® professional must keep confidential and may not disclose any non-public personal information about any prospective, current, or former Client (“client”), except:
- Ordinary business purposes: CFP pro’s firm, as necessary to CFP’s atty’s/accountants/auditors, persons acting in representative capacity on behalf of client
- Legal and enforcement purposes: law enforcement authorities, as required to comply with federal/state/local law, as required with authorized investigation/subpoena by gov authority, as necessary to defend against allegations of wrongdoing, etc.
CFP may not use non-public personal info for his/her direct or indirect personal benefit
CFP must adopt policies regarding privacy protection
- Provide information to a client
When providing FINANCIAL ADVICE
- Description of services/products
- How the client pays and description of additional types of costs client may incur
- How CFP and/or firm is compensated
- Existence of any public discipline or bankruptcy and locations of info
- conflict of interest disclosure (oral or written)
- privacy policy (written)
- Disclosure for economic benefit of referrals or engagement with additional persons
- Any other material information
When providing FINANCIAL PLANNING
- Everything above
- Terms of engagement between client and CFP
Updating Information
- Updates regarding public disciplinary history/bankruptcy or material changes
- WITHIN 90 DAYS
- Duties when communicating with a client
A CFP® professional must provide a Client with accurate information, in accordance with the Engagement, and in response to reasonable Client requests, in a manner and format that a Client reasonably may be expected to understand.
- Duties when representing compensation method
- No false or misleading representations
Fee-only
- NO sales related compensation
- related parties receive NO sales-related compensation in connection with services of the firm or CFP
Fee-based
- Receives some sales-related comp (ie for life insurance, 12b-1 fees, spreads, transaction fees, revenue sharing, referral or solicitor fees, etc.)
Sales-related comp does not include:
- soft dollars,
- reasonable and customary fees for custodial or similar administrative services IF the fee is not determined based on the amount or value of client transaction
- non-monetary benefits provided by another service provider
- reasonable and customary fees for professional services, OTHER than solicitations and referrals. Ex: TAMP
- fee the related party solicitor receives for soliciting clients for CFP
- Duties when recommending, engaging, and working with additional persons
- Have a reasonable basis for the recommendation
- Disclose to the client if you receive a referral fee
- Exercise REASONABLE care to protect client interests
When working with other provider:
- Communicate with the other provider about the scope of their respective services and the allocation of responsibility between them;
- Inform the Client in a timely manner if there is reasonable belief that the other provider’s services were not performed well
- Duties when selecting, using, and recommending technology
- Use reasonable care and judgment when selecting/using software, digital tools, or other tech
- A CFP® professional must have a reasonable level of understanding of the assumptions and outcomes of the technology employed
- A CFP® professional must have a reasonable basis for believing that the technology produces reliable, objective, and appropriate outcomes
- Refrain from borrowing or lending money and commingling financial assets
A CFP® professional may not, directly or indirectly, borrow money from or lend money to a Client unless:
- The Client is a member of the CFP® professional’s Family
- The lender is a business organization or legal entity in the business of lending money
A CFP® professional may not commingle a Client’s Financial Assets with the Financial Assets of the CFP® professional or the CFP® Professional’s Firm
Examples of Qualitative (subjective) information (FP Step 1)
- Client health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action
Examples of quantitative or objective information (FP Step 1)
Client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, and capacity for risk
Consumer Credit Protection Act
Right to know costs and terms of credit
Equal Credit Opportunity Act
Right to fair opportunity to obtain credit
Fair Credit Reporting Act
Right to know what’s in your credit file
Fair Credit Billing Act
Right to have billing mistakes resolved
Fair Debt Collection Practices Act
Right to be protected from collection agencies
Chapter 7 Bankruptcy
Primary purpose: liquidation
Who can file: individuals/businesses
Unsecured debt: eliminated
Secured debt: nonexempt assets are sold to pay off secured debt
Can it stop foreclosure: no
How long: 4-6 months
On credit report: 10 years
Chapter 13 Bankruptcy
Primary Purpose: repayment
Who can file: individuals
Unsecured debt: Paid back over time through repayment plan
Secured debt: Paid back over time through repayment plan
Can it stop foreclosure: yes
How long: 3-5 years
On credit report: 7 years
Chapter 11 Bankruptcy
Primary purpose: reorganization
Who can file: businesses mainly
Unsecured debt: reorganized and paid back over time
Secured debt: restructured and paid back over time
Can it stop foreclosure: yes
How long: 6 months - 2 years
On credit report: 10 years
Housing Cost Mortgage Ratio
Limit: ≤ 28%
Numerator: PITI
Denominator: Gross Income
Consumer Debt Mortgage Ratio
Limit: ≤ 20%
Numerator: Non-housing consumer debt
Denominator: NET income
Total Debt (mortgage ratio)
Limit: ≤ 36%
Numerator: consumer debt + PITI
Denominator: Gross Income
GDP Formula
Y = C + I + G + NE or (X - M)
C = Consumer spending
I = industry investment
G = Government spending
X - M or NE = excess of exports over imports (Net Exports)
Balance Sheet vs Cash Flow statements
Balance Sheet:
Time: A point in time
Purpose: financial position
Measures: assets, liabilities, shareholders’ equity
Starting Point: cash balance
Ending Point: retained earnings
Cash Flow Statement:
Time: Period of time
Purpose: cash movements
Measures: increases/decreases in cash
Starting Point: net income
Ending Point: cash balance
Liquidity Ratios
Used to determine the ability to meet short-term obligations
Activity Ratios
Used to determine the relative efficiency of financial management
Profitability Ratios
Used to measure relative profitability
Debt Ratios
Used to determine the ability to meet long-term obligations
Current Ratio
Liquidity Ratio
Current assets/current liabilities
Quick Ratio
Liquidity ratio
current assets - inventories / current liabilities
Working Capital
Liquidity Ratio
current assets - current liabilities
Inventory Turnover
Activity Ratio
COGS / Avg Inventory
Days to Sell Inventory
Activity Ratio
365 / inventory turnover
Accounts receivable turnover
Activity Ratio
Sales(credit) / avg accounts rec.
Receivable Collection Period
Activity Ratio
365 / Accounts Rec. turnover
Gross Profit Martin
Profitability Ratio
Gross profit / sales
Operating Profit Margin
Profitability Ratio
Operating income / Revenue
Return on Assets
Profitability Ratio
Earnings after taxes / total assets
Return on Equity
Profitability Ratio
Earnings after taxes / equity
Debt to Equity
Debt Ratio
Total long term debt / equity
Times Interest Earned
Debt Ratio
EBIT / Interest expense
Debt Ratio
Total debt / Total assets
529 Plans vs. Coverdell ESAs (primary differences)
Federal Gift Tax Treatment
- 529: $16k annual exclusion or up to $80k w/ 5-year accelerated election
- ESA: $16k
Maximum Investment
- 529: Established by the program; many in excess of $400k/bene
- ESA: $2k/bene/year combined from all sources
Qualified Expenses
- 529: College expenses, room and board for half-time + students; Up to $10k for K-12 schools, up to $10k in student loan payment
- ESA: College expenses, room and board for half-time + students; additional types of K-12 expenses
Time/Age Restrictions
- 529: None unless imposed by program
- ESA: Contributions BEFORE beneficiary reaches age 18; use account or change bene by age 30
Income Restructions
- 529: None
- ESA: Contribution phase out for MFJ (190k-220k) and Single (110k)
EE & I Bonds vs. UGMA/UTMA Accounts (education funding differences)
Federal Income Tax
- Bonds: Tax-deferred, tax-free for state; certain post-1989 EE/I bonds tax-free for qualified higher ed expenses
- U accts: Earnings/gains taxed to minor; first $1,150 of unearned income is tax exempt; UI over $2,300 is taxed at parent’s highest marginal rate
Gift tax treatment
- Bonds: no gift as qualifying bonds must be owned by the parent
- U accts: transfers treated as completed gift; apply $16k annual gift exclusion
Estate Tax Treatment
- Bonds: value included in bond owner’s gross estate
- U accts: Value removed from donor’s gross estate
Max Investment
- Bonds: EE: $10k/year/owner Series I: $10k digital, $5k paper /year/owner
- U accts: no limit
Qualified expenses
- Bonds: tuition and fees
- U accts: any purpose w/o limitations
Change Bene?
- Bonds: NA
- U accts: NO - represents irrevocable gift to child
Time/Age restrictions
- Bonds: purchaser must be at least 24 years old
- U accts: custodianship terminates when minor reaches age established under state law
Income restrictions
- Bonds: Interest exclusion phases out $128,650 - $158,650 (MFJ) or $85,800-$100,800 (Single)
- U accts: None
Federal financial aid
- Bonds: Counted as asset of bond owner
- U accts: Counted as STUDENT asset
Alternative sources of education funding
- Roth IRA’s
- Traditional IRA’s
- Mutual Funds
- Home equity loans
- Life Insurance cash value
- Community college
- Deferred entry
Expected Family Contribution Formula
Income
- Parent: 22%-47%
- Student: 50%
Plus
Assets
- Parent: 5.64%
- Student: 20%
Financial Need Formula
Cost of Attendance (COA) - EFC = Financial Need
Student Income Protected amount (Ed Needs)
$7,040 for the 2022-23 academic year
American Opportunity Tax Credit (AOTC)
Max Benefit: up to $2,500 credit PER ELIGIBLE STUDENT
Refundable? 40% of credit refundable (i.e. $1,000)
Number of years of post-secondary education available:
- First 4 years of post-secondary ed before 2022
Number of tax years benefit available:
- 4 years per eligible student
Type of program required:
- Student must be pursuing a degree or a recognized education credential
Number of courses:
- Must be enrolled at least half time for at least one academic period beginning in 2022
Felony drug conviction:
- students must have no felony drug convictions as of the end of 2022
Qualified expenses:
- Tuition, required enrollment fees, and materials needed for the course of study
Lifetime Learning Credit (LLC)
Max Benefit: Up to $2,000 credit PER RETURN
Refundable? NO
Number of years of post-secondary education available:
- All years of post-secondary education and for courses to acquire or improve job skills
Number of tax years benefit available
- Unlimited
Type of program required:
- Student does not need to be pursuing a degree or other recognized education credential.
Number of courses:
- Available for one or more courses
Felony drug conviction:
- Does not apply
Qualified expenses:
- Tuition and fees required for enrollment or attendance only.
AOTC Calculation
100% of the first $2,000 of qualified education expenses paid for each eligible student
25% of the next $2k of qualified education expenses paid for that student, for a total of $2,500
