Fundamentals Flashcards

Question

Fee-Based

Answer 1

must clearly state fees & commissions or not fee-only

Answer 2

broadly defined 12b-1 fees, transaction fees, revenue sharing, referral fees

Answer 3

Violation of CFP Board's Procedural Rules will result in one of the following sanctions: 1. Private censure 2. Public censure 3. Suspension (maximum 5 years) 4. Revocation 5. Temporary bar (respondent not yet a CFP professional) 6. Permanent bar (respondent not yet a CFP professional) *Written notice to certificant's firm required for public discipline (Standards D.3.)

Answer 4

six principles; a CFP professional must: 1. Act w/ honesty, integrity, competence, & diligence 2. Act in the client's best interests 3. Exercise due care 4. Avoid or disclose & manage conflicts of interests 5. Maintain the confidentiality & protect the privacy of client information 6. Act in a manner that reflects positively on the financial planning profession & CFP certification

Answer 5

after CFP & CERTIFIED FINANCIAL PLANNER marks: professional practitioner certificant certification mark exam

Answer 6

CFP professional must report to CFP Board w/in 30 calendar days of BOTH initiation & conclusion: - charge or conviction of a felony - charge or conviction of a relevant misdemeanor (including 2nd or more alcohol or drug-related offense) - conduct mentioned adversely in finding a regulatory action involving failure to comply w/ the laws or rules governing professional services (except minor rule violations) - suspension or revocation of a professional license - termination for cause from employment involving allegations of dishonesty, unethical conduct, or compliance failures - filing for a personal bankruptcy or business bankruptcy in which the CFP professional was a control person - receipt of notice of a federal tax lien on property owned by the CFP professional - conduct mentioned adversely in a civil action alleging fraud, theft, misrepresentation, or other dishonest conduct NOTE: no need to report if timely & accurately reported on Form U4

Answer 7

public censure

Answer 8

any personal bankruptcy or business bankruptcy where the CFP professional was a control person is subject to public censure unless the CFP professional can rebut the presumption of inability to responsibly manage financial affairs Single bankruptcy = certificant may accept public censure w/out hearing or pay hearing fee w/ expedited adjudication Multiple bankruptcies = follow normal adjudication process

Answer 9

existence of any public discipline or any bankruptcy & the web pages of relevant public websites of any government authority, SRO, or professional organization that provides disciplinary history

Answer 10

Fed support economic growth, full employment, & price stability 4 Tools: 1. reserve requirements 2. discount rate 3. open market operations 4. interest rate on required balances & excess reserves MS increases, interest rates decrease MS decreases, interest rates increase

Answer 11

Congress seeks to support economic growth, full employment, price stability (same as Fed) 3 Tools: 1. taxation 2. spending 3. debt management

Answer 12

downward sloping (top left to bottom right) at lower prices people demand more higher prices, people demand less

Answer 13

upward sloping (bottom left to top right) producer's willingness to supply more at higher prices at lower prices = less incentive for a producer to supply goods

Answer 14

point of intersection of supply & demand curves at that price the quantity supplied equals the quantity demanded

Answer 15

movement along demand curve = price change price drops, people buy more

Answer 16

shift in demand curve change in preferences, income, tax policy, etc

Answer 17

movement along supply curve = price change price drops, producers supply less

Answer 18

shift in supply curve change in technology, competition, etc

Answer 19

products w/ similar purpose; replaceable (coffee/tea) increase in price of one good increases demand for the other good

Answer 20

products consumed jointly (peanut butter & jelly) increase in price of one good decreases demand for other

Answer 21

large percentage change in price results in smaller percentage change in quantity demanded examples = necessities (gasoline, pharmaceuticals)

Answer 22

small percentage change in price results in larger percentage change in quantity demanded Examples = luxury goods (expensive cars)

Answer 23

percentage change in price leads to the same percentage change in quantity demanded

Answer 24

value of total output w/in a country regardless of asset ownership over a period of time 4 Main Areas: 1. consumer spending 2. government spending 3. business investing 4. net imports/exports

Answer 25

value of total output by the citizens of a country regardless of where the production takes place

Answer 26

expectations low inflation, current low interest rates unemployment decreases as companies increase production monetary/fiscal policy actions support recovery stock market/housing market typically strong

Answer 27

Fed manages inflation consumer demand increasing but increasing supply helps maintain price levels firms may expand capacity little interest rate movement unemployment continues to decrease consumer sentiment/spending is high yield curve likely upward sloping to indicate interest rates will rise in the future (normal yield curve)

Answer 28

price levels increase interest rates increase (reflect higher inflation expectations) unemployment at lowest level GDP is highest at peak

Answer 29

decline in GDP 2 or more consecutive quarters (depression = at least 6 quarters negative GDP consecutive) stock market & housing decline unemployment rises consumer spending is less Fed will try to stimulate economy by reducing interest rates yield curve may be inverted (downward sloping) to reflect expectation of lower rates recession bottoms out at trough economic forces at work to move into expansion

Answer 30

an increase in general price levels of goods & services greatest risk w/ unexpected inflation is loss in purchasing power

Answer 31

Expansion Peak Contraction Trough *focus on unemployment; if high then probably in the trough focus on the heard, if 3/4 are moving then expansion or contraction, if 3/4 at highs/lows then peak or trough inflation interest rates unemployment GDP *unemployment moves in opposite direction of other 3

Answer 32

slowdown in rate of inflation

Answer 33

decrease in price levels (opposite of inflation)

Answer 34

occurs when inflation & unemployment are both high during a period of slow or stagnant economic growth

Answer 35

measures the overall price level for a basket of consumer goods & services

Answer 36

measures price level changes for materials used at the producer (or manufacturing) level

Answer 37

ratio of nominal GDP to Real GDP & shows the change in the value of output that results from inflation

Answer 38

lists income & expenses over a period of time

Answer 39

lists assets, liabilities & net worth snapshot in time

Answer 40

NW = Assets - Liabilities

Answer 41

used to determine emergency fund & current ratios important consideration for individuals w/ disability policies w/ longer elimination periods (3-6 months)

Answer 42

expected to turn over in one year cash, checking accounts, money market, short term CDs

Answer 43

due w/in 1 year credit card balances, short term loans, etc

Answer 44

= Current Assets / Current Liabilities ratio should be greater than 1.0

Answer 45

= Annual Savings / Annual Gross Income should be at least 10% if retirement is the only goal; add to the rate to accommodate retirement & other goals; 20-25% if started saving later in life *include both EE & ER contributions

Answer 46

up to $750k for mortgages after 12/15/17 up to $1,000,000 mortgages on or before 12/15/17 in acquisition debt can be considered for qualified residence interest itemized deduction

Answer 47

= Current Assets / Monthly Non-Discretionary Expenses ratio gives # of months covered if one family income 3-6 months 2 family incomes only 3 months necessary

Answer 48

principal plus interest plus taxes plus insurance (PITI) = Housing Cost (HC) HC1 no greater than 28% of GROSS income (HR1) HC + all other recurring debt payments (HC2) no greater than 36% of GROSS income (HR2) consumer debt payments are added to housing costs in determining HR2

Answer 49

generally include all income statement expenses other than savings, entertainment, & income & payroll taxes (in the event of job loss) costs or expenses that would continue in the event of a job loss

Answer 50

Equities are the only asset class that can be expected to consistently outpace inflation & taxes Historically real estate & precious metals have also been decent hedges against inflation

Answer 51

general tool for financial planning that profiles a client based on person's age & stage most useful when planner only has partial information

Answer 52

applies only to deposit accounts (checking, savings, money market deposit accounts, CDs) does NOT apply to stocks, bonds, mutual funds, insurance products, annuities, or cryptocurrency FDIC only covers U.S. dollar deposits that are payable in the U.S.; does not cover stocks, bonds, mutual funds (including money funds), or cryptocurrency money market deposit accounts ARE covered per category/type of ownership w/in an insured institution: $250k insurance for all single accounts combined, $250k for interest in all joint accounts combined, $250k total for certain retirement accounts depending on investment options used (Traditional, Roth, SEP, SIMPLE IRAs), $250k as beneficiary of trust account (max 5 beneficiaries = $1,250,000 max per grantor in aggregate for all types of trusts)

Answer 53

Liquidation debtor gets a discharge from all but non-dischargeable debts Non-dischargeable debts (no forgiveness, cannot be eliminated through bankruptcy) = Student Loans (unless meets "undue hardship" exception), Back taxes (past 3 years), Alimony & child support, Debts from "bad acts" such as fraud or misappropriation etc debtor turns all non exempt assets over to trustee for liquidation PROTECTED ASSETS: 1. IRAs - $1,512,350 as indexed 2. IRA rollovers - unlimited (if not commingled w/ regular IRA contributions) 3. Qualified plans - unlimited 4. Inherited IRAs = NOT PROTECTED 5. Pensions 6. Life Insurance 7. Annuities

Answer 54

generally for business reorganization

Answer 55

adjustment of debts for individuals (means tested-repayment period is 36-60 months) debtor keeps some non-exempt assets

Answer 56

Workers Comp: - laws place absolute liability on employer - benefits NOT taxable Unemployment: - compensation funded by employer payroll tax - benefits TAXABLE

Answer 57

retain use risk reduction measures

Answer 58

avoid this risk modify behavior

Answer 59

cause of a financial loss (fire, theft, collision, hurricane)

Answer 60

condition that increases the likelihood that a peril will occur

Answer 61

storing gasoline too close to an open flame (may cause a fire)

Answer 62

dishonesty example = an insured files a fraudulent claim

Answer 63

carelessness insured does not take proper precautions to protect an asset because the asset is insured

Answer 64

loss of lifetime income d/t early death 12-16 times gross pay Needs Approach & Human Life Value Method may be used to determine insurance coverage

Answer 65

Loss of income & increased costs d/t unforeseen accidents or illnesses an appropriate plan for your health care needs ACA (health care reform) has removed lifetime limits on major medical policies

Answer 66

Loss of income & increased costs d/t unforeseen accidents or illnesses 60-70% of gross pay; should cover sickness & accident should be guaranteed renewable or non-cancellable

Answer 67

increased costs of custodial care for elderly daily (or monthly) benefits at least average cost of an appropriate facility benefits should be inflation adjusted; benefit period at least 36-60 months

Answer 68

property losses less than or equal to full replacement cost value on both dwelling & content; coverage for both should be open perils homeowner w/ standard HO3, 4, or 6 policy should endorse personal property for open perils & replacement value; HO15 is a rider that adds open perils coverage for personal property

Answer 69

property losses less than or equal to full FMV for collision & comprehensive liability coverage is a necessity

Answer 70

costs that arise from negligence or other acts for which the insured is held legally responsible minimum $1M personal liability policy (PLUP umbrella!) may need to increase underlying liability coverages on homeowners/auto policies to satisfy PLUP issuer

Answer 71

Saving for College (Before College) pre-paid tuition plan, savings plan generally parent asset for financial aid purposes unused funds from account open at least 15 years can be incrementally rolled to Roth IRA for beneficiary as current year contribution (lifetime max $35k) NO PHASE-OUT FOR CONTRIBUTION ELIGIBILITY

Answer 72

Saving for College (Before College) contribution limit $2,000/year per beneficiary funds must be used by age 30 NO contributions past 18th birthday owner may change beneficiary use for college, secondary, or primary education generally parent asset for financial aid purposes HIGH PHASE-OUT FOR CONTRIBUTION ELIGIBILITY

Answer 73

Saving for College (Before College) 10% penalty waived on non-qualified distributions used for education HIGH PHASE-OUT FOR ELIGIBILITY

Answer 74

Saving for College (Before College) purchased in parents name (at least 24 years old at time of purchase) no income tax on interest if used for qualified education expenses must be redeemed in same year expenses are incurred may convert into 529 plan or coverdell LOWER PHASE-OUT FOR ELIGIBILITY

Answer 75

Saving for College (Before College) custodial assets unearned income may be subject to kiddie tax (children under 19 or a full time student under age 24) considered asset of child UTMA may include real estate

Answer 76

Paying for College (During College) Pell, FSEOG Undergraduate only Need based

Answer 77

Paying for College (During College) Stafford (subsidized) Undergraduate Need based

Answer 78

Paying for College (During College) unsubsidized graduate or undergraduate NOT need based

Answer 79

Paying for College (During College) Parent Loans for Undergraduate Students Undergraduate only NOT need based Student PLUS loans available for graduate students

Answer 80

1st 4 years of post-secondary education 100% of first $2,000 25% of next $2,000 of qualified education expenses maximum annual credit = $2,500 per student

Answer 81

20% of up to $10,000 qualified expenses (lesser of $10,000 or qualified expenses) per family credit maximum credit = $2,000 per year

Answer 82

cannot use both AOTC & LLC for expenses incurred by the same person in the same year

Answer 83

requires full disclosure about new security issues registration statement must be filed w/ SEC one portion is the prospectus

Answer 84

regulates secondary market established SEC as agency in charge of regulating securities laws, exchanges, & their members, brokers & dealers

Answer 85

defines/regulates investment companies 3 types = open-end, closed-end, UIT

Answer 86

Defines an investment adviser: ABC - provides Advice/Analysis, is in Business of providing the advice/analyses, & receives Compensation for providing the advice/analyses assets < $100M = register w/ state assets > $110M = register w/ SEC assets b/t $100M & $110M = choose state or SEC registration EXCLUSIONS: Lawyers, Accountants, Teachers, Engineers (LATE) as well as broker/dealers, U.S. Government securities dealers, banks, & publishers of bona fide newspapers EXCEPTION: foreign advisors w/ fewer than 15 clients in last 12 months & do NOT hold themselves out to the public as an investment advisor

Answer 87

Investment Company Products/Variable Contracts representative sell MFs & variable insurance products (must hold insurance license to sell insurance products)

Answer 88

General Securities Representative sell general securities (stocks, bonds, options) excludes commodities & futures

Answer 89

an independent regulator of securities firms conducting business in the United States primary goal = protect investors by maintaining fairness in the U.S. capital markets persons register w/ FINRA using Form U-4

Answer 90

unlimited liability 1 participant individual level, Form 1040 Schedule C income is self-employment income

Answer 91

unlimited liability more than 1 participant, no maximum flow-through, Form 1065 income (reported on schedule K-1) = self-employment income NOTE: 2017 TCJA permits flow through entities to claim a 20% deduction against qualifying business income (QBI)

Answer 92

General partner = unlimited liability; Limited partner = limited liability at least one general partner & 1 limited partner, no maximum flow-through, Form 1065 income (reported on schedule K-1) = self-employment income for the general partner; may or may not be for limited partners NOTE: 2017 TCJA permits flow through entities to claim a 20% deduction against qualifying business income (QBI)

Answer 93

limited liability more than 1 participant, no maximum flow-through, Form 1065 income could be self-employment or ordinary reported on schedule K-1 NOTE: 2017 TCJA permits flow through entities to claim a 20% deduction against qualifying business income (QBI)

Answer 94

limited liability for limited partners, unlimited liability for general partner (though GP often retains small % ownership such as 1%) more than 1 participant, no maximum taxed as partnership, entity form 1065, schedule K-1s issued to general & limited partners purpose is to transfer assets to younger generations using annual exclusions & valuation discounts for minority interest & lack of marketability FLPs if properly structured work extremely well for estate planning

Answer 95

limited liability 1 or more members can be taxed as sole proprietorship (Form 1040 schedule C), partnership (Form 1065), corporation (Form 1120), or S-corporation (Form 1120S) income could be self-employment, W-2 income & ordinary income, W-2 income NOTE: partnerships (in addition to LLCs) may also be taxed as another type of entity by filing Form 8832 - Entity Classification Election NOTE: 2017 TCJA permits flow through entities to claim a 20% deduction against qualifying business income (QBI)

Answer 96

limited liability no more than 100 shareholders flow-through, Form 1120S owners' income flows through on Schedule K-1 employee's income is reported on W-2 owner employees receive both Schedule K-1 & W-2 NOTE: 2017 TCJA permits flow through entities to claim a 20% deduction against qualifying business income (QBI)

Answer 97

limited liability no restrictions on # of participants entity level - corporation pays tax; Form 1120 income (reported on W-2 & Form 1099-div) could be W-2 income & dividend income

Answer 98

LLCs have several advantages over S-corporations LLCs can specially allocate income & deductions S-corporations must allocate on pro rata ownership basis S-corporations limited to 100 owners no maximum # of LLC members S-corporations have limitations on ownership (only U.S. citizens/residents may be shareholders; partnerships & corporations may NOT be shareholders LLCs do NOT have these restrictions

Answer 99

the future dollar amount to which a known sum today will increase, compounded at a defined interest rate over a specific period of time FV involves a process called compounding

Answer 100

the current dollar value of a future sum discounted at a defined interest rate over a specific period of time PV involves a process called discounting

Answer 101

annuity = series of equal cash flows that occur consecutively ordinary = deferred annuity; annuity due = immediate annuity ordinary annuity payments = end of each period annuity due payments = beginning of each period annuity dues generally used for retirement funding & education funding; one needs money on the first day of retirement or college, NOT at the end of the month ordinary annuities used for debt repayments (car loans, mortgages, bank loans, student loans, credit cards) because interest is charged from day one but is paid in arrears

Answer 102

useful estimation tool (time to double) so long as interest rate is in 6-9% range; example interest 9%, 72/9 = 8 years to double outside of 6-9% range it will produce errors