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CFP Study Prep_self > Fundamentals > Flashcards

Fundamentals Flashcards

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CFP® flashcards
1
Q

Describe steps of Financial Planning Process

A

Ukelele In A Divebar Playing Iron Maiden

7 step process:
1. Understand client current financial and personal circumstances using quantitative and qualitative information
2. Identify and select client goals by helping client to prioritize
3. Assess client current course of action and potential alternatives
4. Develop recommendations based on assumptions, estimates, basis, timing, priority and whether recommendation is dependent on others
5. Present recommendations explaining rationale behind each and relationship to goals and objectives
6. Implement plan recommendations, identifying who, what, when of specific actions and products/services to take action (optional for client engagement)
7. Monitor progress of plan and any changes in client situation, start over as needed based on current qualitative and quantitative information (optional for client engagement)

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2
Q

Name the elements of CFP Code of Ethics

A
  1. Honesty, Integrity, Competence, Diligence
  2. Exercise due care
  3. Client interest first
  4. Protect client privacy and access to non public information
  5. Disclose and manage conflicts of interest
  6. Act in a way that reflects positively on financial planning profession
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3
Q

Name the CFP Standards of Conduct

A
  1. Duties (15) owed to clients
  2. Duties owed to firms and subordinates - use reasonable care when supervising, comply with lawful objectives of firm, report and CFP board action
  3. Duties owed to CFP board - provide written notice with 30 days of any adverse or alleged conduct
  4. Financial Planning and Application of Practice Standard - Collaborative process with client to meet life goals based on Financial Advice tailored to client circumstances
  5. Practice Standard for Financial Planning Process - 7 step process
  6. Prohibition of circumvention - No 3rd party can be used to violate Code of Ethics or Standards
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4
Q

Describe the duties owed to clients under CFP Standards of Conduct

A

15 duties:

(1) Fiduciary Duty: Duty of loyalty (client interest 1st, manage conflicts of interest, care and follow client instructions), Duty of care, Follow client instructions
(2) Integrity
(3) Competence
(4) Diligence
(5) Disclose/Manage conflicts of interest
(6) Sound and Objective Professional Judgement
(7) Professionalism
(8) Comply with Law
(9) Confidentiality & Privacy
(10) Provide information to client
(11) Duties when communicating with client
(12) Duties when representing compensation method
(13) Duties when working with others / recommending professionals
(14) Duties when selecting technology
(15) Refrain from borrowing and lending money

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5
Q

What additional duties does a CFP have when giving financial advice, in addition to that must be done at all times

A
  1. Fiduciary responsibility
  2. Disclose and manage conflicts of interest
  3. Provide all information to client
  4. Duties when recommending, engaging and working with additional persons on behalf of client
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6
Q

What additional duties does a CFP have when providing financial planning, in addition to that must be done at all times and providing financial advice

A
  1. Follow practice standards for the Financial Planning Process
  2. Provide information to client in writing
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7
Q

Under Investment Advisor Act of 1940, what defines an Investment Advisor

A

A-B-C

Advice is provided by the individual based on general or specific information
Business is based on providing advice, guidance and analysis of financial circumstances
Compensation is received for providing such advice

RIAs are held to fiduciary responsibility

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8
Q

Name the entities and functions of CFP Hearing Process

A

Board Counsel (Legal) - Reviews, investigates and delivers formal complaint or settlement offer to respondent (requiring response in 30 days)

Hearing Panel (Jury) - Conducts hearing (within 30 days of notice) with respondent based on written documents and statements (due 45 days post complaint) and witnesses (list due 30 days after complaint) and makes recommendations

Disciplinary and Ethics Committee (Judge/Judicial) - Reviews hearing panel recommendations, issues final order and manages appeals to Board of Directors Appeals Committee (within 30 days of DEC final order, in appealed)

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9
Q

Describe the forms of DEC discipline that may be ordered/imposed from least to most severe

A
  • Private Censure: Unpublished written reproach
  • Public Letter of Admonition or Public Censure: Written reproach published in press release
  • Suspension: Prohibited from using CFP marks or referencing CFP certified for min 90 days to Maximum 5 years
    Revocation: Termination of right to use CFP marks or permanently barred from applying/obtaining CFP certification
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10
Q

What is CFP Board Administrative order of Suspension or Revocation

A

A failure to respond or pay hearing/ settlement fees that results in Order of Suspension of certification and license for 1 year plus 1 day or Order of Revocation that revokes certification and license permanently, both until amounts due are paid or waiver obtained

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11
Q

What is can Optimism with investors lead to

A

Optimism can lead to exuberance, which can lead to market bubbles.

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12
Q

What is Heuristic Bias

A

Any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching a short-term goal or approximation.
Examples: Rules of thumb, educated guesses, and trial & error.

Heuristics reduce the cognitive load of decision making, which allows biases to cloud objectivity.

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13
Q

What is Anchoring Bias

A

Anchoring is where an investor sets a value at the initial point of information (typically their buy price).

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14
Q

What is Prospect theory Bias

A

People suffer more greatly from losses than they benefit from gains.

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15
Q

What is Recency bias

A

Recency bias can make investors focus more on the most current events, leading to faulty predictions that this is always how it will always be.

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16
Q

What is Overconfidence bias

A

Overconfidence leads people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes.

Factors leading to overconfidence:
- Choice
- Task familiarity
- Information (confirmation bias)
- Active involvement
- Past success

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17
Q

What is Disposition effect bias

A

People seek pride and avoid regret (the disposition effect):
- Sell winners too quickly (confirms correct choice)
- Hold losers too long (avoids confirming incorrect choice)

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18
Q

What 3 effects caused when investors consider their past experiences?

A

House money effect (take more risk)

Snakebite effect (take less risk)

Break-evenitis (take more risk)

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19
Q

What can mental accounting lead to?

A

Mental accounting can lead to naïve diversification (i.e., the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit).

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20
Q

What bias stems from familiarity and single stock concentration?

A

Home bias

21
Q

What behavior stems from social interactions and finding comfort in opinions of groups and numbers of people., ie…poll taking

A

herd mentality (or, herding).

22
Q

What are the different categories of financial ratios

A

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

23
Q

Financial ratios:

What is current ratio:

A

Current Assets / Current Liabilities (Liquidity)

24
Q

Financial ratios:

What is quick ratio:

A

Current Assets - Inventories / Current Liabilities (Liquidity)

25
Q

Financial ratios:

What is working capital :

A

Current Assets - Current Liabilities (Liquidity)

26
Q

Financial ratios:

Inventory Turnover :

A

Cost of Good Sold / Average Inventory ( Activity ratio)

27
Q

Financial ratios:

Days to Sell Inventory :

A

365 / Inventory Turnover ( Activity ratio)

28
Q

Financial ratios:

Accounts Receivable Turnover :

A

Sales (on credit) / Average Accounts Receivable ( Activity ratio)

29
Q

Financial ratios:

Receivable Collection Period :

A

365 / Accounts Receivable Turnover ( Activity ratio)

30
Q

Financial ratios:

Gross Profit Margin

A

Gross Profit / Sales ( Profitability Ratio)

31
Q

Financial ratios:

Operating Profit Margin

A

Operating Income Profit / Revenue ( Profitability Ratio)

32
Q

Financial ratios:

Return on Assets (ROA)

A

EAT (Earnings After Taxes / Total Assets ( Profitability Ratio)

33
Q

Financial ratios:

Return on Equity (ROE)

A

EAT (Earnings After Taxes / Equity ( Profitability Ratio)

34
Q

Financial ratios:

Debt to Equity

A

Total Long Term debt / Equity ( Debt Ratio)

35
Q

Financial ratios:

Times Interest Earned

A

EBIT: Earnings Before Interest and Taxes / Interest Expense ( Debt Ratio)

36
Q

Financial ratios:

Debt Ratio

A

Total Debt (ST+LT Liabilities) / Total Assets ( Debt Ratio)

37
Q

What are the different types of Bankruptcy procedures and key elements of each (purpose, who, eligibility, unsecured debt, secured debt, foreclosure, time to complete, time on credit report)

A

Chapter 7 - Liquidate/sell all assets by trustee to pay off loan; Can be individual or business; Eliminates all debt except student loans, income taxes, Secured debt, alimony, child support. Will not protect agains foreclosure per-se, available for lower income individuals (income limits), takes 3-6 mo to complete and on credit report for 10 yrs

Chapter 13 - Repay all debts from earned income; Only for individual; Establishes repayment schedule to payoff debt at more aggressive payments. Available for debts (limit) of $419K unsecured loans and $1.287K secured loans; Protects against foreclosure , takes 3-5 yrs to complete and on credit report for 7 yrs

Chapter 11 - Restructure all debts from business; Primarily for business or individuals above Ch 13 limits; Unsecured debt is reorganized and Secured debt is restructured to allow debt to be paid back on a schedule . Available for all debts, no limitation; Protects against foreclosure , takes 6mo -2 yrs to complete and on credit report for 10 yrs

38
Q

What are the 5 different Consumer Protection Laws

A

Consumer Credit Protection Act - access to rates and terms of credit
Fair Consumer Opportunity Act - opportunity to gain access to credit
Fair Consumer Credit Reporting Act - right to know whats in credit reports
Fair Consumer Credit Billing Act - right to have billing mistakes resolved
Fair Debt Collection Act - right to be protected from collection agencies

39
Q

What is CFP definition of recession and depression

A

Recession is 6 mo or 2 consecutive quarters of declining GDP;

Depression is 18 mo or 6 consecutive quarters of declining GDP

40
Q

What is difference between Chapter 7, 11 and 13 bankruptcy filings

A

Chapter 7 = liquidate assets
Chapter 11 = reorganization of business or self employed
Chapter 13 = adjusting debts (renegotiating)

41
Q

Name the 3 primary debt ratios, max level and how calculated

A

Consumer - 20% of consumer/credit card debt as % of net income
Housing - 28% of principal, interest, taxes and insurance as % of gross income (PITI)
Housing Plus - 36% of PITI + other recurring debt as % of gross income

42
Q

How much of an education funding plans can be accessed for private elementary school without incurring a penalty?

A

529 plans can be used to pay up to $10,000 per year per beneficiary for tuition at primary schools and an unlimited amount for qualified expenses at secondary schools. These plans are no longer limited to post-secondary schooling. The tuition is below $10,000 per student so they can access the full amount needed without penalty.

43
Q

Can a UTMA be transferred to any other investment vehicle

A

Yes, can be moved to 529 plan

44
Q

Q: After the closing of Anthony’s estate, William and Brenda Richter come to engage you to create a financial plan. However, William balks somewhat at your fee and is uncertain as to the extent of the services he will require. He suggests that since the two of you don’t know each other well, that you start off with just a basic allocation and you go from there. Your best course of action is to:

  • Leave the room and suggest that he and his wife privately discuss the services required.
  • Inquire as to how the death of his brother and the newly-acquired inheritance may have altered his and his wife’s goals.
  • Write a broad letter of agreement and amend it as necessary to adjust to the scope of the engagement.
  • Take information from the prior engagement and reduce your fee.
A

A: Inquire as to how the death of his brother and the newly-acquired inheritance may have altered his and his wife’s goals.

Leaving the room for William and his wife to discuss the issue is not likely to advance the conversation. While the scope of the engagement may change as it evolves, this engagement has no defined responsibilities or services to be provided. Even though you may have garnered some information about William Richter in his role as executor of his brother’s estate, your new client is William and Brenda Richter. The scope of the engagement is much more likely to gain structure by shifting the conversation to their goals and engaging them as a couple.

45
Q

What are duties Owed to Clients under Financial Planning

A

Prior to entering into an agreement, the certificant shall discuss with the prospective client all the relevant items indicated and provide a written copy of the information. Material conflicts of interest can be disclosed orally or in writing.

46
Q

Rita Caruso made use of an investment counselor who advised her on investments for her retirement account. The counselor failed to reallocate when the market turned down, so she lost a substantial amount of value in her account. Rita is disillusioned with the investment counselor and has consulted a CFP® professional to advise her on her financial planning. What is the first action that the CFP® professional should take?

  1. Discuss the differences between investment counselors and CFP® professionals
  2. Discuss the services that will be provided by the CFP® professional
  3. Discuss investment strategies for maximizing returns for a given level of risk tolerance
  4. Discuss the possibility of restricting the scope of the engagement to matters for which sufficient information can be made available.
A

2

Initially, the CFP® professional and client need to agree on the services to be provided. They must mutually define the scope of the engagement. Until there is agreement on the engagement and the services to be provided, any discussion of investment strategies will be premature. A discussion of the differences between investment counselors and CFP® professionals is not necessary or relevant to describing the services to be provided by the CFP® professional, and it is not helpful to reaching a mutual definition of the scope of the engagement. Whether the scope of the engagement needs to be restricted will depend on the information provided during the data gathering stage.

47
Q

Define Sales Based Compensation

A

Sales Based Compensation is defined more than any de minimis benefit tied to the sale of a financial asset. Specific examples include bonuses, front end or trailing commissions, ongoing 12b-1 fees, transaction fees, revenue sharing or solicitor fees.

48
Q

How are 12b-1 fees classified

A

Sales Related Compensation vs fee only, fee based or professional compenstation

49
Q

Jeffrey and Charles are surprised at the results indicated by the risk assessment questionnaire which identifies them as aggressive investors. They have always considered themselves to be moderate or conservative to moderate investors. Jeffrey seems to be more comfortable with the assessment than Charles. You feel the assessment is accurate and an aggressive allocation is important to reach their goals. Which of the following actions will be appropriate for you to take?

You should explain the logistics of the questionnaire in the hope they will agree on a more aggressive allocation.

You should create a more moderate portfolio with the intent of gradually moving them into something more suitable after some education.

You should appease them by finding the “middle ground.”

You should create alternative portfolios to demonstrate the overall impact on their plan.

A

Whereas all of the options may be viable at some point, the best course of action is to create alternative portfolios for the client to consider. These alternative scenarios will help to educate them on the consequences of their risk assessment and allocation.

CFP Study Prep_self (9 decks)

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