F and I/Economic Business Cycle, Consumer Protection Flashcards
Q1: What is the first stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: 100: Establish Client-Planner Relationships
A2:
- Clearly ID the client
- Duty of loyalty
- Determine client’s needs and expectations; then see if FP is a match and communicate that to client; may need to refer if no match
- must identify, communicate and resolve COIs by MUTUAL CONSENT
- FP explains role and resp in FP process
- scope of engagement defined (limited) and documented, COIs disclosed and resolved, compensation
- Advisory agreements used in this step of FP process
Q1: What is the second stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: Gathering Client Data - Determine Goals and Expectations
A2:
- Active and engaged listener
- 4 categories of info: assets/liabilities, dollar values, ownership info and contractual agreements
- FP/client MUTUALLY define client’s personal and financial goals
- FP should explore client’s values, attitudes, expectations and time horizons
- FP should give risk tolerance and personal financial inventory questionairres
- FPs responsible for verifying info provided by client
- formal written process leads to higher levels of trust and commitment
Q1: What is the third stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: Analyze and Evaluate the Client’s Financial Status
A2:
- Financial Ratio analysis, prepare financial statements
- FP must evaluate impact of continuing on current course
- FP may discover need to expand scope of engagement; to protect from liability conduct objective analysis/evaluation
- For each cash flow need(e.g. education, retirement) a capital needs analysis must be done. Also do a Sensitivity Analysis using Monte Carlo
What should be done for EVERY engagement in Stage 3?
Analyze and Evalate:
- emergency fund
- level of debt
- insurable risks
Q1: What is the fourth stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: Developing and Presenting (Communicating) the Financial Plan
A2:
- FP/Client should consider alternatives to current
- FP presenting advantages and disadvantages of each alternative, along with alternative “most likely” to accomplish goals (as opinion, not fact)
- FP must disclose critical assumptions
- Plan presented as 1) recommendation (optimal) 2) alternatives
- Questions answered: Who, When, Why regarding recommendations
- Words, numbers, graphics should be used
What elements should be reviewed in stage 4?
Goals, assumptions, observations/findings, recommendations, alternatives
What are the communication techniques in Stage 4?
Pacing, Reflecting (Repeating), rephrasing (restate in client’s words and in planner’s words)
Q1: What is the Fifth stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: Implementing the Financial Plan recommendations
A2:
- Identify activities necessary for implementation
- Determine FP and client activities, possibly refer
- Share client info as approved by client
- select and purchase agreed upon products
- FP and client mutually agree on responsibilities
- COI disclosed
- FP should discuss any reservations the client has
- FP uses implementation timeline to prioritize recs and keep client on track
Q1: What is the Sixth stage of the Financial Planning process?
Q2: What are the activities during this stage?
A1: Monitoring the Financial Plan
A2:
- FP and client should meet to review changes in client’s life that impact goals
- Purpose:
- Inrease likelihood of long-term financial security
- Ensure financial plan is up to date
- lessen liability exposure of CFP
- Build trust
- Two types of reviews:
- Regular
- Episodic (after major life changing events)
- CFP should review plan at least annually
- Investment results communicated at least quarterly (or monthly during volatility). Investment management may require more frequent reviews. Performance benchmarks at least annually.
Q1: What are the two information types?
Q2: What are the characteristics of each?
A1: Quantitative and Qualitative
A2:
Qualitative: data expressed in terms of conditions, aspirations, hopes and dreams
“how a client feels about things”
Quantitative: stated as a number or quantity
What is the Three-Panel Approach?
Metrics to identify clients strengths and weaknesses in a case.
Benchmarks are used for Risks, Short-term Savings and Investments and Long-term Savings and Investments
If a client is ABOVE the benchmark it is considered a strength, BELOW is a weakness
What is included in the categories of the Three-Panel Approach?
Risks:
Life Insurance (10-16X Gross Pay), Health Insurance, Disability (60-70% of Gross Pay), Property Insurance (Home/Auto equal to FMV), Long-term Care (36-60 months, inflation protected), Umbrella Liability ($1M - $3M)
Short-term Savings and Investments:
Emergency Fund (3-6 months, Current Assets divided by Monthly Non-discretionary Cash Flows); Housing Ratios (28/36), 28% PITI divided by Monthly Gross Income, 36% PITI + Recurring Debt Payments divided by Monthly Gross Income; Debt Analysis (Good, Bad, Reasonable)
Long-Term Savings and Investments:
Education Funding (3000/6000/9000 for 18 yrs); Retirement (16x income needed, savings rate 10-12%, Rate of Return 8-10%, Standard Deviation 8-14%)
Legacy: Will, DPOA, Health Care Directive
What are the benchmarks for the first panel?
Risks:
Life Insurance - 10-16x gross income/pay
Health Insurance - 1M lifetime cap pre-ACA (ACA eliminated per illness/lifetime caps)
Disability - Assuming after-tax premiums, 60-70% of take home pay
Property - Both Home/Auto for FMV
Long-term Care - daily benefit for nursing home care, home health care or help with ADLs with inflation protection
Personal Liability Umbrella Policy (PLUP) $1-3M in liability protection
What are the benchmarks for the second panel?
Short-term Savings and Investments
Emergency Fund: 3-6 months of non-discretionary expenses
Housing Ratio 28%: PITI should not exceed 28% of gross income
Housing Ratio Plus All Other Debt 36%: PITI plus all recurring debt payments should not exceed 36% of gross income
Good, Bad, Reasonable Debt:
Good: (Useful life exceeds term of debt, 15 year mortgage or 3 year car loan)
Reasonable: (30 year mortgage, 5 year car loan
Bad: Credit card debt carried month to month
What are the benchmarks for the third panel?
Long-Term Savings and Investments
Education: 3/6/9 (public, semi-private, private college annual tuition savings) for 18 years
Retirement: by age 62-65, save 16x annual income needed
Savings Rate: 10-12% towards retirement assuming savings starts at an early age, education goal is extra
ROI: 8-10% with long-term time horizon
Risk: Standard deviation 8-14%
Legacy: “The Big Three” Will, DPOA for Health Care, Advanced Medical Directive
Q1: what causes a shift along the demand curve?
Q2: What causes the demand curve to shift up and to the right?
A1: A change in price
A2: Anything that causes discretionary income to increase will shift the demand curve up and to the right (and vice versa for down and to the left)
Q1: what causes a shift along the supply curve?
Q2: What causes the supply curve to shift down and to the right?
A1: Any time there is a change in price, AKA change in quantity supplied
A2: Anything that causes production to improve will shift the supply curve down and to the right (and vice versa for anything that increases production costs or decrease in supply)
Technology, Competition, Anything other than price
Q1: What is price elasticity?
Q2: Describe elastic demand. Examples?
Q3: Describe inelastic demand. Examples?
Q4: What is the shape of an inelastic demand curve?
A1: measures change in quantity demanded relative to changes in price.
A2: Quantity demanded responds significantly to change in price; airline tickets, movie tickets, alcohol, luxury goods
A3: Quantity demanded changes very little to changes in price; life’s necessities, e.g. milk and gasoline
A4: Almost vertical, sloping down and to the right, “I” rememeber to help with shape
Q1: How long is the average business life cycle?
Q2: What are the phases?
Q3: What are the variables? Which direction are they headed in each phase?
A1: 60 Months
A2: Expansion, Peak, Recession/Contraction, Trough
A3: Inflation, Interest Rates, Unemployment, GDP
A4: Peak Recession Trough__Expansion
Inflation Highest Decreasing Lowest Increasing
Interest Rates Highest Decreasing Lowest Increasing
Unemployment Lowest Increasing Highest Decreasing
GDP Highest Decreasing Lowest Increasing
Q1: What types of investments should be owned in the Expansion phase?
Q2: Peak?
Q3: Contraction/Recession?
Q4: Trough
A1: Short-duration bonds, equities
A2: Bonds, preferred stock and other high duration or fixed income assets should be sold. Equities and hard assets (gold, real estate) tend to perform well
A3: Equities and hard assets should be moved into short-term cash, bonds until market settles
A4: High duration bonds, stock purchases late in cycle if valuations ok
Q1: What are the goals of the Fed?
Q2: Whta are the 4 tools the Fed uses to influence money supply and interest rates?
A1: maintain long-term economic growth, price levels supported by economy, full employment
A2: Reserve requirement, discount rate, Open market operations, excess reserves
Q1: Describe the first tool of the Fed monetary policy:
Q2: How is it used?
A1: Reserve Requirement: percent of deposits a bank must keep in cash
A2: as RR increase, less cash for banks to lend, money supply decreases and interest rates increase; as RR decrease MS increases IR decrease
Q1: Describe the second tool of the Fed monetary policy:
Q2: How is it used?
A1: Discount Rate: the overnight rae member banks can borrow from the Fed to meet reserve requirements
A2: As DR increases, short term rates increase; as DR decreases, STR decrease
Q1: Describe the third tool of the Fed monetary policy:
Q2: How is it used?
A1: Open Market Operations: the Fed buys/sells govt secs to influence money supply
A2:
Tighten: Fed sells UST, putting UST on the market and receiving cash in return, this decreases money supply and increases interest rates
Ease: Fed buys UST, puts cash into the market, increasing money supply and decreasing rates
“easy to buy, tight to sell”
Q1: Describe the fourth tool of the Fed monetary policy:
Q2: How is it used?
A1: Excess Reserves: monies a bank holds at fed in excess of reserve requirement amount
A2:
Tighten: increase in reserve rate equals a decrease in money supply
Ease: decrease in reserve rate equals an increase in money supply
Q1: What is Fiscal Policy
Q2: What are the goals
A1: Policy where Congress controls spending and taxation which influences money supply and interest rates?
A2: Maintain economic growth, price stability, full employment
What are the tools of Fiscal Policy?
Taxation: (First) increase tax rates will reduce $ available for spending thereby increasing rates (alternatively decreasing tax rates increases money supply decreasing interest rates)
Spending; (Second) through government spending Congress can increase money supply decreasing interest rates (alternatively decreasing spending increases interest rates)
Debt Management: (Third) Deficit spending, Congress spends more than tax revenues collected. Congress must borrow to continue spending. As they borrow more, the amount of $ available decreases, placing increasing pressure on interest rates
Q1: What are examples of debts not discharged through Chapter 7 bankruptcy?
Q2: What about fraud and negligence?
Q3: What assets are exempt?
Q4: What changed in 2005 re: Chapter 7?
A1: Student loans, 3 years back taxes, alimony, child support
A2: Fraud=no, negligence=yes
A3:
- IRA/Roth exempt up to $1M
- Converted/Rollover IRA & Qualified Plans = unlimited
- Rollover must be clearly marked and not commingled
A4: Means testing began, if average monthly income for their region is greater than than a threshold, cannot file for Chapter 7
