Fundamental Financial Planning Flashcards
1
Q
How does a CFP determine completeness of information to enable analysis?
A
may involve reviewing recent investment
statements containing essential details like plan type, adjusted cost base, market
value, rates of return, beneficiaries, successor holder, or other relevant information
2
Q
What is encompassed in the FP Standards Council’s Standards of Professional Responsibility?
A
Code of Ethics, Rules of Conduct, Fitness Standards, Financial Planning Practice Standards
3
Q
What is the FP Code of Ethics?
A
moral guideline for assessing the conduct of Certificants, outlining the standards of ethical conduct expected from them and their peers. It includes principles, directives, and descriptions defining appropriate conduct. It does not establish standards for civil liability
4
Q
Who does the Code of Ethics primarily serve?
A
primarily serves the public by setting expectations for client treatment, assures industry professionals of a Certificant’s financial planning expertise and ethical commitment, and acts as a cornerstone for the profession to ensure universal adherence to ethical principles
5
Q
How many principles are in the Code of Ethics?
A
8
6
Q
Principle 1: Duty of Loyalty to the Client
A
Honesty and put client needs first
7
Q
Principle 2: Integrity
A
adhere to moral rules and duties - honest and just
8
Q
Principle 3: Objectivity
A
Intellectual honesty, impartiality and sound judgement
9
Q
Principle 4: Competence
A
maintain skills and knowledge and applying high level of knowledge effectively
10
Q
Principle 5: Fairness
A
provide client what they should expect from professional relationship, disclose all relevant facts and conflicts
11
Q
Principle 6: Confidentiality
A
of client information to maintain trust. Must get explicit authorization to share client info
12
Q
Principle 7: Diligence
A
care in handling client affairs. Timely and thorough when guiding, informing, planning, supervising, and delivering financial advice
13
Q
Principle 8: Professionalism
A
behaviour that inspires confidence and respect from clients
14
Q
What are the FP rules of conduct?
A
standards of conduct that CFP and QAFP professionals
must follow.
1. Do not engage with any fraud, dishonesty, deceit or make false claims
2. do not engage in activity that looks poor on the profession including in private
3.only raise concern about other FP professional to FP Canada
4. promptly inform disciplinary body of any illegal conduct
5. report any egregious violations to FP Canada
6. Must disclose to clients how you/firm is compensated
15
Q
Can you comingle client funds as a cfp?
A
Yes, just not with your own personal funds and only if legal requirements are fulfilled
16
Q
When should you advise client you might not be able to continue in a professional relationship if a conflict of interest materializes in the future?
A
as early in engagement as possible to increase level of trust and respect
17
Q
What do you do if a conflict of interest arises during an engagement
A
cease service until full written disclosure of conflict and consent from client is received.
18
Q
What is your responsibility when leaving a firm or ending an engagement?
A
need to provide prompt notification to the client and shall make sure that the
withdrawal will not prejudice the client.
If you leave the firm and that departure leads to the ending of a client relationship, (1) directly notify the client or when that is not possible, (2) take the steps to ensure that their firm has notified the client.
When CFP and QAFP professionals end their engagement they should assist the client in ensuring a transition to a new financial planner.
19
Q
What is a CFP required to disclose in writing to client upon engagement?
A
- Compensation
- Conflicts of interest (and potential)
- Info about CFP/firm that would materially impact client decision
- info about expertise
- Contact info for CFP
- products CFP is licensed to sell
- notice that CFP might have to terminate engagement if conflict arises
20
Q
What are the Fitness Standards
A
Describe how a CFP should act to maintain certification and maintain highest level of competence and professionalism. For instance, cannot be bankrupt, cannot have been suspended from other professional licenses for longer than a year.
21
Q
What is the purpose of the Practice Standards
A
- Establishes the practice activities expected of the planner in the delivery of services to the client
- Clarifies the standard practice to promote a common delivery of services
- Outlines respective roles and responsibilities of planners and clients in any engagements or
meetings - Serves the public interest by defining a level of service the protects client interests
Essentially explains roles and responsibilities of CFP and process of planning to make it a uniform delivery, for any engagement involving planning
22
Q
When must you notify FP Canada of changes to your situation as a FP, like declaring bankruptcy?
A
Within 15 days
23
Q
What are the Practice Standards
A
- Explain the Role of the Financial Planner and Value of the Financial Planning Process
- Define the Terms of the Engagement
- Identify the Client’s Goals, Needs and Priorities
- Gather the Client’s Information
- Assess the Client’s Current Situation
- Identify and Evaluate the Appropriate Financial Planning Strategies
- Develop the Financial Planning Recommendations
- Compile and Present the Financial Planning Recommendations and Supporting Rationale
- Discuss Implementation Action, Responsibilities and Time Frames
- Implement the Financial Planning Recommendations
24
Q
What are the components of a financial plan
A
- Cover/Title page (contact info, client names etc)
- Executive summary (Concise summary of goals, recommendations, assumptions, disclaimer re info provided)
- Financial planning areas (for each area, current situation, issues/opportunities, options, and recommendations)
- Action Plan (prioritized by urgency)
- Appendix (supporting docs to plan)
25
What is a Fiduciary
Someone who holds a position of trust and confidence and is legally obligated to act in the best interests of another party, known as the beneficiary or principal.
26
When might a person have fiduciary duty?
When someone relies on them based on:
- Vulnerability (old, cognitively impaired, lack of financial knowledge)
- Trust (if someone places a significant amount of trust in their planner)
- Reliance (someone who heavily relies on planner for advice)
- Discretion
27
What are some trends impacting planning profession
expanded definition of family, different types of retirement (phased, semi), aging population, longevity, shift from DB to DC pensions, fluctuating savings rates, high debt levels, financial regulation, fintech
28
Who does OSFI regulate
financial institutions in Canada like federal banks, insurance companies, trust and loan companies, private pension plans
29
What banks does OSFI regulate
domestic banks and foreign bank branches operating in Canada.
30
What regulation does OSFI administer
Bank Act, Insurance Companies Act, Trust and Loan Companies Act
31
What is FCAC
Financial Consumer Agency of Canada.
Protects and educates consumers of financial products and services and makes sure institutions comply with consumer protection laws.
32
What is OPC
Privacy Commissioner of Canada.
Not just for financial services, but oversees the application of the Personal Information Protection and Electronic Documents Act (PIPEDA), which governs
the collection, use, and disclosure of personal information by private sector organizations,
including financial institutions
33
What is FINTRAC
Finanical Transaction and Report Analysis Centre.
Canada's financial intelligence unit for combatting ML and terrorist financing.
34
What are the three stages of Money Laundering
Placement
Layering
Integration
35
What is placement in money laundering
depositing illegal funds in financial institution
36
What is layering in money laundering
converting proceeds of crime into another form which involves complex transactions and many layers making the audit trail more difficult
37
What is integration in money laundering
placing laundered funds back into legitimate economy
38
What is Structuring in money laundering
AKA Smurfing. Making lots of small deposits to evade detection
39
Over-Invoicing and Under-Invoicing
Criminals manipulate the prices of goods in
international trade transactions. Over-invoicing inflates the cost of goods, allowing for
the transfer of excess funds to the criminal organization. Under-invoicing does the
opposite
40
Trade-Based Smuggling
Money launderers hide funds by mixing them with legitimate goods or exploiting trade routes for smuggling cash
41
What is underground banking or Hawalas
Informal or unregulated money transfer systems, that may be used to move money across borders without leaving
a paper trail.
42
PCMLTFA
Proceeds of Crime ML and Terrorist Financing.
places obligations on individuals employed in the financial services industry to report certain activities to FINTRAC
43
How does limbic system impact people's emotions
- involved in processing emotions and responses to stimuli
- prioritizes immediate rewards over long-term benefits
- can lead to gut-feeling response and impulse
- may give more weight to available info and ignore missing evidence which means you are making decision on incomplete info
- overweights low probability events
- doesn't like ambiguity and prefers clarity
- suppresses doubt which can lead to overconfidence
- responds more strongly to losses than gains
- thinks narrowly about problems leading to short sightedness in decision making
44
How does the limbic system impact people's operations
o Generates impressions, feelings, intuitions, and inclinations (to be used by the
prefrontal cortex).
o Creates patterns in memory for ideas already activated.
o Distinguishes surprises from ordinary situations.
o Infers and invents causes and intentions.
o Makes short-term predictions and decisions regarding situations that are familiar.
45
How does the pre-frontal cortex help us
helps with more balance decision making when it collaborates with the impulsive limbic system. Cortex allows more comprehensive decision making and problem solving that is more detailed and rational
46
Characteristics of prefrontal cortex
deliberate
measured
effortful
logical
generates beliefs, attitudes and intentions
controls thoughts and behaviours
follows rules-based process
compares attributes when decision making
47
What factors constrain someone's decision making ability
Time - too much or too little
Information- too much/little, incomplete
Knowledge - lack of, incorrect
Motivation - lack of, or excessive urgency
Fatigue & hunger/thirst
Stress/anxiety
quantity of decisions - overload
environment - noise, time of year, comfort
48
When are decisions easily made
when the choice is simple;
related to one topic;
contains limited number of options;
minimal ambiguity;
come to decision yourself
49
Maslows Hierarchy of needs
Bottom up:
Physiological needs (food,water,shelter,sleep)
Safety Needs (physical, financial, health)
Love and belongingness (connections, friends)
Esteem (self worth, confidence)
Self Actualization of Needs (personal growth)
50
What is Sudden Wealth Syndrome
The psychological and emotional challenges that individuals may experience when they come into a significant and unexpected windfall of money or wealth. This syndrome is characterized by a range of emotional and behavioral reactions in response
to newfound riches. Key features include emotional turmoil, financial inexperience,
relationship strain, lifestyle changes, identity crisis, loss of privacy, financial stress and
adjustment difficulties.
51
In which ways can someone experience grief that would impact their life
Death of important person
Death of Pet
Loss of relationship
Loss of job
diagnosis of illness
Catastrophic loss of property
52
Stages of Grief
Denial
Anger
Bargaining (what if, if only...)
Depression
Acceptance
53
How might Grief impact financial decision making
anxiety - hinder rational decision making
depression - lack of interest in finances
Significant Personal Relationship Dysfunction (discussions about finances become challenging)
Recall of past bad experiences with money
Addictive or compulsive behaviours
Inability to change destructive financial behaviours
inability to follow through on financial plans
54
What are some ways to engage with someone who might be suffering from mental depletion or cognitive fatigue
- affirm the individual and validate their emotions
- clarify the circumstances, encourage them to share thoughts
- simplify decision making for them
- prioritize decisions if dealing with lots or complex ones
- postpone any non essential decision making.
55
What are heuristcs
mental strategies to make quick decisions. Can be helpful and efficient but can lead to errors or biases in decision making.
56
What is a bias
pattern in thinking that deviates from objective judgement leading to judgements that are irrational or unfairly skewed
57
Conservatism bias
cling to one's beliefs and be resistant to change even when new information contradicts those beliefs
58
Confirmation bias
seek, interpret and remember info in a way that confirms your pre-existing thoughts.
59
cognitive dissonance
discomfort or tension experienced when
an individual holds two conflicting beliefs, engages in actions contradictory to their beliefs, or encounters new information that challenges their existing beliefs. To alleviate this discomfort, people may engage in mental gymnastics to rationalize or justify their beliefs or actions.
60
hindsight bias
"I-knew-it-all-along" effect, is the belief that
past events were predictable at the time they occurred, even when there was no objective
basis for such predictions. This bias can lead individuals to overestimate their ability to
foresee outcomes after the fact.
61
illusion of control bias
tendency to overestimate one's influence or
control over external events, even when outcomes are determined by chance or factors
beyond one's control. This bias can lead to unwarranted confidence in one's decision making abilities.
62
representativeness bias
making judgments or
classifications based on a limited set of characteristics without adequately considering the base rates of those characteristics. People may rely too heavily on superficial resemblances, leading to errors in judgment and decision-making.
63
anchoring bias
relying heavily on an initial piece of information
(the "anchor") when making decisions and adjusting insufficiently away from it. The anchor can have a disproportionate influence on final judgments,
64
availability/familiarity/frequency/recency bias
tendency to overestimate the likelihood of events that are more readily recalled or are
emotionally charged.
65
framing bias
occurs when individuals draw different conclusions based on how information is presented or framed.
66
self-attribution bias
individuals attributing more responsibility for their successes to themselves while attributing failures to external factors or circumstances. It can result in a lack of accountability for mistakes and an inflated sense of personal achievement.
67
sunk-cost bias
when individuals continue to invest resources (e.g.,money, time, effort) into a decision or project despite evidence that the expected benefits no longer justify the costs.
68
outcome bias
Outcome bias involves evaluating the quality of a decision based on its eventual outcome rather than the information and reasoning available at the time the decision was made. This bias can lead to unfairly judging decisions as good or bad solely based on luck or hindsight.
69
affinity bias
being drawn to people, things, or decisions that are perceived as similar to oneself.
70
disposition bias
tendency to sell an asset that has increased in value and resist selling an asset that has declined in value. This bias can result from the emotional attachment to investments and a reluctance to realize losses.
71
endowment bias
when individuals overvalue an object simply
because they own it. People tend to attach more value to possessions they own, which can
influence decisions related to buying, selling, or trading items.
72
loss aversion bias
tendency to perceive losses as more emotionally painful than equivalent gains are pleasurable. It can lead to risk aversion and a preference for avoiding losses over seeking potential gains, even when the expected outcomes are the same.
73
overconfidence bias
Overconfidence bias involves individuals being overly sure of themselves and their ideas. This bias can lead to overestimating one's knowledge, abilities,
and the accuracy of their predictions, potentially resulting in unwarranted confidence in decision-making.
74
regret aversion bias
tendency to avoid making decisions due to
the fear of experiencing regret. Individuals may choose inaction or maintain the status quo
to minimize the possibility of feeling regret, even if taking action may have better long-term
outcomes
75
self control bias
prioritize short-term gratification over
long-term goals or benefits. It can result in impulsive decision-making, where immediate
rewards or pleasures are favored over more prudent, delayed rewards.
76
status quo bias
preference for maintaining the current situation
or existing choices over making changes. People often resist change due to the comfort and familiarity associated with the status quo, even when alternatives may be better.
77
What is the Curse of Knowledge bias
In financial planners, the tendency to assume that others have the same background knowledge and understanding as oneself. Financial planners may overestimate their clients' familiarity with financial concepts, leading to communication gaps and misunderstandings
78
What is the Empathy Gap bias in financial planners
tendency to experience reduced empathy for
others based on one's own current emotional state or financial circumstance.
79
What is the Framing Effect bias for financial planners
Financial planners may influence clients' decisions by framing financial options or risks in specific ways, which can impact the choices clients make.
80
What is the projection bias in financial planners
tendency to believe that other individuals share
one's own priorities, attitudes, or beliefs. Financial planners may assume that clients have the same financial goals or risk tolerance as themselves, potentially leading to misalignment in financial planning.
81
What is the Illusion of Transparency bias in financial planners
tendency to overestimate how
well others understand one's own mental state, thoughts, or intentions. Financial planners
may assume that clients fully grasp complex financial strategies or products when, in reality,
clients may have limited understanding.
82
What is the Naive Realism bias in financial planners
the belief in one's own objectiveness and completeness of knowledge, often leading to the assumption that one's perspective is the only valid or correct one. Financial planners may inadvertently discount alternative viewpoints or strategies.
83
What is the fundamental attribution error bias in financial planners
tendency to attribute
others' actions to their character or disposition while underestimating the influence of
situational factors. Financial planners may mistakenly attribute a client's financial decisions solely to their personality traits, ignoring external circumstances that may have played a significant role.
84
What is the modality effect bias in financial planners
tendency to experience different levels of learning or recall based on the presentation of information. Financial planners may find that clients remember and understand financial concepts better when presented in a particular format (e.g., visual, verbal) and may need to adapt their communication accordingly.
85
What is mental accounting
categorizing financial resources by source or purpose of funds
86
How does an individual's point of reference impact decision making
if something good or bad just happened to them they might be in more positive or negative point of reference, impacting their decisions
87
How does an individual's aversion to loss impact decision making
can lead to avoiding losses rather than pursuing gains
88
How does someone's view of guaranteed goans vs losses impact decision making
A guaranteed gain or loss may be viewed as more certain and less risky, influencing decisions to favor such outcomes even when the expected gains or losses are higher but less certain
89
How does someones perception of probability of events occurring impact decision making
People assess the probability of events occurring differently based on their
perceptions and judgments. If individuals believe an event is highly probable, they
may make decisions based on that belief, even if the probability is objectively low.
Conversely, they may dismiss decisions with a high expected value if they believe the
event is unlikely to happen.
90
How does absolute and relative size of gains/losses impact financial decision making
The absolute and relative sizes of potential gains or losses can heavily influence decision-making. Individuals may prioritize choices that offer substantial absolute
gains or losses, even if the relative impact on their overall financial situation is small.
91
What are the stages of the change process
1. Pre-contemplation.
are often in denial or ignorance of the need to
change.
2. Contemplation.
They recognize the problem but may still have mixed feelings about acting. They weigh the pros and cons of change and consider the potential
benefits and challenges.
3. preparation/planning
Individuals are committed to making a change and start taking concrete steps toward it
4. Action
implementing the steps outlined in the preparation phase
5. Maintenance
Sustaining new behaviour over time
6.Termination/Relapse
Either behaviour is new normal or relapse occurs
92
What are the three steps a financial planner can take to facilitate change
ID behaviour change
Create a change plan
Support Behavioural change
93
How can FP motivate change
encourage forward looking mindset
link financial goals to emotions and values
pre-commitment strategies
encourage client to join peer groups that reinforce financial goals
educate on long-term benefits
94
What 2 components make up trust
Character and competence
95
What is bypassing
when two people attach different meanings to the same word or phrase, leading to confusion or miscommunication.
96
What are the different styles of communication
1. Emotive (avoid formality)
2. Directive (focus on business)
3. Reflective (reserved, not overly emotive, avoid pressing for quick answers)
4. Supportive (reserved, listeners, thoughtful decision makers. Want social relationship.)
97
What factors impact client's motivation to change
Emotions
knowledge/understanding
Risk/Uncertainty
Perceived value
Cost (dollar, time, commitment, emotion)
98
What are the 2 types of orientations regarding motivational focus
promotion focus(goal achievement)
Prevention Focus (objective avoidance)
99
What are things a promotion focused client responds well to when motivating them to change
optimistic language oriented around benefits that emphasizes gains, rewards etc of changing. Also mention lost opportunities or gains
100
What are things a prevention focused client responds well to when motivating them to change
pessimistic language that hi-lights risks and negative consequences of not changing and how an action can help avoid that risk.
101
What are some pre-commitment strategies to help with motivation and implementation of change
change peer group and social rewards
Adjusting immediate payoff and losses (decrease immediate benefits of negative actions and increase immediate losses in financial plans)
Increase future payoff and decrease future losses (explain long term payoffs of actions and educate to reduce future losses)
managing options (reduce number for negative actions and increase for positive actions)
102
What biases is someone who is in the Idealism investor personality susceptible to?
Overconfidence in that he/she overestimates his/her investing capabilities;
Optimism in that he/she generally believes that his/her investments will do well;
Self Attribution in that he/she would attribute his/her portfolio’s success to his/her superb investing capabilities
