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Fundamentals Flashcards

1
Q

7 Steps in the Financial Planning Process

A

Uber Is A Drunk Person’s Immediate Motor Vehicle - UIADPIMV

  1. Understanding the client’s personal & financial circumstances
  2. Identifying & selecting goals
  3. Analyzing the client’s current course of action & potential alternative courses of action
  4. Developing the financial planning recommendations
  5. Presenting the financial planning recommendations
  6. Implementing the financial planning recommendations
  7. Monitoring progress & updating
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2
Q

Financial Advice

A

a communication that would reasonably be viewed as a recommendation that the client take or refrain from taking a particular course of action w/ respect to: the development or implementation of a financial plan; purchasing, holding, gifting, or selling financial assets; investment strategies, portfolio composition, or management of financial assets; selection of other persons to provide financial or professional services for the client

exercise of discretionary authority over the client’s financial assets

only Privacy Policy in writing; everything else orally or writing

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3
Q

Financial Planning

A

a collaborative process that helps maximize a client’s potential for meeting life goals through Financial Advice that integrates relative elements of the client’s personal & financial circumstances

only Material Conflicts of Interest orally OR writing; everything else writing

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4
Q

Money Disorders

A

rooted in emotion & may be associated w/ money beliefs

include:
compulsive buying disorder
hoarding
gambling disorder
workaholism
financial enabling/financial dependence

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5
Q

5 Stages of Change

A
  1. Pre-contemplation
  2. Contemplation
  3. Preparation
  4. Action
  5. Maintenance
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6
Q

Self-Determination Theory

A

there are 3 main psychological needs that determine motivation

Competence + Relatedness + Autonomy = Intrinsic Motivation

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7
Q

Money Beliefs

A

a client’s perceptions about the purpose of money & how it should be used & managed can have a positive or negative impact on their ability to meet their goals

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8
Q

Money Avoidance

A

tries not to think about money; believes they do not deserve money

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9
Q

Money Worship

A

buys things in an effort to create happiness

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10
Q

Money Status

A

needs to keep up the appearance of being successful

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11
Q

Money Vigilance

A

alert & watchful in financial matters; may have anxiety about financial future

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12
Q

Behavior Finance

A

investment decisions are impacted by cognitive biases & heuristics

rules of thumb that shorten the decision-making process

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13
Q

Affect Heuristic

A

judging something as good or bad

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14
Q

Availability Heuristic

A

relying on knowledge already attained

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15
Q

Anchoring

A

focusing on a particular reference point even if it is not relevant or pertinent to the issue in question

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16
Q

Herding

A

mimicking the actions of a larger group

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17
Q

Active Listening

A

focuses on what the speaker is saying

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18
Q

Reflective Listening

A

focuses on both the content being said & the feelings being expressed by the speaker

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19
Q

Motivational Interviewing

A

focuses on overcoming ambivalence to change

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20
Q

Joining

A

making a connection w/ the client & establishing a trusting relationship

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21
Q

Fiduciary Duty

A

at all times a CFP professional providing Financial Advice must act as a fiduciary (act in the best interest of the client)

  1. Duty of Loyalty - client’s interest ahead of planner’s; avoid or disclose, obtain client’s informed consent, manage conflicts of interest
  2. Duty of Care - skill, prudence & diligence
  3. Duty to follow client instructions - if reasonable & lawful
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22
Q

Standards of Conduct

A
  1. Duties owed to clients
  2. Financial planning & application of the Practice Standards for the financial planning process
  3. Practice Standards for the financial planning process
  4. Duties owed to firms & subordinates
  5. Duties owed to CFP Board
  6. Prohibition on circumvention
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23
Q

Compensation Disclosures (Standards A. 12.)

A

must be provided to client prior to or at time of engagement

oral or in writing if advice does NOT require Financial Planning

written if CFP professional is required to provide Financial Planning in accordance w/ the Practice Standards

must disclose issues related to compensation; specific dollar amount not necessary unless requested by client; sources & calculation of compensation to certificant, certificant’s employer, or a related party is necessary

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24
Q

Fee Only

A

only be used if no sales-related compensation to certificant or related party

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25
Q

Fee-Based

A

must clearly state fees & commissions or not fee-only

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26
Q

Sales-related compensation

A

broadly defined

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

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27
Q

Procedural Rules

A

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.)

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28
Q

Code of Ethics

A

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
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29
Q

Acceptable Nouns (6)

A

after CFP & CERTIFIED FINANCIAL PLANNER marks:

professional

practitioner

certificant

certification

mark

exam

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30
Q

Notice to CFP Board (Standards E.3.)

A

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

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31
Q

Sanction for Failure to Timely Report Information

A

public censure

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32
Q

Sanction Guidelines for Bankruptcies

A

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

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33
Q

When providing Financial Planning in accordance w/ the Practice Standards, the client must be provided written disclosures including:

A

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

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34
Q

Monetary Policy

A

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

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35
Q

Fiscal Policy

A

Congress seeks to support economic growth, full employment, price stability (same as Fed)

3 Tools:
1. taxation
2. spending
3. debt management

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36
Q

Demand Curve

A

downward sloping (top left to bottom right)

at lower prices people demand more

higher prices, people demand less

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37
Q

Supply Curve

A

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

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38
Q

Equilibrium Price

A

point of intersection of supply & demand curves

at that price the quantity supplied equals the quantity demanded

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39
Q

Change in Quantity Demanded

A

movement along demand curve = price change

price drops, people buy more

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40
Q

Change in Demand

A

shift in demand curve

change in preferences, income, tax policy, etc

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41
Q

Change in Quantity Supplied

A

movement along supply curve = price change

price drops, producers supply less

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42
Q

Change in Supply

A

shift in supply curve

change in technology, competition, etc

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43
Q

Substitutes

A

products w/ similar purpose; replaceable (coffee/tea)

increase in price of one good increases demand for the other good

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44
Q

Complements

A

products consumed jointly (peanut butter & jelly)

increase in price of one good decreases demand for other

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45
Q

Inelastic Demand

A

large percentage change in price results in smaller percentage change in quantity demanded

examples = necessities (gasoline, pharmaceuticals)

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46
Q

Elastic Demand

A

small percentage change in price results in larger percentage change in quantity demanded

Examples = luxury goods (expensive cars)

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47
Q

Unit Elastic

A

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

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48
Q

Gross Domestic Product GDP

A

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

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49
Q

Gross National Product GNP

A

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

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50
Q

Early Expansion

A

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

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51
Q

Mid-Expansion

A

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)

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52
Q

Late-Expansion

A

price levels increase

interest rates increase (reflect higher inflation expectations)

unemployment at lowest level

GDP is highest at peak

53
Q

Recession

A

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

54
Q

Inflation

A

an increase in general price levels of goods & services

greatest risk w/ unexpected inflation is loss in purchasing power

55
Q

Business Cycle & Tip

A

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

56
Q

Disinflation

A

slowdown in rate of inflation

57
Q

Deflation

A

decrease in price levels (opposite of inflation)

58
Q

Stagflation

A

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

59
Q

Consumer Price Index CPI

A

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

60
Q

Producer Price Index PPI

A

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

61
Q

GDP Deflator

A

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

62
Q

Income Statement

A

lists income & expenses over a period of time

63
Q

Balance Sheet

A

lists assets, liabilities & net worth

snapshot in time

64
Q

Net Worth (Equity) Formula

A

NW = Assets - Liabilities

65
Q

Cash & cash equivalents

A

used to determine emergency fund & current ratios

important consideration for individuals w/ disability policies w/ longer elimination periods (3-6 months)

66
Q

Current Assets

A

expected to turn over in one year

cash, checking accounts, money market, short term CDs

67
Q

Current Liabilities

A

due w/in 1 year

credit card balances, short term loans, etc

68
Q

Current Ratio

A

= Current Assets / Current Liabilities

ratio should be greater than 1.0

69
Q

Savings Rate

A

= 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

70
Q

Housing Mortgages

A

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

71
Q

Emergency Fund Ratio

A

= 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

72
Q

Debt/Housing Ratios

A

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

73
Q

Nondiscretionary cash flows

A

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

74
Q

Outpacing Inflation

A

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

75
Q

Life Cycle Approach

A

general tool for financial planning that profiles a client based on person’s age & stage

most useful when planner only has partial information

76
Q

FDIC Insurance

A

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)

77
Q

Chapter 7 Bankruptcy

A

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

78
Q

Chapter 11 Bankruptcy

A

generally for business reorganization

79
Q

Chapter 13 Bankruptcy

A

adjustment of debts for individuals (means tested-repayment period is 36-60 months)

debtor keeps some non-exempt assets

80
Q

Workers’ Compensation vs Unemployment

A

Workers Comp:
- laws place absolute liability on employer
- benefits NOT taxable

Unemployment:
- compensation funded by employer payroll tax
- benefits TAXABLE

81
Q

Low occurrence, Low Loss

A

retain

82
Q

High occurrence, Low loss

A

retain

use risk reduction measures

83
Q

Low occurrence, High loss

A

Insurance

84
Q

High occurrence, High loss

A

avoid this risk

modify behavior

85
Q

Peril

A

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

86
Q

Hazard

A

condition that increases the likelihood that a peril will occur

87
Q

Physical Hazard

A

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

88
Q

Moral Hazard

A

dishonesty

example = an insured files a fraudulent claim

89
Q

Morale Hazard

A

carelessness

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

90
Q

Life Insurance

A

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

91
Q

Health Insurance

A

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

92
Q

Disability Insurance

A

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

93
Q

Long-Term Care

A

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

94
Q

Homeowners Insurance

A

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

95
Q

Automobile Insurance

A

property losses

less than or equal to full FMV for collision & comprehensive

liability coverage is a necessity

96
Q

Personal Liability Insurance

A

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

97
Q

529 Plans

A

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

98
Q

Coverdell

A

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

99
Q

Traditional IRA & Roth IRA - College

A

Saving for College (Before College)

10% penalty waived on non-qualified distributions used for education

HIGH PHASE-OUT FOR ELIGIBILITY

100
Q

EE or I Bond - College

A

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

101
Q

UGMA, UTMA - College

A

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

102
Q

Grants - College

A

Paying for College (During College)

Pell, FSEOG

Undergraduate only

Need based

103
Q

Loans - College

A

Paying for College (During College)

Stafford (subsidized)

Undergraduate

Need based

104
Q

Stafford - College

A

Paying for College (During College)

unsubsidized

graduate or undergraduate

NOT need based

105
Q

PLUS - College

A

Paying for College (During College)

Parent Loans for Undergraduate Students

Undergraduate only NOT need based

Student PLUS loans available for graduate students

106
Q

American Opportunity Tax Credit AOTC

A

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

107
Q

Lifetime Learning Credit LLC

A

20% of up to $10,000 qualified expenses
(lesser of $10,000 or qualified expenses)

per family credit

maximum credit = $2,000 per year

108
Q

AOTC & LLC QuickTip

A

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

109
Q

Securities Act of 1933

A

requires full disclosure about new security issues

registration statement must be filed w/ SEC

one portion is the prospectus

110
Q

Securities Exchange Act of 1934

A

regulates secondary market

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

111
Q

Investment Company Act of 1940

A

defines/regulates investment companies

3 types = open-end, closed-end, UIT

112
Q

Investment Advisers Act of 1940

A

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

113
Q

Series 6

A

Investment Company Products/Variable Contracts representative

sell MFs & variable insurance products (must hold insurance license to sell insurance products)

114
Q

Series 7

A

General Securities Representative

sell general securities (stocks, bonds, options)

excludes commodities & futures

115
Q

FINRA (Financial Industry Regulatory Authority)

A

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

116
Q

Sole Proprietor

A

unlimited liability

1 participant

individual level, Form 1040 Schedule C

income is self-employment income

117
Q

General Partnership

A

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)

118
Q

Limited Partnership

A

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)

119
Q

Limited Liability Partnership LLP

A

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)

120
Q

Family Limited Partnership FLP

A

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

121
Q

Limited Liability Company LLC

A

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)

122
Q

S-Corporation

A

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)

123
Q

Corporation (C-Corp)

A

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

124
Q

Business Entities QuickTip

A

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

125
Q

Future Value

A

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

126
Q

Present Value

A

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

127
Q

Annuities

A

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

128
Q

Rule of 72

A

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

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