Fundamentals Flashcards
What are the code of Ethics?
1)Honesty,integrity,competence 2)Client’s best interest 3)exercise due care 4)Avoid/disclose conflicts of interest 5)Maintain confidentiality and protect privacy of client info 6)act in manner that is positive for CFP
What is correct way to use CFP Marks?
1)Cole Taylor, CFP 2)CERTIFIED FINANCIAL PLANNER 3)Followed by 6 nouns 4)Cant use in email or website
What duties equal up to Fiduciary duty?
Duty of: Loyalty, Care, Follow Client Instructions
Disclosing Conflicts (Compensation)
What the sources are and how it is calculated
Disclosing Conflicts (Limited product set)
You only have 1 type of product that you can sell but it might not be the best one for client
Disclosing Conflicts (Proprietary Funds)
You can only sell “fidelity” funds
Disclosing Conflicts (Referrals)
Disclose any referrals and the benefits that you get out of them
Finacial Advice (What to provide to client written/orally)
1)Written - Privacy policy 2) Orally or writing - Everything else
Finacial Planning (What to provide to client written/orally)
1)Written - Everything 2)Orally or wirting - material conflicts of interest
Delivery similarities between Financial advice and Financial planning?
1) Privacy document in writing 2)Conflicts of interest can be oral or in writing
When do charges and fee descriptions be provided to client?
Provided prior to or at the time of engagement
How soon should you let clients and CFP board about material changes? Reporting
CFP Board - 30 days // Clients - 90 days (webpages)
When is the terms and engagement given to client?
Provided prior to or at the time of engagement
What is the terms and engagement?
First - you should gather data before you give this to client. Outlines 1)scope of engagement 2)Periods the services will be provided 3)Clients responsibilities
Fee Only Compensation
Advisor and firm cannot charge firm or have the ability to get sales related compensation
Fee Based Compensation
Fee and Commission can be collected
Sales related compensation Examples
12b-1 Fees, transaction fees, revenue sharing, referral fees (NOT SOFT DOLLARS)
Financial planning definition
Financial planning is collaborative process that helps maxmize a client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances
Examples of relevant examples of clients and personal/financial circumstances
Manage cashflow, identify and manage risk, educational needs, financial security, tax considerations, retirement, philanthropic, estate
Integration factors - what to take in account of
1) Changes in one thing might affect other things (they do not happen in a silo) 2)portion and amount of the assets going toward something 3)length and time the clients financial situation might be affected 4)Risks that clients get exposed to if they take on this task 5)Barriers of taking on this task (Some things have surrender charges)
Financial planning process (In Order)
Uber Is A Drunk Person’s Immediate Motor vehicle
What steps is the finacial planning responsible for?
All unless some steps (Usually 6 or 7) are specifically exluded from the scope of the engagement (this should be documented ie. Emails, handwritten notes)
FFP1: Understanding the Client’s personal and Financial Circumstances
Obtaining qualative and quantitative information, anazlyzing that information and seeing what is missing (this is done through interviews, questionaires)
FFP2: Identifying and selecting goals
Identify and prioritize goals - Be honest if any goals are unrealistic // Develop reasonable assumptions and estimates (Inflation, tax rates, investment returns)
FFP3: Analyzing the client’s current course of action and potential alternative course(s) of action
Current course pros and cons along with alternative courses of action
FFP4: Developing the Financial Planning Recommendations
Selecting 1 or more recommendations that will help client achive goals. CFP should consider 1) Assumptions and estimates 2)basis for making recommendations 3)timing and priority recommendations 4) whether the recommendation is independent or dependent
FFP5: Presenting the financial planning recommendations
Present recommendations and describe the advantages and disadvantages current alternative plans - recommendations may be over orally, in writing, in person, over the phone
FFP6: Implementing the financial planning recommendations
Must be completed unless specifically excluded - Establish the responsibilities of the client, CFP and third parties (CPA, attorney). Set timeline and priority.
FFP7: Monitoring progress and updating
Must be completed unless specifically excluded - Establish monitoring by understanding how and when. Client should give material info to planner when it occurs - Planner should update goals and recommendations
Examples of qualitative and quantitative information
Qual - health, life expectancy, values, goals, expectations // Quant - Age, dependents, income, savings, taxes, cash flow
After recommendations have been presented to client - the client can ____.
Accept or reject it. Once accepted - planner can move on
What are “regulars reviews” Monitoring
reviews occur at predetermined intervals
What are “Episodic reviews” Monitoring
reviews occur after major and life changing events
How often should 1)investments results 2)performance benchmarks should be reviews
1) at least quarterly 2) at least annually
If you get public discipline by CFP board, what should you do?
Provide notice to CFP’s firm
Definition of Felony
Offence of at least one-year imprisonment or a fine of at least $1,000
Definition of Relevant Misdemeanor
A criminal offense that is not a felony that involves fraud, theft, misrepresentation, violence or a second (or more) and/or drug-related offence
How do driving offenses, tickets that do not involve alcohol and drugs are classified?
Not relevant misdemeanors // first alcohol and drug misdemeanor is not reletvant
Are tax/financial misdemeanors are relevant misdemeanors?
Yes
Communication (Pacing)
Matching the speed of listening
Communication (Rephrasing)
Restating or repeating back what the client has said
Communication (Reflecting)
Paraphrasing technique (saying it in the planners words)
Open or Closed questions
Open - Lengthy response // Closed - One word
ALWAYS BAR from being certified
1) Felony conviction: Theft, embezzlement, tax fraud, murder/rape, violent crime in past 5 years 2) revocation of financial professional license
PRESUMED BAR from being certified
1) two of more personal or business bankruptcies 2) Felony conviction of: Violent crimes OTHER than murder or rape that are MORE than 5 years ago, Nonviolent crimes within last 5 years 3) revocation or suspension of non financial license (Real estate), Suspension or financial professional license
How long are bankruptcies going to be established on CFP board’s website?
10 years (if it is unfortunate event ie. Son has cancer - good chance it wont be published)
ADVERSE CONDUCT being certified
Customer complaints, arbitrations, misdemeanor convictions, employer terminations/investigations, Felony nonviolent more than 5 years
If PRESUMED BAR, you can petition for fitness determination BY
Respondent must prove by evidence and DEC can grant or deny the person
Refrain from borrowing or lending money and comingling assets
You cant do either: However you can borrow or lend money with a member of the CFP’s family or if the lender is a business organization or legal business of lending money. You CANT EVER commingle assets
What need should be the biggest?
Always place the need with the biggest financial risk first
Who is responsible for RMD’s, 401k rollover check is on time?
CFP Professional
What the CFP not responsible for?
Selling real estate, estate docs, Completing tax return
How long does CFP have to alert CFP board when CFP does adverse action?
30 days
AUM register with the state vs registering with the SEC
Under $100M - State // Over $110M - SEC // Between $100M and $110M - You get to choose
Do you need client consent if you assigning advisory contracts to someone else?
Yes
What form do you need to register with the SEC?
ADV
What form do you need to withdrawal register with the SEC?
ADV-W
How often do you need to file the ADV Part 1 and Schedule 1?
Annually
Form ADV Part 1A and B(Description)
Firm name, background
Form ADV Part 2A and B(Description)
Firm and advisor information, compensation and fees, education, investment objectives & Strategies, conflicts of interest
Form ADV Part 3(Description)
CRS or Relationship summary
EXCEPTIONS to registration by Advisors Act
The PUBLISHER (Forbes, WSJ) was BROKE (Broker Dealer) because LATE (Lawyer, accountant, teacher) to US (US Securities) BANK (Bank and bank holding)
EXCEMPTIONS to registration by Advisors Act
1) Clients resides in state of business of advisor who do not advise on national securities, Advisors who only have clients of INSURANCE, VENTURE, PRIVATE FUNDS and foreign advisors with no place of business in the US
EXCEPTIONS vs EXEMPTIONS
Exceptions - don’t have to register ever // Excemptions - don’t have to register right now
Broshure Rule
Disclose to every client: Fees, education, types of securities (Must be give to client at or before entering contract)
Series 6 vs Series 7
You can sell = 6) Mutual funds, UITs and variable life insurance and annuities 7) everything besides commodities and futures
Demand
quantity of good or serives that consumers are willing to purchase
Supply
quantity of good or serives that businesses are willing to supply
Quantity Demanded /Supplied
Change of price or any movement along the demand curve / supply curve
What causes shift in the demand Curve?
Income, taxes, savings rate, disposable income
What causes shift in the supply Curve?
Technology, competition, anything other than price
Subsitutes vs complements
Sub - serve similar purpose // Comp - consumed jointly
GDP vs GNP
GDP - goods/services produced in the US // GNP - goods/services produced by US companies but anywhere in the world (Fort plant in mexico)
Expansion(GDP,Inflation,Interest Rates,Unemployment)
GDP, inflation and interest rates increasing // Unemployment is decreasing
Peak(GDP,Inflation,Interest Rates,Unemployment)
GDP at highest // Inflation and interest rates are peaking // Unemployment at its lowest levels
Contraction(GDP,Inflation,Interest Rates,Unemployment)
GDP begins to slow // Inflation and interest rates begin declining // Unemployment begins to increase
Trough(GDP,Inflation,Interest Rates,Unemployment)
GDP, inflation and interest rates are at their lowest levels // Unemployment is at its highest
Who runs the monetary policy?
Fed Reserve - controls money supply and influences interest rates
Who runs the Fiscal policy?
Congress - Controls spending and taxation\
Goals of Monetary and Fiscal policy
Maintain: Long term economic growth, price levels supported by the economy,full employment
Monetary policy - Ease vs Tighten
Ease - more money // Tighten - less money
Monetary policy - Tools (4)
Reserve Requirement (% of deposits a bank must maintain in deposits), Discount Rate (Overnight rate to borrow from federal reserve), Open market operations (Buying selling government securities), Excess Reserve Rate (Excess funds that gets interest rate if bank holds it)
Fed Funds rate
Borrowing money bank to bank
Fiscal policy - Tools (3)
Taxation (On people), Spending (Increase spending - decreasing rates), Debt management (More debt - higher interest rates)
Fair Credit reporting act
If refused credit or employment - must given report on why
Fair Debt collection Act
Creditors cannot harass or threaten you with lawsuits
Fair credit billing act (Know timelines)
30 days to acknowledge, 90 days to correct, lesser of $50 or the charges
FDIC Insurance (What is its own account)
1) Individual 2) Joint 3) Trust
What is COVERED and NOT COVERED when it comes to FDIC Insurance
Covered - Payable in US // Not covered - 1) Only Payable outside of the US 2)held in money market fund 3)Stocks, bonds, mutual funds
Bankruptct Laws - Chapter 7 What is this?
Relief through liquidation
Chapter 7 Bankruptcy - what is NOT discharged? (Things that are expensive but not forgiven)
Not discharged - 3 years of back taxes, alimony and child support, student loans, monies owed due to malicious acts
Chapter 7 Bankruptcy - what assets are protected?
Rollover IRAs (Unlimited protection), IRA/ROTH up to $1.3M, Alimony & child support, pensions, life insurance and annuites. (NOT INH IRAS)
Chapter 11 Bankruptcy - What is this?
Relief though company reorganization
Chapter 13 Bankruptcy - What is this?
Relief through adjusting debts
Worker Compensation & Unemployment compensation
Workers comp - not taxable benefits if someone gets injured // Unemployment comp - taxable benefits if someone losses job
What does the balance sheet show you?
Moment in time of ASSETS - LIABILITIES = NET WORTH
What does the income statement show you?
Over a period of time - Income, Savings, and expenses
Liquidity Ratio - Current Ratio
(Current Assets / Current Liabilities) - Needs to be atleast one // A & L needs to be under 1 year
Liquidity Ratio - Emergency Fund
(Current Assets / Monthly Non-Disc Expenses) // Non disc - Debt, food // Single earner - 6 months, Dual earner - 3 Mo
Housing ratio - 28% Ratio
(Monthly housing costs (PITI) / Monthly gross income) - Needs to be less than or equal to 28%
Housing ratio - 36% Ratio
(Monthly housing costs (PITI) + All other recurring debt / Monthly gross income) - Needs to be less than or equal to 36%
Primary driver when you should rent vs buy -
TIME!! Rent (1-3 Years) // Buy (3+ years)
Adjustable rate Mortgage
Good when the time in property will be short (1-3 Years) 2/6 - cannt increase more than 2% a year and 6% during the length of loan (MOVES up and down)
Reverse mortgage
Homeowner (Age 62 and above) receives monthly payment to live in home
Conventional mortgage
fixed rate (Normal)
Mortgage refinancing
Lower your mortgage rate but have up front costs (points paid)
Performance Ratio - Savings Ratio
(Annual Savings (EE + ER Contributions) / Annual gross income) - 10-12% target
Performance Ratio - Rate of Return on Investments (ROI)
Target of 9-12% depending on clients age + Risk tolerance
FAFSA - What is it?
Information sent to colleges to calculate the EFC (Expected family contribution) - Begins financial aid process
EFC (Expected family contribution) // Financial need formula
(Tuition/Cost of Attendance - EFC = Financial Need)
Which students are considered independent?
1)Over age 23 2)have legal dependents other than spouse 3)Married
Federal Pell Grant
“Need” Based - dependent on EFC (Grant is FREE money) - Only to students that have not earned bachelors or professional degree
Stafford Loan
Subsidized stafford is “Need” Based (not available to grad students) // Unsubsidize stafford is NOT need based (Avaiable to grad students)
what does subsidize mean?
Government will cover interest while in school
PLUS Loan
Undergrad and NOT need based, depends on parents credit // Unsubsidized and must be paid within 10 years
Graduate PLUS loans
Student credit health is taken into account
Federal Supplement Education Opportunity Grant (FESOG)
Awarded to students with low EFC // Only paid if funds are available
Prepaid tuition
Pay in-state college at fixed cost // Use the credit when the child goes to that college
Advantages and Disadvantages of Prepaid tuition
Adv - Lock in cost of todays dollars // Disadv - Only earn return equal to inflation, you only get principal back if student decides to not go to that college
529 Plans
Contribute to savings account to portfolio of stocks // Appreciation in asset value is tax free // Pay 5 years ahead
Advantages and Disadvantages of 529 plans
Adv - No Phase out, can change beneficiary, remove assets from gross estate, Use for elementary // Disad - 10% penalty if not used for education, Distributions from other than parents (grandparents) is income to child
What is need based and not need based for financial aid
Need based - Federal pell grant, Subsidized Stafford loan, FESOG // Not need based - Unsubsidized stafford, PLUS loan
529A ABLE
529 account for special need of child - if account balance is over $100k, SSI will suspend
Coverdell Education Savings Account
Contributions limited to $2,000 per year per beneficiary, must use the funds by 30, considered an asset of the parent
Investment Advisor KNOWS his ABC’s
A - Advice, B - Business, C - Compensation
Exception is that TABLES are incidental
Teacher Accountant Brokers Lawyers Engineers
VIPs are SaFE from exemptions
Venture capital, Insurance companies, Private funds less than $150 million, home State, Foreign advisors and securities not on a national Exchange
Accredited Investor 1 2 3 test
$1M // $200k income if single // $300k of joint spousal income
Three Panel approach: How much do you need of LIFE INSURANCE?
10-16x gross pay
Three Panel approach: How much do you need of disability insurance?
60-70% gross pay
Three Panel approach: How much do you need of PLUP?
$1-3M
Three Panel approach: How much do you need of Property (Home and Auto)?
policy that cover both home and auto for FMV
Three Panel approach: How much do you need of Education funding?
$3k,$6k,$9k per child per year for 18 years
Three Panel approach: How much do you need of retirement amount?
16 x pre retirement
Three Panel approach: what do you need for legacy?
Will, Durable POA, Advanced medical directive
Inelastic vs elastic curve
Inelastic - Gas/milk (Looks like an I slope vertical) // Elastic - alcohol, movie tickets, luxury goods (Horizontal slope)
What types are things are cyclical in nature and fluctuate directly with the business cycle?
Consumer durables and capital goods
Recession and Depression
Recession - 6mo/2q // Depression - 18mo/6q [Declining GDP]
Monetary Policy - Increase in Reserve requirment (vice versa for decrese)
MS - Down // IR - Up
Monetary Policy - Increase in Discount rate (vice versa for decrese)
MS - Down // IR - Up
Monetary Policy - Sales of treasuries (vice versa for buying)
MS - Down // IR - Up
Monetary Policy - Increase in Excess reserve rate (vice versa for decrese)
MS - Down // IR - Up
Examples of Cash and Cash equicvalents or current assets
Cash, Laddered CDs every 6 mo, NOT EE BONDS
Examples of invested assets
stocks, bonds, mutual funds, retirement accounts, business ownership
Examples of personal use assets
Personal residence, car, furniture, boat and clothing
Examples of Current liabilities
Anything that is due within 12 mo - CC bills, cable, cell phone bills
Examples of Long term liabilities
Over 12 mo - loan on car and home
Lifetime learning credit (LLC)
20% of up to $10,000 in qualified expenses per year ($2,000) // Per family
American opportunity tax credit (AOTC)
100% of first $2,000, 25% of second $2,000 ($2,500) // Per Student
Roth IRA Education Benefit
10% Penalty is waived on non qualified distributions used for education expenses BUT could impact retirement goals
Series EE Bond
No federal income tax oninterest if used to pay for qualified expenses // Bonds must be purchased not in child’s name and over 24 years old
Can an EE Bond be used with AOTC?
Yes but cant be the same expenses
UGMA/UTMA
Custodial account - donor irrevocably gifts assets to kid // It is the childs assets (Not good for FAFSA and Child can use it for anything) // Cannot be transferable to someone else because it’s the childs assets
Can UGMA/UTMA be subject to what tax?
Kiddie Tax - interest dividends and capital gains within the account
Student Loan Interest deductibilty
Above the line deduction and limited to $2500 a year (Only for tuition, room, board etc.)
Lifetime learning credit - Who is this for?
Undergrad, graduate or professional programs // Per family // Having a felony does not affect the ability to have this
Lifetime learning credit - Amount?
20% of up to $10,000 in qualified expenses ($2,000)
American opportunity tax credit - Who is this for?
First four years of post secondary education // Per student // if has felony, you cannot have this credit
American opportunity tax credit - amount?
100% of first $2,000 // 25% of second $2,000 – Max amount is $2,500 per year
An individual may claim the AOTC or LLC in the same year as a dist. From 529 plan BUT just
not for the same expenses
An individual may NOT claim both the AOTC and LLC for the
same child in the same year
Phase out limits for AOTC/LLC
S -80-90 // MFJ - 160-180
Employer education assistance - What is this? How much?
Can pay for or reimburse education expenses up to $5,250 per year // Loans of the spouses or dependents do not count // ER gets no above the line interest deduction
