Fundamentals Flashcards
What conduct is deemed always bar?
-felony conviction for financially based crime: theft, embezzlement, tax fraud and other tax-related schemes, etc.
-revocation of a financial professional license, unless administrative in nature
-felony conviction for any degree of murder or rape
-felony conviction for any other violent crime within the last 5 years
What conduct is presumed bar?
-two or more personal bankruptcies
-revocation or suspension of a nonfinancial professional license, unless administrative in nature
-suspension (not revocation!) of a financial professional license, unless administrative in nature
-felony conviction for nonviolent crimes within the last five years
-felony conviction for violent crimes other than murder or rape that occurred more than five years ago
How is an investment advisor defined for purposes of the IAA1940?
Someone who is in the business of providing advice about securities for compensation
-an advisor knows his ABCs! Advice, Business, Compensation
Who have exceptions from registering with the SEC?
-any broker/dealer whose advisory services are solely incidental to the conduct of business
-lawyers, accountants, teachers, engineers whose advice is solely incidental to the conduct of business
TABLE: Teachers, Accountants, Brokers, Lawyers, Engineers
Who is exempt from registration with the SEC?
-advisors solely to venture capital funds (Venture)
-advisors whose only clients are insurance companies (Insurance)
-advisors solely to private funds less than $150m (Private funds)
-advisors whose clients reside in their state of business and who do not provide advice, services, analysis, or reports regarding nationally listed securities (home State)
-foreign advisors without a place of business in the US (Foreign)
-advisors not providing advice about securities traded on a national exchange (Exchange)
VIPs are SaFE from exemptions
What is an accredited investor?
-must have $1m net worth exclusive of personal residence OR
-make a minimum of $200k single OR
-$300k MFJ
1, 2, 3 test
What is the benchmark for life insurance coverage?
10-16x gross income
What is the benchmark for disability insurance?
60-70% gross income
How many months is the benchmark for an emergency fund, and what is the formula?
3-6 months, current assets divided by monthly non-discretionary cash flows
What is the housing ratio benchmark and formula?
Mortgage payment, plus interest, taxes, and HOI should not exceed 28% of gross income
What is the benchmark and formula for the housing ratio plus all debts?
Mortgage payment, interest, taxes, HOI, and all other recurring debt payments divided by gross income should not exceed 36%
How much should someone save for education funding?
$3/6/9k per child for 18 years, depending if school is public, semi-private, or private university
How much should someone have saved for retirement and what should their savings rate be?
16x pre-retirement income, 10-12%
What is the difference between elastic and inelastic demand?
If elastic, quantity demanded responds significantly to changes in price (for example, luxury goods)
If inelastic, quantity demanded responds minimally to changes in price (for example, gasoline)
Describe the elastic and inelastic demand curves.
Both curves go down and to the right, but elastic is almost horizontal, and inelastic is almost vertical.
Remember the I in inelastic to resemble the shape on the graph
When must reporting to the CFP board take place for adverse actions?
Within 30 calendar days. Don’t be fooled by exam questions with business days, holidays, or below certain dollar amounts; all adverse actions should be reported, even if they don’t necessarily lead to discipline
Which misdemeanors are irrelevant to the board?
Driving offenses, tickets, and misdemeanors that do not involve alcohol or drugs are not considered relevant. A first alcohol or drug misdemeanor is not relevant either. Tax and financial misdemeanors are almost always relevant.
What direction is the inflation rate during each phase of the business cycle?
Peak: highest
Trough: lowest
Expansion: increasing
Recession: decreasing
What direction are interest rates during each phase of the business cycle?
Peak: highest
Trough: lowest
Recession: decreasing
Expansion: increasing
What direction is the unemployment rate during each phase of the business cycle?
Peak: lowest
Trough: highest
Expansion: decreasing
Recession: increasing
What direction is GDP during each phase of the business cycle?
Peak: highest
Trough: lowest
Expansion: increasing
Recession: decreasing
What is the length of time for a recession and a depression?
Negative GDP for 2 consecutive quarters, and negative GDP for 6 consecutive quarters
Who controls the discount rate, and who controls the fed funds rate?
The discount rate is the rate that member banks will borrow from the Fed Reserve, the fed funds rate is the overnight borrowing rate between member banks (not controlled by the fed!!)
What tools will the Fed use to control the money supply?
- Open market operations
- Alter the reserve requirement
- Alter the discount rate
- Alter the excess reserves rules
What happens when the Fed increases the reserve requirement?
The money supply decreases because banks are forced to keep more money on hand, therefore increasing rates
What happens when the Fed increases the discount rate?
As interest rates rise, cost of capital goes up, so money becomes harder to obtain, decreasing the money supply
What happens when the Fed undergoes open market operations?
When the Fed buys securities, it lowers rates (because they buy back highest rates first) and increases money supply.
What are the types of ownership for FDIC?
- Individual
- Joint
- Trust
- Self-directed retirement
What are the debts that are not discharged in bankruptcy?
-Student and government loans
-3 years of back taxes
-alimony and child support
-monies owed due to malicious acts, drunk driving, criminal fines, etc.
What property is immune from creditors during bankruptcy?
-qualified plans
-homestead
-life insurance
What is the current ratio and formula?
The measure of a client’s ability to meet short-term obligations
Current assets divided by current liabilities
On the exam, if non-discretionary expenses are expressed as combined fixed and variable, use the combined number as a substitute
What is the formula for the savings ratio?
Annual savings (Employee AND EMPLOYER CONTRIBUTIONS) divided by annual gross income
Which financial aids programs are needs based and which are not?
Pell, subsidized Stafford, and Perkins are all needs based
Unsubsidized Stafford, parent plus, and grad plus are not needs based
Out of prepaid tuition, 529 plans, Coverdells, and UGMA/UTMA, which is considered an asset of the child when determining financial aid?
UGMA/UTMA
What is the tax credit amount of the Lifetime Learning Credit?
What is the maximum use?
How many times can it be claimed?
-20% up to $10k per year
-maximum use is $2k per family per year
-it can be claimed for an unlimited number of years
How do qualified expenses need to be paid with LLC and AOTC?
LLC: all expenses must be paid directly to the institution
AOTC: tuition and fees paid directly to the institution, books and supplies do not have to be paid directly to the university
What are the tax credit amounts for the American Opportunity Tax Credit?
How many dependents can use it?
-100% of first $2k
-25% of the next $2k
-maximum credit is $2500, but can be used per student
How does the coordination between LLC, AOTC, and qualified tuition plans work?
-An individual may use AOTC and LLC in the same year as a distribution from a 529 or a qualified tuition plan, just not the same expenses
-An individual may not claim both the AOTC and LLC for the same child in the same same year
What is the limit on student loan interest deductions?
$2500
Which qualified education plan can ONLY be used on tuition and fees, but not books and supplies, equipment, or room and board?
Prepaid tuition and series EE bonds
Which qualified education plan can pay for tuition and fees, books and supplies, equipment, and room and board?
529, Coverdell, and Roth IRA
Which qualified education plan can pay for room and board, but require the student to be living on campus at least more than half of the year?
529 and Roth
Do the LLC or AOTC qualify for room and board?
No
What risks are insurable?
not Catastrophic
Homogenous exposure units
Accidental
measurable and Determinable
CHAD
What are the elements of a legal contract?
Competent parties
Offer and
Acceptance
Legal consideration
Lawful purpose
COALL
What regulatory power does the NAIC have over the insurance industry?
None, regulation occurs at the state level. The NAIC measures the financial health of insurance companies and provides a framework that state legislatures may adopt
