Fundamentals Flashcards
When can CFP borrow or lend money to client?
Not allowed directly or indirectly unless client is member of CFP’s family or lender is a business organization.
When can CFP or firm commingle assets with client?
Never; not for CFP or firm
What are the practice standards?
Uber Is A Drunk Persons Immediate Motorvehicle
- Understanding circumstances
- Identifying/selecting goals
- Analyzing current/proposed action
- Develop plan recommendations
- Present recommendations
- Implement
- Monitor/update
What are the approved nouns to follow CFP mark?
- There are 6
- professional, practitioner, mark, certificant, certification, or exam
Approved uses of CFP mark
- CFP(R)
- CERTIFIED FINANCIAL PLANNER(TM)
How long does CFP have to respond to Notice of Investigation and what happens if no response?
- 30 calendar days to respond
- If not: Second notice is sent
- 30 calendar days to respond
- If not: default
How long does CFP have to respond to Request for Documentation and what happens if CFP doesn’t respond?
- 30 calendar days to respond
- If not, second request sent
- 14 calendar days to respond
- If not, notice of failure to cooperate which can be grounds for sanction
How long does CFP have to respond to Motion for Interim Suspension?
- 14 calendar days
- If not, no specifically stated consequences
How long can suspension and revocation of use of marks last?
- Suspension: 90 days to 5 years
- Revocation: Permanent
If CFP use of marks is suspended or revoked, how long does CFP have to prove they’ve stopped using the marks?
- 45 calendar days
- If not, consequence not specifically stated
How long does CFP have to notify CFP board of address or email address change?
- 30 calendar days
- If not, no specifically stated consequence
Fitness Standards - What type of conduct is Unacceptable and will ALWAYS bar certification?
- Felony for theft, embezzlement, other financial crimes
- Felony for tax fraud, other tax-related crimes
- Revocation of financial professional license (securities, broker/dealer, insurance, accountant) unless administrative
- Felony for murder or rape
- Felony for violent crime within last 5 years
Fitness Standards - What type of conduct is PRESUMED to be unacceptable?
- 2+ personal/business bankruptcies
- Revocation or suspension of non-financial license (real estate, attorney) unless administrative
- Felony for nonviolent crime (including perjury) within last 5 years
- Felony for violent crime >5 years ago
When must CFP report a bankruptcy?
- To CFP Board within 30 calendar days
- To clients within 90 days
Who does an investment advisor register with?
- If assets <$100M, state
- If assets >$110M, SEC
- If assets between $100M and $110M, can choose
How is an investment advisor defined in Investment Advisors Act of 1940?
Investment advisor knows his ABCs
In the BUSINESS of providing ADVICE about securities for COMPENSATION
What are the EXCEPTions for who is not required to register with the SEC under the Advisors Act?
The Publisher was Broke because he was L.A.T.E. to US Bank
- Publisher of newspaper/periodical
- Broker/dealer (advice is incidental)
- Lawyers, Accountants, Teachers, Engineers (whose advice is incidental)
- U.S. secured securities
- Banks that are not investment companies
What are the EXEMPTions for who must register with SEC?
VIPs are SaFE from exemptions
- Advisors solely to VENTURE capital funds
- Advisors solely to INSURANCE companies
- Advisors solely to PRIVATE funds <$150M
- Advisors whose clients reside in their STATE only
- FOREIGN advisors without business in US
- Advisors not advising on securities traded on NATIONAL exchange
What are the requirements to be considered an accredited investor?
1, 2, 3 test
- $1M net worth excluding personal residence OR
- Make over $200K in 2 most recent years if single
- Make over $300K in 2 most recent years if spouse/spouse equivalent
What is the benchmark for education funding?
Per year, per child for 18 years: $3K (public), $6K (semi-private), $9K (private)
What is the benchmark for retirement?
16x pre-retirement income and savings rate of 10-12%
What is the benchmark for long-term care?
36-60 months
What happens to the demand curve when discretionary income changes?
- Increase in discretionary income shifts demand curve up and to the right
- Decrease in discretionary income shifts demand curve down and to the left
What causes a shift in the supply curve to the left or right?
- technology
- competition
- anything other than price
- e.g., any change that causes production to improve will shift supply curve down and to the right
Business Life Cycle - What characterizes Peak?
- GDP: Highest
- Inflation: Highest
- Interest Rates: Highest
- Unemployment: Lowest
Business Life Cycle - What characterizes Recession?
- GDP: Decreasing
- Inflation: Decreasing
- Interest rates: Decreasing
- Unemployment: Increasing
Business Life Cycle - What characterizes Trough?
- GDP: Lowest
- Inflation: Lowest
- Interest rates: Lowest
- Unemployment: Highest
Business Life Cycle - What characterizes Expansion?
- GDP: Increasing
- Inflation: Increasing
- Interest rates: Increasing
- Unemployment: Decreasing
What type of goods fluctuate directly with the business cycle?
Consumer durables and capital goods (cyclical in nature)
Does the federal reserve control the prime lending rate?
No
What is the reserve requirement?
First tool used by Fed reserve
How much deposits banks must maintain in cash
What is the Discount Rate?
Second tool used by federal reserve
rate at which banks borrow from federal reserve to meet reserve requirement
What is open market operations?
Third tool used by federal reserve
Reserve buys or sells government securities to influence money supply and put pressure on interest rates
What are excess reserves?
Fourth tool used by federal reserve
Monies that banks hold at federal reserve beyond the reserve requirement
Federal Reserve raises or lowers the interest rate paid to encourage or discourage excess reserves
How do you calculate ROI?
ROI = (ending balance - beginning balance - savings - gifts received) / average invested assets
Average invested assets = (beginning investments + ending investments) / 2
What is a Federal Pell Grant?
Needs based
Only for bachelors or professional degree
What is Stafford Loan?
Aka Federal Direct Loan
Only needs based if subsidized
6 month grace period before repayment
Not available for parents
What is a parent PLUS loan?
Not needs based
Not subsidized
Parents take out the loan and repay
Undergrad only
What is Grad PLUS loan?
For grad students
Based on student’s credit score
Payments begin 6 months after
Unsubsidized
Federal Perkins Loan Program
Expired in 2017
Was needs based for very low EFC
American Opportunity Tax Credit
- 100% of first $2K in expenses
- 25% of next $2K in expenses
- $2500 max per STUDENT
- Tuition must be paid directly but other expenses do not
- Four-years of post-secondary education
Lifetime Learning Credit
- 20% of first $10K in expenses
- $2000 per FAMILY
- Can be claimed an unlimited number of years for undergrad, grad, or professional
- All expenses must be paid directly to institution
Annuity Due vs Ordinary Annuity
- Annuity Due: BEGIN; tuition, retirement income, rent
- Ordinary Annuity: END; debt payments (mortgage, car)
Calculate Real Rate of Return
Inflation adjusted
[(1 + nominal return) / (1 + inflation)] - 1
What is Form ADV?
Used for a Registered Investment Advisor to register with the SEC
- Part 1: Firm name, background of executives, U4 marks
- Part 2: compensation and fees, education, investment objectives/strategies, conflicts of interest
- Part 3: relationship summary to understand differences between brokers and dealers
Fiduciary Duty
- Loyalty (client 1st, avoid conflicts, no regard for self or firm)
- Care
- Follow client instructions (comply w/ engagement, law)
Code of Ethics
I Can Obtain CFP Designation
- Integrity
- Competence and confidentiality
- Objective judgement
- Conflicts disclosed (can be oral)
- Fairness
- Professionalism (reflects positively on CFP profession)
- Diligence
When is a client first engaged with a CFP?
- when written contract is signed
- when client pays CFP
- when client first relies on the CFP’s advice
- when client transfers their assets to the CFP for management
When client first relies on CFP’s advice
What must be provided in written form when providing financial advice and financial planning?
Financial advice: Privacy policy
Financial Planning: All except for conflicts of interest. Includes:
- privacy policy
- services and products
- how client pays
- how you/firm are compensated
- public discripline and bankruptcy
- terms of engagement (assumes monitoring/implementing/updating unless excluded) -→ applies to planning only, not advice
Duties owed to the client
- Fiduciary (loyalty, care, follow client instructions)
- Disclose conflicts
- Confidentiality and privacy
- Provide information to client (privacy document in writing; conflicts can be oral)
Ongoing notification requirements for clients and CFP board
Annual: ADV and privacy
Material changes: to CFP Board within 30 days and clients within 90 days.
Practice Standards: 1. Understanding personal and financial circumstances
quantitative/qualitative info
analyze info for completeness (not analyzing specifics; that’s step 3)
address incomplete info (either limit scope or terminate agreement if major info missing)
Practice Standards: 2. Identifying and selecting goals
identify potential goals (including my assessment of circumstances)
select and prioritize goals
discuss anything unrealistic
Practice Standards: 3. Analyze current course of action and potential alternative courses
Analyze current course (advantages/disadvantages)
Analyze potential courses (not a recommendation until selecting in step 4)
Duties owed to firms and subordinates
use reasonable care when supervising
comply with lawful objectives of the firm
provide notice of public discipline
What is included in Standards of Conduct?
- A. Duties owed to client
- B. Financial planning and application of Practice Standards for planning process
- C. Practice Standards for planning process
- Duties owed to firms and subordinates
- Duties owed to CFP Board
- Prohibition on circumvention (cannot do anything indirectly that is prohibited directly)
What is the CFP responsible for as it relates to client’s personal finances?
Everything except for selling real estate, writing estate planning documents, and completing tax returns
E.g., is responsible for ensuring RMDs occur, deposits go into 401(k) rollover, etc.
What is the Brochure Rule?
For RIAs; requires written disclosure to every client including:
- Services and fees
- types of securities
- education and business standards
- participation/interest in securities transactions
- conditions for managing accounts
Must be provided at the time of entering a contract and is accompanied by ADV Part 2
What is the definition of a Depression?
Recession lasting for 18+ months
What is Disinflation?
Decline or slowdown in the rate of inflation
What are the 3 main goals of the Federal Reserve?
- Maintain long-term economic growth
- Maintain price levels
- Maintain full employment
What is the Discount Rate?
How much is FDIC Insurance? What does it NOT cover?
$250K per type of ownership per institution
Types of ownership: individual, joint, trusts, self-directed retirement
Does NOT cover mutual funds, stocks, bonds
How are RIA marks used?
CANNOT use RIA letters after your name
CAN use Registered Investment Advisor
What ADV sections must be filed annually?
ADV Part 1 and Schedule 1 must be filed by RIA annually
What form is used to register for FINRA?
Form U-4
What does the Series 6 allow you to sell?
Mutual funds, UITs, and variables (life insurance, annuities) Note: must also have state insurance license to sell variables
What does the Series 7 allow you to sell?
Everything except for commodities and futures.
Monetary Policy vs Fiscal Policy
Both are used to control/influence the money supply and interest rates Monetary: used by Federal Reserve Fiscal: means by which Congress controls spending and taxation
What is the Federal Funds Rate?
Rate at which member banks borrow from each other.
What is the Prime Rate?
Rate banks charge to their best customers. NOT set by Federal Reserve
If the Federal Reserve sells government securities, what happens to interest rates?
They increase because it takes money out of the hands of the people thus decreasing the money supply and with lower money supply, people will pay more for it (higher demand).
What does Fair Credit Reporting Act provide?
Must be provided info if refused employment due to credit Right to one free credit report per year
What does the Fair Credit Billing Act provide?
- Creditor had 30 days to acknowledge billing dispute and 90 days to correct it
- Max liability to consumer of $50 for CC fraud (per card, not overall for a single fraud case)
What does the Truth in Lending Act provide?
Must disclose total cost of financing
What does the CARD Act of 2009 provide?
Must be 21+ to open credit card in own name
Purpose or Chapter 7, 11, and 13 Bankruptcies
7: liquidation 11: reorganizing (business or self-employed) 13: adjusting debts (individuals)
What debts are NOT discharged in Chapter 7?
3 years of back taxes Alimony and child support Student loans (unless undue hardship) Debts through fraud are NOT discharged (e.g., I know I’m going to file so I run up by CC) but those through negligence ARE
What assets are protected in a Chapter 7?
*Rollover IRAs *IRAs and Roths up to $1.3M *Alimony and child support *Pensions, life insurance, annuities *Note: Inherited IRAs do NOT have protection
What does a 2/6 ARM mean?
Interest rate cannot increase more than 2% per year or more than 6% over the term of the loan
Who can get a reverse mortgage?
62 or older
What is the benchmark for ROI?
9-12% (depending on age and risk tolerance)
Who is considered independent for FAFSA purposes?
>23 Has legal dependents Married
What is Federal Supplemental Education Opportunity Grant (FSEOG)?
Needs based Undergrad only Limited funds so only paid if funds available
What type of student loans offer alternate payment options?
Stafford Grad PLUS Consolidation loans NOT parent PLUS
Who claims the asset for prepaid tuition?
Parent
What happens if you don’t use prepaid tuition?
Can receive principal back but no interest
Who claims the asset for 529?
Parents for financial aid purposes
What can 529 money be used for?
Qualified education for college Registered apprenticeships $10K annually for elementary/secondary $10K total for student loans
How much can someone have in 529A ABLE?
-Beneficiary must be entitled to SS disability or SSI -Only 1 account per beneficiary -If balance gets over $100K, SSI is suspended
What is a Coverdell Education Savings Account?
*$2K contributed per year per beneficiary (can have multiple accounts though) *Can use for elementary or secondary as well *Owner can change beneficiary *No contributions after age 18 *No distributions after age 30 *Considered asset of parents for FAFSA *AGI phaseout *Note: basically pointless now that 529s can be used for elementary/secondary
How does a 529 owned by a grandparent impact FAFSA?
- Section 529 plan assets owned by a grandparent are not included in a FAFSA calculation – only the distribution would be considered.
- Thus, waiting to distribute the assets until as late as possible (e.g., last year of college) would allow them to grow and not jeopardize financial aid earlier on.
Who regulates form ADV?
SEC
SEC has ultimate authority over lack of disclosure
Can decisions regarding a petition for consideration be appealed?
Yes; DEC’s decision regarding a petition for consideration may be appealed to the Appeals Committee of the Board of Directors, in accordance with the Disciplinary Rules and Procedures.
What is the index of leading economic indicators used to forecast?
Economic expansions and contractions.
Is life insurance considered an asset for FAFSA?
No
Is investment real estate considered an asset for FAFSA?
Yes
Are annuities considered an asset for FAFSA?
No
As a rule of thumb, it is best if consumer debt does not exceed what % of net income
20%
is scope of engagement required to be provided when entering financial advice relationship?
no; only required when doing financial planning
prospective client needs comprehensive estate planning but CFP isn’t competent, what should they do?
prepare the estate plan with the help of an estate planning attorney
it is not necessary to disengage and would be better than limiting the scope
Values-driven planning
looks at the clients life goals, including personal, emotional, and spiritual goals, rather than just financials
