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(old) Fundamentals and Insurance > F and I/Economic Business Cycle, Consumer Protection > Flashcards

F and I/Economic Business Cycle, Consumer Protection Flashcards

1
Q

Q1: What is the first stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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
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2
Q

Q1: What is the second stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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
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3
Q

Q1: What is the third stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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
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4
Q

What should be done for EVERY engagement in Stage 3?

A

Analyze and Evalate:

  • emergency fund
  • level of debt
  • insurable risks
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5
Q

Q1: What is the fourth stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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
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6
Q

What elements should be reviewed in stage 4?

A

Goals, assumptions, observations/findings, recommendations, alternatives

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7
Q

What are the communication techniques in Stage 4?

A

Pacing, Reflecting (Repeating), rephrasing (restate in client’s words and in planner’s words)

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8
Q

Q1: What is the Fifth stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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
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9
Q

Q1: What is the Sixth stage of the Financial Planning process?

Q2: What are the activities during this stage?

A

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.
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10
Q

Q1: What are the two information types?

Q2: What are the characteristics of each?

A

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

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11
Q

What is the Three-Panel Approach?

A

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

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12
Q

What is included in the categories of the Three-Panel Approach?

A

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

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13
Q

What are the benchmarks for the first panel?

A

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

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14
Q

What are the benchmarks for the second panel?

A

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

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15
Q

What are the benchmarks for the third panel?

A

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

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16
Q

Q1: what causes a shift along the demand curve?

Q2: What causes the demand curve to shift up and to the right?

A

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)

17
Q

Q1: what causes a shift along the supply curve?

Q2: What causes the supply curve to shift down and to the right?

A

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

18
Q

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?

A

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

19
Q

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?

A

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

20
Q

Q1: What types of investments should be owned in the Expansion phase?

Q2: Peak?

Q3: Contraction/Recession?

Q4: Trough

A

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

21
Q

Q1: What are the goals of the Fed?

Q2: Whta are the 4 tools the Fed uses to influence money supply and interest rates?

A

A1: maintain long-term economic growth, price levels supported by economy, full employment

A2: Reserve requirement, discount rate, Open market operations, excess reserves

22
Q

Q1: Describe the first tool of the Fed monetary policy:

Q2: How is it used?

A

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

23
Q

Q1: Describe the second tool of the Fed monetary policy:

Q2: How is it used?

A

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

24
Q

Q1: Describe the third tool of the Fed monetary policy:

Q2: How is it used?

A

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”

25
Q

Q1: Describe the fourth tool of the Fed monetary policy:

Q2: How is it used?

A

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

26
Q

Q1: What is Fiscal Policy

Q2: What are the goals

A

A1: Policy where Congress controls spending and taxation which influences money supply and interest rates?

A2: Maintain economic growth, price stability, full employment

27
Q

What are the tools of Fiscal Policy?

A

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

28
Q

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?

A

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

(old) Fundamentals and Insurance (14 decks)

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